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Regulatory Story
Company Findel PLC
TIDM STU
Headline Final Results
Released 07:00 05-Jun-2019
Number 1503B07

RNS Number : 1503B
Findel PLC
05 June 2019
 

5 June 2019

Findel plc ("Findel" or "the Group")

Another year of strong progress and delivery

Results for the 52 weeks ended 29 March 2019

Findel, the online value retail and Education business, today announces its Full Year Results for the 52-week period ended 29 March 2019.

Financial Highlights

 

2019

2018

Change

Revenue

£506.8m

£479.6m

+5.7%

Adjusted operating profit*

£38.4m

£33.6m

+14.4%

Adjusted operating profit margin*

7.6%

7.0%

+60bps

Adjusted profit before tax*

£28.8m

£24.4m

+17.7%

Profit/(loss) before tax

£29.4m

£22.1m

+33%

Profit/(loss) for the year

£23.3m

£19.6m

+18.9%

Adjusted free cash flow generation*

£28.9m

£15.8m

+83%

Cash generated from operating activities

£22.4m

£11.4m

+95%

Core net debt*

£57.4m

£73.8m

-22%

Overall net debt*

£233.4m

£232.3m

+0.5%

 

Summary

·      Group revenue up 5.7% to £506.8m and adjusted operating profit* up 14.4% to £38.4m

 

·      Group name to be changed to Studio Retail Group plc

 

·      Studio continues to drive Group performance, producing strong growth in customer numbers, sales and profits:

·      Product revenue growth of 7.8% driven by a further increase in the active customer base to 1.9m and higher spend per customer 

·      Focus on value and investment in digital led to online customer ordering increasing to 75% of product revenue (FY18: 68%) with 92% of new customers placing their first orders online (FY18: 84%)

·      Improvements to sourcing and focus on retail profitability helped product margins to widen by 170bp to 32.2% (FY18: 30.5%) and gross profit from retail increased by 13.8% to £98.9m (FY18: £86.9m)

·      Financial services revenue increased by 8.6% to £117.5m, with gross profit from financial services increasing by 1.0%, after adjustment for transition to IFRS 9 in FY19.

·      Adjusted operating profit margin* for the business increased to 9.3% (FY18 restated: 8.6%)

·      Customer redress programme substantially completed

 

·      Education's operational turnaround, focused on digital and value strategies is gaining traction:     

·      Online sales up from c.50% to over 66%, with the main Schools brand seeing over 75% of orders coming online

·      Active customer base up by 8%, driven by investment in product value for online ordering and increased promotional activity, resulting in revenue, excluding the discontinued Sainsbury's scheme, up by 0.8%, despite the investment in value through lower prices

·      Increased use of Far-East sourcing, combined with increased sales of Classmates own-brand alternative, led to increased product margins in H2

 

·      Individually significant items, totalling £4.2m have been recognised reflecting final reconciliation of redress programme and past service cost in respect of GMP, offset by reduction in property provisions; Adjusted profit before tax* up 17.7% to £28.8m

 

·      Core net debt* down by £16.4m to £57.4m after strong working capital generation

 

Phil Maudsley, Group Chief Executive, commented:

"These strong results reflect the clear transformation of the Group into a digital-first, value led retailer.

"In particular, Studio has prospered in current market conditions. We have rapidly grown the active customer base to 1.9 million over the last three years, with new customers drawn to the incredible value we offer, while existing customers are shopping with us more frequently and across wider ranges.

"Our Education business has also adopted a digital-first mentality with an objective to save schools time and money to win back customers and I am delighted with the progress that continues to be made.

"We look ahead with confidence and ambition, as shown by our proposed name change to Studio Retail Group. We remain focused on our customers' needs, and our investment in digital technologies and delivering on our strategic objectives will underpin profitable growth over the medium term."

 

Enquiries

 

Findel plc

Phil Maudsley, Group CEO

Stuart Caldwell, Group CFO

0161 303 3465

 

Tulchan Communications
Catherine James

Will Smith
020 7353 4200

 

 

*           this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below

 

Chairman's Statement

 

This has been another successful year. We have made further progress against our strategic plans, which aim to transform our two businesses from their legacy of catalogue-oriented operations into digital-first value retailers. Group revenue growth of 5.7% translated into adjusted profit before tax* growth of 17.7% and adjusted free cash flow* growth of 83%, showing the resilience of our business model in a challenging retail environment.

Proposed change of name

For many years, Studio has been the main customer-facing brand of our largest business, Express Gifts.  We have increased investment in digital and TV advertising in order to raise the profile of the Studio brand.  The division changed its name from Express Gifts to Studio at the start of 2019 and has recently modernised its logo and websites. 

We think the time is now right to strengthen Studio's identity further and so will be proposing that we change the Group's name from Findel plc to Studio Retail Group plc at the upcoming AGM.

Financial performance

Group revenue increased to £506.8m (FY18 restated: £479.6m) driven by a particularly strong trading performance from Studio in the period leading up to Christmas.  Adjusted profit before tax* increased to £28.8m, up by 17.7% on the equivalent pro-forma result from FY18 of £24.4m which adjusts for the two new accounting standards that we have had to adopt this year.  The statutory profit before tax was £29.4m (FY18 restated: £22.1m).

Improved free cash flow generation, notably working capital efficiencies within Studio, contributed to a reduction in core net debt* of £16.4m to £57.4m and cash from operating activities of £22.4m, notwithstanding a planned c.£12m outflow in respect of the legacy customer refund programme.  That programme has now been substantially completed, with a final reconciliation of the provision included within individually significant items.     

Mandatory bid from Sports Direct

Our largest shareholder, Sports Direct, increased their holding in the Group from 29.9% to 36.8% on 1 March 2019 which triggered a mandatory bid for the remainder of the Group's shares.  As shareholders are aware, Sports Direct  received acceptances of a further 1.0% during this process and so the bid was unsuccessful and lapsed on 3 May 2019.  Costs totalling £0.3m were incurred by the Group in responding to the bid.

Dividends

The Board continues to prioritise investment in improving digital capabilities and in strengthening the financial position of each of the operating subsidiaries' balance sheets and that of the parent company, which has accumulated losses of £99.9m. As such, the Company does not have plans to reinstate dividend payments at this stage.

Management and Board

Bill Grimsey, chair of the Remuneration Committee, will be retiring from the Board after the AGM in July 2019 having served for just over seven years.  His insight into the changing landscape for retail has been of great value to the Board and we wish him well for the future.  Francois Coumau will replace Bill as chair of the Renumeration Committee.

Clare Askem joined the Board in March 2019 as a non-executive director.  She is the Managing Director of Habitat and adds experience of multi-channel retailing, digital marketing and branding to the Board.

Employees

The last two years have seen a significant amount of transition and investment within both businesses as we move towards a digital-first future.  This has led to a number of new roles being created at all levels within the Group.  On behalf of the Board, I would like to thank all our employees for their efforts in delivering these successful results.

Current trading

The early weeks of our financial year are always relatively quiet trading periods for our businesses.  However, the performance to date has been in line with our expectations.  A fuller update on trading will be given at our AGM, which will be held at the end of July.

 

Outlook

We continue to position Studio in the attractive part of the retail market, with its digital-first strategy focussed upon delivering great value to its customers.  Our strategy to grow the Studio customer base and increase our customers' spend with us, particularly on clothing ranges, supported by our flexible credit offer, is working and provides the basis for sustainable medium-term profit growth.

 

Ian Burke

Chairman

4 June 2019

 

 *          this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below

 

 

 

Chief Executive's review

 

 

Studio is thriving in current market conditions as it caters for those customers who truly know the value of the pound in their pocket.  Its transformation from being a small, traditional, Christmas-oriented catalogue retailer into being a substantial, digital and value retailer is evident from these results.  Its objective is "to hunt for value so customers don't have to". It has grown its active customer base to 1.9m rapidly over the last three years, with new customers drawn by the outstanding value in its ranges and established customers coming back having been "wowed" by the quality.  Our expansion into clothing ranges helps the frequency of customer visits to the website, as does the flexible credit offer that many of our customers choose to use.  Studio is in a digital sweet-spot in the retail market.

Education is also using a digital-first mentality and an objective to "save schools time and money" to win back customers and increase our share of their spend.  I am delighted with the progress that it has made over the last two years.

Continuing our strategies for growth

Studio has an ambition to increase its customer base beyond 3 million customers and to see revenue in excess of £1bn.  Having seen the successful expansion of other retailers who have disrupted their markets over the last decade, these levels of ambition are a vital part of our culture.

The main elements of Studio's strategy for growth are as we outlined last year.  It aims to improve its retail profitability, maximise its financial services opportunity, whilst building its growth on strong foundations.  It has delivered significant progress on all three fronts during the last year, notably the 14% increase in its retail gross profit and the substantial completion of the legacy financial services refund programme.  Investing in the customer relationship management system, Salesforce, which is already helping to improve the performance of our customer experience team, will next allow our marketing activities to become more efficient and focussed.

We've gradually been reallocating more of our marketing spend away from catalogues into digital and TV advertising, aiming to raise the profile of the Studio brand.  The recent facelift of the brand, together with sponsorship of the fashion segment of ITV's "This Morning" and selectively advertising in peak TV programmes on top of the traditional daytime slots is helping to boost awareness of the brand and its value credentials.

Investment in our sourcing process tools has helped to widen our product margin significantly over the last year.  Further investment in tools to help our buying and merchandising teams make better deals and set competitive prices will go live over the next two years to continue that trend.  Our team in Asia provide a valuable link in our supply chain, ensuring that we can find the best suppliers and help to oversee quality.

The investment in the Financier tool in 2017 gives us the versatility to offer more tailored repayment options for Studio's customers.  We saw a particularly strong response to our Interest Saver product that we piloted in the run up to Christmas and have since started to roll it out.  The flexible credit product is designed to help customers spread the cost of their purchases without incurring interest.  However, we still have to ensure that lending money to a customer is the responsible thing to do given their circumstances.  We have increased the level of information captured at the point of application to help that decision.  A more sophisticated application decision engine will be deployed later this year to improve that process for customers followed by a tool to personalise the credit journey for each customer.  We will also be introducing a new cash payment alternative to help customers who either choose not to use credit, or for whom it is not appropriate.

Our Education business transformed its strategy two years ago by incentivising schools and nurseries to shift their ordering away from traditional catalogue channels in favour of upgraded websites, by offering reductions of up to 30% against catalogue prices on many key items when ordering online.  At the same time, additional online tools were developed to help teachers save time by automatically comparing our prices against the competition to demonstrate best prices and encouraging switching to our own brand Classmates range to save money.  The investment in product margin has been mitigated as more Far-East sourced product arrives.  The business has also seen a further overhaul of its cost base as it strives to achieve a 10% return on sales in the medium term.   It ended the year with its customer base up by 8% and with over 75% of orders in the main GLS brand coming online.  Its digital transformation is working.

Leadership

The successful transition of Studio and Education into being digital retailers requires a combination of experienced commercial retailers and digital innovators within our leadership teams.  Over the last year, Studio has increased the breadth of leaders at the level just below its executive to harness and deliver more change without materially increasing risk.  Building strong foundations is a key part of Studio's strategy and I'm delighted with the contributions that our new colleagues have made already.

We have also continued the transfer skills and leadership from Studio over to Education to accelerate its development of Far-East buying, commercial and digital marketing.

Brexit

The Group prepared itself for the potential of Brexit at the end of March 2019 by accelerating a limited level of stock purchases, particularly in Education to ensure continued supply towards the end of the academic year.  However, with the timing and nature of Brexit now uncertain, much of that activity has since been unwound. 

The majority of Studio's supplies are sourced, either directly or indirectly, from outside the European Union.  All of Studio's customers are based in the UK and therefore, any imposition of customs tariffs is not anticipated to have a material impact on our operations.  There is a broader risk that consumer confidence suffers if there continues to be a lack of clarity over Brexit, but we believe that more customers will seek Studio's value offer if economic conditions weaken.

Potential collaboration with Sports Direct

We announced in March 2018 that we were exploring possibilities for commercial supply arrangements between Studio and our largest shareholder, Sports Direct International plc.  The results of the pilot-scale trials undertaken in FY19 have not yet indicated that a fuller roll-out of licenced menswear will be beneficial.  However, we have continued to explore the potential for access to other Sports Direct owned brands in future seasons, as well as ways in which Sports Direct can help to improve our own supply chains.  Progress on these initiatives was put on hold during the recent mandatory bid process, but we anticipate resuming discussions in the near future.

Looking forwards

I've seen a significant amount of change within Findel over my 32 years with the Group, but I'm excited about its future renamed as Studio Retail Group.  The business continues to undergo significant change as we adapt to the changing customer and competitive landscape. With a clearly differentiated strategy based on deep customer insight I am confident that we have the business plans in place to deliver significant and sustainable growth in profit over the coming years.

 

 

DIVISIONAL OVERVIEW

Studio

Summary income statement

 

2019

2018

Change

 

£'000

£'000

 

Product revenue

307,249

284,965

7.8%

Financial services revenue

117,451

108,116

8.6%

Sourcing revenue

26

196

-86.7%

Reportable segment revenue

424,726

393,277

8.0%

 

 

 

 

Product cost of sales

(208,344)

(198,021)

-5.2%

Financial services cost of sales

(36,623)

(30,556)

-19.9%

Sourcing costs of sales

(18)

(205)

91.2%

Total cost of sales

(244,985)

(228,782)

-7.1%

 

 

 

 

Gross profit

179,741

164,495

9.3%

 

 

 

 

Marketing costs

(39,694)

(40,741)

2.6%

Distribution costs

(38,396)

(35,183)

-9.1%

Administrative costs

(53,723)

(47,189)

-13.8%

EBITDA

47,928

41,382

15.8%

 

 

 

 

Depreciation and amortisation

(8,480)

(7,455)

-13.7%

 

 

 

 

Adjusted operating profit^

39,448

33,927

16.3%

 

 

 

 

IFRS 9 adjustment

 

2,400

-100.0%

 

 

 

 

Operating profit for segmental reporting^

39,448

36,327

8.6%

 

 

 

 

Product margin %

32.2%

30.5%

+170bp

Impairment loss on trade receivables as % of revenue*

8.6%

7.8%

+80bp

Adjusted operating profit %

9.3%

8.6%

+70bp

 

^ excluding individually significant items

*           this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below

  

Studio has moved away from its roots of being a traditional catalogue business with a heritage in Christmas gifts, cards and decorations, to now becoming a leading digital value retailer.  Its broad product offer covers a fast-growing clothing and footwear category alongside home and electrical products plus the more seasonal ranges, many of which can be personalised for free.  Over 75% of sales are generated online and, although catalogues are still used, they are just a part of the wider marketing activity which includes growing investment into TV and digital media.  Underpinning all this, is the drive to amaze our customers with value and provide them with a range of payment options, including our flexible credit facility. 

 

In January 2019, the business changed its name from 'Express Gifts Ltd' to 'Studio Retail Ltd', which aligns with the main customer facing brand, Studio (the other smaller brand is Ace), recognises the changes in the business over recent years and facilitates the ongoing transformation programme as we aim to be the UK's most loved digital value retailer.

 

Studio has significant opportunity for growth in the UK, and the combination of a broad, value product range and financial services creates a point of difference to other retailers.  With no physical stores to service and with over 75% of orders coming online (the rest being phone and postal orders), it is now striving to utilise data and technology across all aspects of the business to improve decision making, becoming a truly digital retailer.  With the Customer at the Heart of the business, ongoing improvements to customer experience and service means our 1.9m customers love the Studio offer and continue to shop with us more frequently.

 

To deliver this ambition, Studio continues with a strategy built around three key pillars:

 

-       Improve Retail Profitability

-       Maximise Financial Services Opportunity

-       Build Strong Foundations

 

The plans and priorities underpinning the three pillars have been clarified over the last year, as well as defining the values we aim to deliver to customers by actively demonstrating them internally within Studio.

 

These values came through customer research and by involving 700 colleagues across the business:

v Inclusive - the broad product range has wide customer appeal, and the flexible payment option opens up our retail offer to customers who may prefer to spread the cost of purchases.  To deliver this we act as one team, with no departmental silos.

v Trusted - customers have to be able to trust us to deliver the value and quality they expect, to deliver for those important family moments, like Christmas, and also that we make responsible decisions when we lend money.  We do this by being positive and delivering against our promises.

v Amazing - we amaze customers with our value and product range, along with targeted offers and service.  To do this we are innovative, think big and are creative.

v Savvy - for customers, shopping with Studio is clever - with its great range and value, there is no reason to buy elsewhere.  For colleagues it means we are commercial, we hunt for great value and use the tools available to be even better at our jobs and deliver for our customers.

 

The strategic pillars frame the business plans and a transformation programme is already delivering business change which has driven the sales and profit growth seen in 2018/19.  This programme continues, with investment in new technology, process change and enhancing the capabilities of our people to enable Studio to continue to grow into the future.

 

Retail Profitability

Increasing the retail profitability will be achieved by growing sales through having more customers, who shop more frequently, and by improving how we plan and source our ranges to improve product margins.

 

The actions we are taking to deliver this are:

·      Build the Studio brand as the online destination for value and raise its profile within our target audience of value-conscious customers.

·      Focus on Customer Experience with a single view of the customer to improve how we target and service them, alongside a programme to continually make Studio easier, faster and more trusted to shop with.

·      Product development -changing our buying processes to improve product planning and sourcing to in turn improve margins, with particular focus on attracting customers with Clothing, Footwear, our Wow ranges (larger volume lines, offering exceptional value) and gift offer - especially where we can add value through personalisation.

 

In the year 1.9 million customers shopped with Studio, which is up 5.6% on the prior year and builds upon the success in recent years where new customers are recruited through increased use of TV advertising and digital marketing, with customers then being retained through data-driven CRM programmes utilising catalogue mailings and targeted digital activity.  We have recently updated the creative look and feel of Studio for customers with a revamped website and new advertising creative and, to better establish the brand, have sponsored the fashion section within ITV's "This Morning" programme which commenced in March 2019.  This was done at the same time as improving the efficiency of our marketing spend and reducing the cost to sales ratio* from 14.3% to 12.9%.

 

Our business model is built around customer lifetime value, with initial acquisition costs taking time to recover.  The credit account acts as a loyalty mechanic, even for customers who pay in full when they get a statement and retention is further enabled by targeted marketing and improving service levels to deliver a better overall experience.  We have selected Salesforce to provide a new marketing and customer service platform with initial phases of development implemented in January 2019, and further roll out planned later in the coming year.  We measure how customers rate our service through a Net Promoter Score (NPS) survey and through insight, root cause analysis and an ongoing programme of improvements, we increased this NPS score by 25% in the year from 34.2% to 42.8%.  We also benchmarked favourably through a survey conducted with the Institute of Customer Services.

 

Our online order penetration increased from 68% to over 75%, and we added new functionality to our website platform, including improved search (utilising artificial intelligence), customer reviews, improved design and site speed.  This helped contribute to our biggest ever sales week around Black Friday.  Mobile orders grew in the year from 51% to 62% of online sales, and we have commenced development of our first app for delivery in the summer of 2019.

 

Product sales grew by just under 8% overall in FY19, with Home & Leisure ranges growing by around 6% and Clothing & Footwear categories growing faster by around 12%.  Clothing & Footwear remains a key growth category for us, mainly from our own-brand ranges, as it still only represents around 30% of total sales but helps to drive customer order frequency.  Garden ranges saw a strong performance, helped by a long hot summer and products such as our Aqua Spa for £250 showed we can still deliver exceptional value, even at higher price points.  Since the Brexit vote in 2016 and the subsequent devaluation of Sterling we have been focused on improving product planning and sourcing, so we continue to deliver value for customers and can also improve our margins.  In the year we increased our gross product margin % by 170bp and maintained our competitive price benchmark position. 

 

We have also introduced a new seasonally based planning process which enhances our process from Autumn Winter 2019 launch later in the year and moves away from the traditional catalogue focused approach.  By bringing stock in at more seasonally appropriate times, we have been able to improve our working capital in FY19.

 

We also consolidated our overseas buying offices into Shanghai, where we have over 50 colleagues monitoring our supply chain and securing the best deals.  We have increased the proportion of direct sourcing through them which in turn improves cost prices.  We have continued to reduce and simplify our ranges and, through careful management, reduced stock holdings without impacting service levels to customers.

 

Financial Services

The second of our strategic pillars is maximising the financial services opportunity, whilst ensuring the credit offered is relevant, appropriate and affordable for our customers, so we meet regulatory guidelines.  The majority of Studio customers have a revolving credit account that allows them to either pay for their purchases within a month when their statement arrives, or to roll their balance and spread payments to help with their household budgeting. 

 

The benefit to Studio of the credit proposition is not just an additional revenue stream through financial income when customers choose to roll a balance, but also in that the account facility drives higher loyalty for the retail part of the business and a regular prompt for the customer to revisit the website.  As we move forward, we will continue to deliver actions to underpin:

·      Payment proposition - provide a range of repayment options to make shopping with Studio easy, and to enhance the benefits of the credit account to be an ideal option for all customers

·      Lending approach - ensure that when we lend money to our customers it is done in a responsible way, with appropriate credit limits and that customers are treated fairly should they subsequently find they have repayment issues

·      Operational efficiency - to utilise new technologies to improve efficiency and how we service customer accounts

 

Studio's consumer credit activity is regulated by the Financial Conduct Authority (FCA), and there are a number of guidelines which they have issued to ensure firms treat customers fairly, and that lenders take responsible steps to ensure loans are affordable and avoid any customer harm.  Studio constantly reviews its processes to ensure it remains aligned with the FCA guidelines and is utilising new robust systems and risk management tools to help in this area.  Credit limit strategies have been reviewed in the last year, and more detailed information is now captured where relevant on income to assess whether our customer can afford to take on new or additional credit from us.  A new application and decision platform is in development for launch in 2019 to further enhance decision making in this area.  This follows on from us implementing the Financier account management system in 2017, and we are now utilising this to test new financial products for our customers.

 

Financial income in the year was up by 8.6% but we also saw increases to the impairment loss on trade receivables, partly due to the growth in balances flowing from higher retail sales, and also due to an accounting standard change, IFRS 9, which requires earlier recognition of potential default. Repayment rates and the arrears profile remained broadly unchanged.

 

In 2018 we also implemented a new strategic fraud tool, which utilises artificial intelligence and enhanced data sets, to identify potentially fraudulent product orders before the goods are dispatched.  Not only did this help to significantly lower the levels of losses due to fraud, but better protects our customers from such activity. 

 

Our programme to refund customers in respect of historical credit and insurance products that were flawed continued and the vast majority of refunds have now been completed with some residual follow up left to complete in the coming few months.  As a result, we have now been able to fully reconcile this programme against the provision for the activity and have had to make a final net adjustment of £2.9m as we saw better response rates from customers and took on board some updated guidelines from the FCA in respect of this activity.  We completed the process to proactively approach and refund customers who purchased PPI from us several years ago and so we have seen relatively low levels of new claims for this product in the last two years.

 

Strong Foundations 

The third strategic pillar is Strong Foundations, where we are investing in the infrastructure to support our future growth, improve processes and how we manage the business and develop our people and culture for the future. Key action areas here are:

·      Warehouse development - ensure our current operations are robust and create a clear plan to improve service and scale to manage our sales ambitions

·      Data and technology - data is our most valuable asset and we will ensure it is kept safe and secure as well as building new capabilities to drive greater business intelligence.  We will also modernise our technology architecture to be agile and scalable

·      Cost efficiency - continually look at ways to be more efficient and keep costs down so we can deliver on our value promise

·      People and culture - we need to have people with the right skills to deliver our plans and a culture that makes Studio a great place to work.

 

Over the last two years we have addressed many historical issues in this area but have a wide-scale transformation plan ahead of us, so we have invested in resource within our change function and IT areas to deliver improved project governance and delivery capability.

 

Within our warehouse operation we invested in updating legacy systems and operational hardware to ensure the current operation is robust in the medium term.  We are now reviewing a number of strategic options to ensure our warehouse operations are capable of supporting the ongoing business growth, as well as changing customer expectations on service.

 

As this transformation programme requires new systems, we have started to articulate a clear IT strategy around data, application and infrastructure architectures.  This is aligned to the projects we are delivering, and new ways of working are being introduced, including increased use of offshore development and testing.  A new systems integration platform (Mulesoft) was developed through these new processes and successfully deployed in March.  We have also been making infrastructure changes to improve business resilience and, in anticipation of the introduction of GDPR regulations in May 2018, had rolled out changes to further strengthen data security.

 

Finally, and most important, is the need to improve the skills and capability of our people and transform the business culture.  In 2018, we reviewed all business functions, with job roles being clarified, the organisation structure adapted to enhance capabilities, and leadership training for all senior managers delivered.  A new HR system and Applicant Tracking system were introduced to better support people management.  Further improvements are planned during 2019 as we work towards the introduction of the Senior Manager & Certification Regime from the FCA in December, designed to improve individual accountability in key areas to protect against customer harm.

 

On the back of the company name change to Studio Retail, we started to update signage around the offices and have now completed reception refits at both the Accrington and Clayton offices, and further refurbishment planned for 2019 to enhance the working environment.  We are a major employer in Accrington, and more widely in Lancashire with c.1500 employees (rising to c. 2000 in the run up to Christmas) and are raising the profile of our employee brand with enhanced corporate activity, including sponsorship of local activities such as the new stand at Accrington Stanley Football Club.

 

 

Performance and Progress

The last year saw good progress on Studio's transformational plans, and also against financial measures.  The growth in the customer base by 5.6% was the main driver in product sales increasing 7.8% to £307.2m.  Through improved product planning and sourcing, we increased product gross margin by 170bp to 32.2% which was slightly ahead of our plans.  This improved margin was achieved despite the loss of c.£1m of income received in FY18 from our former subsidiary, Kleeneze (which was sold in 2015).  The sales and margin increase delivered a gross profit from product sales of £98.9m, up 13.8%.

 

Financial income increased by 8.6% to £117.5m, in line with the growth in Eligible Receivables.  The reported impairment loss on trade receivables increased by £8.5m to £36.6m, although £2.4m of this increase represents the effect of the transition in FY19 to IFRS 9.  The business benefitted in the prior year from a one-time step-change in our debt sale strategy which yielded a £3.5m benefit compared to FY17, although it also continued to benefit from favourable pricing conditions in debt sale markets in FY19, which may not continue into future periods.

 

Marketing efficiencies, as we moved investment from print/paper into TV and Digital advertising meant the ratio to product sales* dropped from 14.3% to 12.9%, and we also drove out operational efficiencies in our warehouse and customer service operations.  As we go through the business transformation we did invest in resource with our IT and Change function, to improve project delivery and make the business more secure and resilient, plus within Buying & Merchandising, to support the shift to a seasonal planning approach.

 

Adjusted Operating Profit* for the year increased by £5.5m to £39.4m.  Individually significant costs of  £2.9m relating to the final reconciliation for the provision for historical insurance product refunds were incurred in the period bringing the reported operating profit to £36.5m.

 

The senior management team, which has been significantly changed in recent years, was further strengthened by a new Marketing and Digital Director, joining in August 2018.  The team, along with a consistent and clear strategy focussed on delivering value, is well positioned to continue to grow the business.

 

 

Findel Education

Summary income statement

 

2019

2018

Change

 

£'000

£'000

 

Revenue

82,081

86,336

-4.9%

Cost of sales

(53,015)

(55,324)

4.2%

Gross profit

29,066

31,012

-6.3%

Marketing costs

(2,803)

(3,393)

17.4%

Distribution costs

(8,836)

(10,013)

11.8%

Administrative costs

(12,552)

(13,183)

4.8%

EBITDA*

4,875

4,423

10.2%

Depreciation and amortisation

(1,658)

(1,488)

-11.4%

Operating profit^

3,217

2,935

9.6%

 

 

 

 

Gross profit margin %

35.4%

35.9%

-50bp

Operating profit%

3.9%

3.4%

+50bp

^ excluding individually significant items

*           this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below

 

Our business model

 

Findel Education is one of the largest independent suppliers of school and early years resources (excluding IT and publishing) to primary, secondary and nursery educational establishments both in the UK and Internationally to over 130 countries.

 

It offers three distinct brand propositions - School, Classroom and Specialist - each of which supports differing educational resources requirements within schools and nurseries. The School brands (GLS, A-Z and WNW) are primarily focussed on servicing the basic commodity needs of all educational establishments with products such as stationery, janitorial supplies, furniture and arts & crafts materials. The Classroom brand (Hope Education) focuses on the supply of specialist curriculum and early years teaching resources to Primary School and Nurseries. The Specialist brands (Davies Sports, Philip Harris Scientific, and Learning Development Aids LDA) are specialists in their respective fields and focus on both Primary and Secondary school establishments.

 

Our brands, their products and service strengths combine to sell resources to International Schools and Groups as well as UK Academy Groups.

 

Our market

 

Schools are typically funded with a pre-agreed sum per pupil to cover the cost of staffing, buildings, utilities, IT, specialist textbooks and educational resources.  The latter of these, which Findel Education services, only accounts for around 5% of the overall school budget and has been squeezed in real terms by up to 8% over the last three years as other areas have been prioritised. Whilst the last 12 months have seen greater stability for resource budgets, it remains clear that a successful player in the resource market needs to be able to save schools money.

Procurement of educational resources is normally managed in a school by the School Business Manager ("SBM").  This key role in a school has replaced the traditional bursar in recent years, with an influx of private sector business managers now entering the sector bringing with them modern procurement and commercial skills. SBM's are far more open minded to change, seeking best value, easier digital procurement processes and great service.  Nonetheless, the SBM still has numerous competing demands placed upon them.  As a result, it is clear that a successful player in the resource market also needs to be able to save schools time.

Organisations competing in the UK education resources market tend to either be structured on a not-for-profit basis, often under local authority control, or be privately owned such as Findel Education.  Our ambition is to achieve a 10% return on sales in the medium-term, in line with our privately-owned competitors, compared to the 3.9% achieved in FY19.  That ambition requires us to increase our scale, reduce our operating costs and improve our own supply chain to lower buying prices without sacrificing product quality.

 

Our business strategy: 'Saving Schools Time and Money'

 

The educational resources market has been relatively slow to adopt digital channels for procurement, with large annual catalogues being the preferred route for teachers and SBMs to browse.  This has started to change in recent years, particularly as School Integrated Management Systems ("SIMS") have evolved to manage pupil lists, timetabling, attendance and performance data, as well as routine administration matters such as procurement.  These systems are key in saving schools time.

Our own websites have been overhauled in response to this structural change, with the capability to seamlessly integrate with several of the leading SIMS providers, notably Capita.  Over 3,000 schools now order from us using these platforms, with 66% of total orders in FY19 being placed using either the website or SIMS, up from c.50% in FY18.

We have also developed tools and new market-first features such as Share My Basket, Quick Order, Repeat Order, Wishlists and 1-Click checkout.  These aim to make it easier for teachers and SBMs to place orders with us, demonstrate best value, leading to higher levels of customer loyalty and a greater share of the school's budget.

At the same time, we have actively sought to recover market share that has been lost over many years.  We have increased our promotional activity in recent months to recruit new customers and have incentivised new and existing customers to increase their level of online shopping by offering significantly lower prices on a broad range of over 2,200 products, but only if bought using the website or SIMS channels.  That lower online value pricing has brought our ranges into line with the key not-for-profit competitors in the sector, improving our competitive position whilst also helping to save schools money.

 

 

Our business strategy: Improving profitability

 

The online value pricing strategy, together with the improved digital tools and promotional activity has seen the active customer base increasing by 8% over the last 12 months after years of decline.  However, the business has warehouse and office support facilities capable of supporting a significantly greater level of activity.  A further £2.4m of cost reductions were delivered during FY19 on the back of the large warehouse cost reduction in FY18. This has been a key to funding the investment in value.

Our buying and supply chain has been focused on overseas sourcing through the Group's Shanghai Resourcing Office to support the re-sourcing of several key ranges from the Far East, including our Classmates ranges. Substantial re-sourcing and renegotiation with both UK and Far-East suppliers has been necessary to support the investment in lower prices to customers, with suppliers benefitting from increased volumes.

The business is transforming at pace and will become a Digital First business during FY20. This will continue to reduce the overhead cost base as traditional marketing and buying processes are replaced by digital technologies, including a further reduction in the size and quantity of annual catalogues.

 

FY19 Performance and Progress

 

Total revenue for the business reduced by £4.3m to £82.1m (FY18 restated: £86.3m).  However, the business started the year knowing that it would not repeat the c.£5m of revenue and c.£0.7m of contribution from the Sainsbury's Active Kids Scheme, which was discontinued at the end of FY18.  Therefore, the ongoing activities with the business grew by £0.7m or 0.8%, supported by the 8% growth in the active customer base.

During the year the business successfully re-tendered for the Scotland Excel and NI Library Board contracts. These were important wins in two of our key regions where we hold a high percentage of market share.

The investment in lower prices for online purchases supressed revenue leading to the gross profit margin reducing by 50bp to 35.4% (FY18 restated: 35.9%).  This gap has improved in recent months, as expected, from -250bp seen in H1 to +230bp in H2 in part due to improved stock management and a consequential reduction in provisions.

Operational cost reductions totalling £2.4m helped to more than offset the lost Sainsbury's contribution and margin investment, leading to the operating profit for Education increasing by 9.6% to £3.2m (FY18 restated: £2.9m).

 

*           this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below

 

 

 

FINANCE REVIEW

 

Group profit before tax

The Group has produced an adjusted profit before tax* of £28.8m in FY19, up by 17.7% from £24.4m in FY18.  This figure is presented on a like-for-like GAAP basis taking into account the adoption of IFRS 9 and IFRS 15, as summarised below.

 

2019

2018

(Restated)

Change

 

£000

£000

£000

Adjusted operating profit*:

 

 

 

Studio

39,448

33,927

5,521

Education

3,217

2,935

282

Central

(4,248)

(3,286)

(962)

Adjusted operating profit*

38,417

33,576

4,841

Net finance costs*

(9,656)

(9,130)

(526)

Adjusted profit before tax*

28,761

24,446

4,315

Pro-forma adjustment for IFRS9 for FY18

 

2,400

(2,400)

Individually significant costs

(4,158)

-

(4,158)

Fair value movement on derivative financial instruments

4,750

(4,701)

9,451

Profit/(loss) before tax

29,353

22,145

7,208

*     this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be below.

 

The key elements of this improved performance are discussed earlier in the Strategic Report.

Individually significant items totalling £4.2m (FY18: nil) were incurred, as discussed in more detail below and set out in Note 3.  The fair value movement on derivative financial instruments was a credit of £4.8m (FY18: charge of £4.7m).  This is presented below the adjusted profit before tax* on the income statement as it relates to the reversal of prior year fair value movements net of the revaluation of hedging contracts that will unwind during FY20.

Individually significant items

Provisions totalling £29.0m were built up in FY16 and FY17 in relation to the anticipated refund of premiums and interest to customers in respect of historic flawed credit and insurance products.  Those provisions contained assumptions and judgements on the likely level of customer response and the quantum of refund due to each responding customer.  This programme has also been refined over the last two years to include new guidance from the FCA on refund matters, including the treatment of commissions following the "Plevin" ruling.  This refined scope, together with slightly higher response levels than originally anticipated, has led to an additional £2.9m of charges being required.  The customer contact programme is now substantially concluded.

Education consolidated its warehousing estate at the end of 2016 and an onerous lease provision was recorded in FY17 in respect of the vacant warehouse in Enfield.  The site became unavailable for occupation during 2018 due to damage caused by third-parties and relief from rental payments was secured from the landlord during that period whilst repairs were undertaken.  The site has recently been sublet at market rates, leading to a favourable reduction in the level of onerous lease provision being required of £1.2m.

In October 2018, the High Court handed down a judgement involving the Lloyds Banking Group's defined benefit pension schemes.  The judgement concluded that the schemes should be amended to equalise pension benefits for men and women in relation to guaranteed minimum pension benefits.  The issues determined by the judgement arise in relation to many other defined benefit pension schemes, including the Findel Group Pension Fund.  After discussion with the trustees, actuaries and legal advisors of our fund, we have recognised an additional past service charge of approximately £2.5m, representing around 1.7% of total scheme liabilities in relation to this historical issue. 

Pensions

The net valuation on the Group's legacy defined benefit scheme at the end of FY19, measured in accordance with IAS19, moved from a surplus of £2.2m as at March 2018 to a small deficit of £0.1m due to the additional service costs noted above.  The normal triennial valuation of the scheme as at April 2019 is currently in progress.  In the meantime, as previously agreed with the scheme's trustees, the Group has made additional voluntary contributions totalling £2.5m in FY19.  These contributions will increase to £5.0m from FY20 until the middle of FY24.

Taxation

The Group posted a charge of £6.1m in the year in respect of taxation.  The increase from the £2.6m charge seen in FY18 was largely due to the recognition of previously unrecognised deferred tax last year.  The underlying effective tax rate* for the year was 20.3% (FY18 restated: 21.0%).

Earnings per share

The adjusted earnings per share* for the year was 26.48p in FY19 (FY18 restated: 27.09p).  The basic earnings per share was 26.98p per share (FY18 restated: 22.68p).

Summary balance sheet

 

2019

2018

Restated

Change

 

£000

£000

£000

Intangible fixed assets

24,952

25,175

(223)

Tangible fixed assets

45,511

45,350

161

Net working capital

201,010

198,101

2,909

Net debt*

(233,440)

(232,329)

(1,111)

Other net assets

5,487

2,896

2,591

Net assets

43,520

39,193

4,327

 

Consolidated net assets amounted to £43.5m at the period end (FY18: £39.2m), reflecting the net profit reported and the actuarial remeasurements in respect of the pension deficit. The net assets are equivalent to 50p per ordinary share (FY18 restated: 45p per ordinary share).

Impact of new accounting standards

IFRS 9 "Financial Instruments"

This new standard replaced IAS 39 "Financial instruments: recognition and measurement" and first applied to the Group for FY19.  Its main impact is upon the level of bad debt provision and impairment charge required against Studio's trade receivables, by moving from the current approach of an incurred loss model to an expected loss model. 

Under IAS 39, impairment provisions are only reflected when there is objective evidence of impairment, which is normally a missed payment. However, the expected loss approach of IFRS 9 is instead based upon the probability of default, regardless of whether a missed payment has occurred.  Consequently, impairment provisions under IFRS 9 are recognised earlier than under IAS 39.  There was also be a one-time adjustment to both receivables, deferred tax and reserves upon adoption.

It is important to note that the lifetime profitability of a customer and the cash received from the customer is unaffected by this change in accounting standard.

The Group has taken the exemption available not to restate comparative information for prior periods and has therefore recognised a charge of £17.8m in accumulated losses on transition at 31 March 2018, being the first day of the current accounting period.   That said, and as indicated in the 2018 Annual Report & Accounts, the pro forma impact of the standard upon the FY18 income statement would have been to reduce Adjusted Profit Before Tax by £2.4m.

The change in this accounting standard has no impact upon the Group's debt covenants, which in the case of the revolving bank facility are calculated by reference to IAS 39, and in the case of the securitisation facility by reference to the gross balances owed by the customer.

 

IFRS 15 "Revenue from contracts with customers"

This new standard replaces several current standards and aims to standardise aspects of revenue recognition. Its main effect on the Group will be to change the point of recognition of product sales from the point of despatch to the point of delivery to the customer.  For most of the Group, the impact will result in a one-time delay of between 1-3 days in the recognition of revenue. 

Full retrospective adoption has been applied for this standard, with comparative figures for FY18 restated as set out in note 1. The adoption of IFRS 15 resulted in a charge of £0.5m being recorded in accumulated losses at 31 March 2017.

 

Indicative impact of new accounting standards

IFRS 16 "Leases"

 

The Group will adopt IFRS 16 in the 2019/20 financial year. On the adoption of IFRS 16, lease agreements will give rise to both a right of use asset and a lease liability for future lease payables. Whilst the new standard has no effect on the total cost recognised over the course of a lease, under IFRS 16 the lease cost will be higher in the in the early years of the lease. The lease cost will also be split between depreciation of the right of use asset and interest on the lease liability in the income statement rather than being presented within trading costs as is currently the case. The new standard does not impact on the Group's cash flows under lease arrangements but there will some changes to presentation in the cash flow statement.  The Group has decided to adopt the modified retrospective transition approach and as such will apply the requirements of IFRS 16 prospectively from 30 March 2019. Consequently, there will be no adjustment to opening reserves and comparative figures will not be restated.

 

Cash flow and borrowings

A part of management's variable incentive plans relates to the generation of free cashflow, as defined in the table below.  Free cashflow generation was £28.9m (FY18: £15.8m).  After taking account of interest and the net impact of finance leases, the Group's core net debt reduced by £16.4m to £57.4m (FY18: £73.8m), as summarised below.

 

2019

2018

Change

 

£000

£000

£000

Adjusted EBITDA*

50,022

43,995

6,027

Increase in Studio's receivables
net of securitisation inflows

(6,926)

(1,568)

(5,358)

Decrease in other working capital

10,799

6,806

3,993

Capital expenditure

(11,545)

(10,595)

(950)

Cash flows in respect of prior period individually significant items

(11,983)

(20,662)

8,679

Pension scheme contributions

(2,500)

(2,500)

0

Other

1,011

314

697

Adjusted free cashflow*

28,878

15,790

13,088

Income tax

(1,931)

581

(2,512)

Net interest payable

(10,017)

(8,305)

(1,712)

Repayment of finance leases

(571)

(545)

(26)

Acquisition of subsidiaries

-

(450)

450

Movement in core net debt

16,359

7,071

9,288

Opening core net debt*

(73,756)

(80,827)

7,071

Closing core net debt*

(57,397)

(73,756)

16,359

 

 Total net debt* at the year-end was as follows:

 

2019

2018

Change

 

£000

£000

£000

External bank borrowings (excluding securitisation facility)

95,000

100,000

(5,000)

Less total cash

(37,603)

(26,244)

(11,359)

Core net debt*

57,397

73,756

(16,359)

Securitisation drawings

175,545

157,504

18,041

Finance leases

498

1,069

(571)

Net debt*

233,440

232,329

1,111

 

The Group's revolving credit facility was amended during the year with the available level of facilities now scheduled to be £95m between April and December 2019 before reducing to £90m until its new maturity date of 31 December 2020.  The securitisation facility restructured during the year with its maximum available amount increasing from £170m to £185m to cater for the continued growth in Studio's trade receivables and its maturity date also extended to 31 December 2020.

Dividends and capital structure

The Company has not received any dividends from its subsidiaries during the period and its balance sheet as at 29 March 2019 shows a deficiency of £99.9m on its retained reserves (FY18: deficiency of £95.5m).

Our ambition over the next few years is to invest in our digital capabilities in order to increase the level of potentially distributable reserves within the primary operating subsidiary, Studio Retail Limited, to enable it to remit dividends to Findel plc.  This subsidiary's retained reserves have improved marginally during the year, although its profit for the year has been offset by the adoption of IFRS 9 "Financial Instruments" in FY19 of £17.8m as discussed above.

Findel plc is therefore not yet in a position to declare a dividend and does not have plans to reinstate dividend payments at this stage.  The Directors have determined that no interim dividend will be paid (FY18: £nil) and are not recommending the payment of a final dividend (FY18: £nil).

Treasury and risk management

The Group's central treasury function seeks to reduce or eliminate exposure to foreign exchange, interest rate and other financial risks, to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. It does not engage in speculative transactions and transacts only in relation to underlying business requirements in accordance with approved policies.

Interest rate risk management

The Group's interest rate exposure is managed by the use of derivative arrangements as appropriate. The Group has purchased interest rate caps covering the period to August 2020 to protect against the risk of unforeseen increases to LIBOR rates.

Net interest costs for the year were £9.6m, slightly higher than the £9.1m from FY18, reflecting higher LIBOR rates in the second half of the year offset by lower pension scheme interest. This charge was covered 4.0 times by adjusted operating profit* (FY18 restated: 3.7 times).

Currency risk management

A significant proportion of the products sold, principally through Studio, are procured through the Group's Far-East buying operations and beyond. The currency of purchase for these goods is principally the US dollar. 

The Group's hedging policy aims to cover anticipated future exposures on a rolling 12-month basis.  As at the balance sheet date, the Group had forward contracts with an outstanding principal of $93m (FY18: $86m) and an average rate of £1/$1.326 (FY18: $1.311).  The market value and unrealised loss on those contracts as at the balance sheet date, less the reversal of the equivalent valuation as at the end of March 2018, was a gain of £4.8m (FY18: loss of £4.7m). This is presented separately on the Income Statement as it represents an element of product costs to be realised in FY20 as the contracts unwind.  The Group currently has forward contracts in place with an outstanding principal of $90m covering the 12 months to May 2020.

In addition to this direct exposure, the divisions face a significant level of indirect exposure from supplies made by UK suppliers who in turn source goods from overseas.  That risk is normally mitigated through a combination of supplier agreements and fixed term pricing, although from time to time there may be a requirement to increase prices to customers to maintain margins.

Borrowing and counterparty risk

The Group's exposure to borrowing and cash investment risk is managed by dealing only with banks and financial institutions with strong credit ratings.

*           this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below

 

Alternative Performance Measures

The Directors use several Alternative Performance Measures ("APMs") that are considered to provide useful information about the performance and underlying trends facing the Group.  As these APMs are not defined by IFRS, they may not be comparable with APMs shown in other companies' accounts.  They are not intended to be a replacement for, or be superior to, IFRS measures.

The principal APMs used in this Annual Report are set out below.

 

Adjusted EBITDA, adjusted operating profit and adjusted profit before tax

These measures are used by management to assess the underlying trading performance of the Group from period to period.

The following items are excluded in arriving at these measures:

·      Individually significant items are, due to their nature or scale, not reflective of the underlying performance of the Group. The Directors believe that presenting these items separately aids year on year comparability of performance.

·      The Group's foreign exchange hedging policy means that there will be unrealised fair value gains or losses at the period end relating to contracts intended for future periods.  Those fair value movements are therefore excluded from the underlying performance of the Group until realised. 

In the current period, the Group has adopted IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments. The full impact of adopting these new accounting standards is detailed in note 1.

IFRS 15 has been adopted on fully retrospective basis and as a result the figures presented in respect of 2018 have been restated so that they are presented on a consistent basis with the current period. In order to ensure like-for-like comparison between 2019 and 2018, the APMs presented in 2018 have been adjusted to reflect the adoption of IFRS 15 as shown below.

With regards to IFRS 9, the Group has taken the exemption available not to restate comparative information for prior periods. As a result, the impairment loss recognised in respect of Studio's trade receivables in 2019 is calculated on an expected credit loss basis as required by IFRS 9, whereas the 2018 charge is calculated on an incurred loss basis as required by IAS 39. In order to allow a like-for-like comparison of performance between periods, management has applied a pro-forma estimate of the impact of IFRS 9 adoption to the 2018 figures, adjusting the APMs presented in 2018.

The 2019 APMs, the restated 2018 APMs and the originally reported 2018 APMs reconcile to profit before tax as follows:

 

 

2019

 

2018

(restated)

2018

(as reported)

 

£000

£000

£000

Adjusted EBITDA - as reported in 2018

 

46,370

46,370

Adjustment to reflect adoption of IFRS 15

 

25

 

Pro-forma adjustment for IFRS 9

 

(2,400)

 

Adjusted EBITDA - 2019 equivalent basis

50,022

43,995

 

Pro-forma adjustment for IFRS 9

-

2,400

 

Depreciation and amortization

(11,605)

(10,419)

(10,419)

Individually significant items

(4,158)

-

-

Fair value movements on derivatives

4,750

(4,701)

(4,701)

Finance costs

(9,656)

(9,130)

(9,130)

Profit before tax

29,353

22,145

22,120

 

 

2019

 

2018

(restated)

2018

(as reported)

 

£000

£000

£000

Adjusted operating profit - as reported in 2018

 

35,951

35,951

Adjustment to reflect adoption of IFRS 15

 

25

 

Pro-forma adjustment for IFRS 9

 

(2,400)

 

Adjusted operating profit - 2019 equivalent basis

38,417

33,576

 

Pro forma adjustment for IFRS 9

-

2,400

 

Individually significant items

(4,158)

-

-

Fair value movements on derivatives

4,750

(4,701)

(4,701)

Finance costs

(9,656)

(9,130)

(9,130)

Profit before tax

29,353

22,145

22,120

  

 

 

2019

 

2018

(restated)

2018

(as reported)

 

£000

£000

£000

Adjusted profit before tax - as reported in 2018

 

26,821

26,821

Adjustment to reflect adoption of IFRS 15

 

25

 

Pro-forma adjustment for IFRS 9

 

(2,400)

 

Adjusted profit before tax - 2019 equivalent basis

28,761

24,446

 

Pro-forma adjustment for IFRS 9

-

2,400

 

Individually significant items

(4,158)

-

-

Fair value movements on derivatives

4,750

(4,701)

(4,701)

Profit before tax

29,353

22,145

22,120

 

Studio Product Gross Margin %

This is used a measure of the gross profit made by Studio on the sale of products only, which shows progress against one of Studio's strategic pillars. It is derived as follows:

 

2019

2018

 

 

(restated)

 

£000

£000

Product revenue

307,249

284,965

Less product cost of sales

(208,344)

(198,021)

Gross product margin

98,905

86,944

Gross product gross margin %

32.2%

30.5%

 

Studio impairment loss on trade receivables a like-for-like (pro forma IFRS 9) basis

 

IFRS 9 was adopted by the Group on 31 March 2018, being the first day of the current accounting period, the Group has taken the exemption available not to restate comparative information for prior periods. As a result, the impairment loss recognised in respect of Studio's trade receivables in 2019 is calculated on an expected credit loss basis as required by IFRS 9, whereas the 2018 charge is calculated on an incurred loss basis as required by IAS 39. In order to allow a like-for-like comparison of performance between periods, management has applied an pro-forma estimate of the impact of IFRS 9 adoption to the 2018 impairment charge. This allows management to assess the underlying performance and credit quality of Studio's receivables book.

 

 

 

2019

2018

 

£'000

£'000

Impairment loss (as reported)

(36,623)

(28,156)

Pro forma adjustment for IFRS 9

 

(2,400)

Impairment loss on like-for-like (pro-forma IFRS 9) basis

(36,623)

(30,556)

 

 

Studio impairment loss as a % of revenue

This is an assessment of the impairment loss incurred in respect of Studio's trade receivables, stated on a like-for-like (pro-forma IFRS 9) basis, which enables management to assess the quality and performance of its trade receivables.

 

 

2019

2018

 

 

 

(restated)

 

 

£'000

£'000

 

Impairment loss on like-for-like (pro-forma IFRS 9) basis

36,623

30,556

 

Studio total revenue

424,726

393,277

 

Studio impairment losses as a % of revenue

8.6%

7.8%

 

 

 

 

Studio marketing costs to sales ratio

This measure allows management to assess the efficiency of our marketing spend as we pursue our stated strategy of increasing the profile of the Studio brand. It is calculated by dividing marketing costs by product revenue.

 

2019

2018

 

 

(restated)

 

£'000

£'000

Marketing costs

39,694

40,741

Product revenue

307,249

284,965

Marketing costs to sales ratio

12.9%

14.3%

 

Net debt

This measure takes account of total borrowings less cash held by the Group and represents our total indebtedness. Management use this measure for assessing overall gearing.

It is calculated as follows:  

 

2019

2018

 

£000

£000

Total bank loans

270,545

257,504

Obligations under Finance leases

498

1,069

Less cash and cash equivalents

(37,603)

(26,244)

Net debt

233,440

232,329

 

Core net debt

This measure excludes obligations under finance leases and securitisation borrowings from net debt to show borrowings under the revolving credit facility net of cash held by the Group. This is our preferred measure of the indebtedness of the Group and is relevant for covenant purposes.

It is calculated as follows:  

 

2019

2018

 

£000

£000

Net Debt

233,440

232,329

Obligations under finance leases

(498)

(1,069)

Less securitisation borrowings*

(175,545)

(157,504)

Core net debt

57,397

73,756

*Disclosed within bank loans

 

Debt funding consumer receivables

The majority of the trade receivables of Studio are eligible to be funded in part from the securitisation facility, with the remainder being funded from core net debt.  This measure indicates the face value of trade receivables (before any impairment provision) capable of being funded from the securitisation facility. It is useful to management as it demonstrates the proportion of net debt that is supported by paying customer receivables.

It is calculated as follows:  

 

2019

2018

 

£000

£000

Securitisation loans

175,545

157,504

Cash and bank

64,075

64,333

Eligible receivables

239,620

221,837

 

Adjusted free cash flow

Free cash flow generation is a key operational metric and is of interest to investors. Consequently, it forms part of the remuneration targets for the Executive Directors. In the prior period, adjusted free cashflow included income taxes paid or received. In the current period, the remuneration targets for the Executive Directors have been amended to a pre-tax measure and consequently the APM has been adjusted as set out below.

Adjusted free cash flow is reconciled to cash generated by operations as follows:

 

 

2019

2018

 

£000

£000

Adjusted free cashflow as reported in 2018

26,947

16,371

Exclude income taxes paid/(refunded)

1,931

(581)

Adjusted free cash flow - 2019 equivalent basis

28,878

15,790

Securitisation loans drawn

(18,041)

(14,970)

Purchases of property plant and equipment and software

11,545

10,595

Other

(26)

24

Cash generated from operating activities

22,356

11,439

 

 

Adjusted earnings per share

This measure shows the earnings per share given when individually significant items and fair value movements on derivative financial instruments are excluded from the profit after tax figure. Details of how the adjusted earnings per share are calculated can be found in note 5.

 

Underlying effective tax rate

This measure shows the Group's effective tax rate when the tax impact of individually significant items and other non-recurring items are adjusted for. This measure allows management to assess underlying trends in the Group's tax rate. It is calculated as follows:

 

 

2019

2018

 

 

(restated)

 

£000

£000

Tax charge

(6,064)

(2,565)

Exclude tax impact of individually significant items

(741)

-

Exclude impact of additional recognition of deferred tax in respect of tax losses in Education

-

(2,830)

Exclude impact of change in deferred tax rate on pension scheme surplus

-

749

Adjusted tax charge

(6,805)

(4,646)

Profit before tax and individually significant items

33,511

22,145

Underlying effective tax rate

20.3%

21.0%

Principal risks and uncertainties

 

Risk

Root cause

Key mitigating controls

 

Pressures on the levels of disposable income available to lower socio-economic groups, who form a core part of Studio's customer base.

 

The economic outlook is uncertain, particularly in relation to the impact of Brexit and more broadly changes in interest rates and inflation and wage restraint.

 

The expansion of our digital activity and a shift in customer acquisition strategy has broadened the overall customer footprint and reduced our dependency on older, lower socio-economic customer segments.

 

Successful implementation of our strategies to recruit and retain customers, thereby increasing our customer base, will dilute this impact.

 

 

Growth in credit income could slow within the financial services business of Studio.

 

Regulatory changes impacting customer acquisition and credit limit management; and our strategy to put the customer at the heart of the business by balancing financial performance and customer conduct risks.

 

Studio has reviewed its integrated model of retail and financial services in terms of both customer conduct risk and financial performance and developed a business plan on this basis.  The review included stress testing various scenarios.

These factors will require an evolutionary change in our business model placing a greater requirement on the profitability arising from the retail side of Studio. The plans set out in this Strategic Report reflect this.

 

Potential disruption to our business support systems and the storage and protection of our customers' data.

 

The business remains highly dependent upon legacy systems both in the support of running the business on a daily basis and the storage and protection of customer data.

 

The combination of increasing cyber activity, fraud rings and the level of change being deployed in the business makes this an area of higher potential risk.

 

 

 

Resilience testing and recovery plans are in place.

 

The business has continued to invest to update its technology solutions as it seeks to lower its dependency on legacy systems.

Notable examples include the enhancement in website capabilities at Education and the development of the Financier platform at Studio. 

 

In addition, an enhanced fraud solution accompanied by improved operational practices within Studio's customer and financial services departments are being deployed.

 

 

Execution and liquidity risks from a substantial three-year plan of transformation and growth at Studio.

 

 

 

 

Funding growth within our integrated retail and credit business model is dependent on the continued availability of debt facilities.

 

 

 

 

 

Any weakness in project and change management in the delivery of key priorities.

 

 

High level of demand on planning and resource management to ensure timely and on budget delivery.

 

Appropriate facilities are in place for the medium term and regular and rigorous viability exercises are undertaken.

 

Fiscal controls, including business forecasting in support of stock and cash flow management.

 

A Change Board has been established to scrutinise, prioritise and oversee resourcing and delivery of transformation projects.

 

We are adopting an enhanced process of integrated cash management to meet the demands of (i) change and capital deployment within the business; alongside

(ii) daily operational requirements.

 

 

Attracting and retaining the right talent in the business, particularly in the highly competitive areas of digital marketing, IT development and cyber security, to support the deployment of our high growth digital strategy.

 

 

Limited available experienced staff in key business and technical areas and high demand for those people,

 

Significant progress has been made in attracting new talent to the business resulting in the renewal of the senior management teams throughout the Group.

 

Developing the business as a regional employer of choice is a key objective and as such, enhanced personnel frameworks and reward strategies are being developed.

 

 

Any inability to operate from one of our key warehouse facilities

centres 

 

 

While Studio has a number of warehouse facilities, there is a high dependency on its main facility in Accrington.

 

The consolidation of Education's warehousing into its facility at Nottingham has concentrated its fulfilment activities into a single location that could also potentially become a point of failure risk. 

 

 

Appropriate disaster recovery plans have been developed and are periodically reviewed and upgraded.

 

 

 

Findel plc

Group financial information

Consolidated Income Statement

52-week period ended 29 March 2019

 

 

Before

Individually significant items

 

 

 

individually significant items

Total

 

 

£000

£000

£000

Continuing operations

 

 

 

 

Revenue

 

408,688

-

408,688

Credit account interest

 

98,119

-

98,119

Total revenue (including credit interest)

 

506,807

-

506,807

Cost of sales

 

(261,377)

-

(261,377)

Impairment losses on customer receivables

 

(36,623)

-

(36,623)

Gross profit

 

208,807

-

208,807

Trading costs

 

(170,390)

(4,158)

(174,548)

Analysis of operating profit:

 

 

 

 

- EBITDA*

 

50,022

(4,158)

45,864

- Depreciation and amortisation

 

(11,605)

-

(11,605)

Operating profit

 

38,417

(4,158)

34,259

Finance costs

 

(9,656)

-

(9,656)

Profit before tax and fair value movements on derivative financial instruments

 

28,761

(4,158)

24,603

Fair value movements on derivative financial instruments

 

4,750

-

4,750

Profit before tax

 

33,511

(4,158)

29,353

Tax (expense)/income

 

(6,805)

741

(6,064)

Profit for the period

 

26,706

(3,417)

23,289

 

 

 

 

 

 

 

 

 

 

 

Earnings per ordinary share

 

 

 

 

 

 

 

 

 

Basic

 

 

 

26.98p

Diluted

 

 

 

26.98p

 

 

 

 

 

The accompanying notes are an integral part of this consolidated income statement.

*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments.
 

 

Consolidated Income Statement

52-week period ended 30 March 2018 (restated - refer to note 1)

 

 

Before

Individually significant items

 

 

 

individually significant items

Total

 

 

£000

£000

£000

Continuing operations

 

 

 

 

Revenue

 

387,702

-

387,702

Credit account interest

 

91,911

-

91,911

Total revenue (including credit interest)

 

479,613

-

479,613

Cost of sales

 

(253,550)

-

(253,550)

Impairment losses on customer receivables

 

(28,156)

-

(28,156)

Gross profit

 

197,907

-

197,907

Trading costs

 

(161,931)

-

(161,931)

Analysis of operating profit:

 

 

 

 

- EBITDA*

 

46,395

-

46,395

- Depreciation and amortisation

 

(10,419)

-

(10,419)

Operating profit

 

35,976

-

35,976

Finance costs

 

(9,130)

-

(9,130)

Profit before tax and fair value movements on derivative financial instruments

 

26,846

-

26,846

Fair value movements on derivative financial instruments

 

(4,701)

 

-

(4,701)

Profit before tax

 

22,145

-

22,145

Tax expense

 

(2,565)

-

(2,565)

Profit for the period

 

19,580

-

19,580

 

 

 

 

 

 

 

 

 

 

 

Earnings per ordinary share

 

 

 

 

 

 

 

 

 

Basic

 

 

 

22.68p

Diluted

 

 

 

22.68p

 

The accompanying notes are an integral part of this consolidated income statement.

*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments.
 

Consolidated Statement of Comprehensive Income

52-week period ended 29 March 2019

 

 

2019

2018

(restated)

 

£000

 

£000

Profit for the period

23,289

19,580

Other Comprehensive Income

 

 

Items that may be reclassified to profit or loss

 

 

Cash flow hedges

(19)

16

Currency translation (loss)/gain arising on consolidation

(353)

293

 

(372)

309

Items that will not subsequently be reclassified to profit or loss

 

 

Remeasurements of defined benefit pension scheme

(2,374)

5,227

Tax relating to components of other comprehensive income

643

(2,335)

 

(1,731)

2,892

Total comprehensive income for period

21,186

22,781

 

 

The total comprehensive income for the period is attributable to the equity shareholders of the parent company Findel plc.

 

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

 

Consolidated Balance Sheet                                                                                          Company Number: 549034

at 29 March 2019

 

 

2019

2018

(restated)

2017

(restated)

 

 

£000

£000

£000

Non-current assets

 

 

 

 

Intangible assets

 

24,952

25,175

26,186

Property, plant and equipment

 

45,511

45,350

44,416

Derivative financial instruments

 

6

41

32

Retirement benefit surplus

 

-

2,205

-

Deferred tax assets

 

10,556

8,904

8,524

 

 

81,025

81,675

79,158

Current assets

 

 

 

 

Inventories

 

48,757

54,375

58,410

Trade and other receivables

 

235,923

230,802

210,742

Derivative financial instruments

 

604

6

556

Cash and cash equivalents

 

37,603

26,244

29,173

Current tax assets

 

-

451

1,748

 

 

322,887

311,878

300,629

Total assets

 

403,912

393,553

379,787

Current liabilities

 

 

 

 

Trade and other payables

 

(72,592)

(67,047)

(63,474)

Obligations under finance leases

 

(498)

(572)

(545)

Derivative financial instruments

 

-

(4,147)

-

Provisions

 

(3,325)

(9,424)

(27,770)

Current tax liabilities

 

(1,762)

-

-

 

 

(78,177)

(81,190)

(91,789)

Non-current liabilities

 

 

 

 

Bank loans

 

(270,545)

(257,504)

(252,534)

Obligations under finance leases

 

-

(497)

(1,069)

Provisions

 

(7,753)

(10,605)

(12,767)

Retirement benefit obligation

 

(68)

-

(5,415)

Deferred tax liabilities

 

(3,849)

(4,564)

-

 

 

(282,215)

(273,170)

(271,785)

Total liabilities

 

(360,392)

(354,360)

(363,574)

Net assets

 

43,520

39,193

16,213

Equity

 

 

 

 

Share capital

 

48,644

48,644

48,644

Translation reserve

 

764

1,117

824

Hedging reserve

 

(54)

(35)

(51)

Accumulated losses

 

(5,834)

(10,533)

(33,204)

Total equity

 

43,520

39,193

16,213

 

The accompanying notes are an integral part of this consolidated balance sheet.

Consolidated Cash Flow Statement

52-week period ended 29 March 2019

 

 

2019

2018

(restated)

 

 

£000

£000

Profit for the period

 

23,289

19,580

Adjustments for:

 

 

 

Income tax

 

6,064

2,565

Finance costs

 

9,656

9,130

Depreciation of property, plant and equipment

 

9,438

8,423

Amortisation of intangible assets

 

2,167

1,996

Share-based payment expense

 

926

199

Loss on disposal of property, plant and equipment

 

-

192

Fair value movements on financial instruments net of premiums paid

 

(4,784)

4,648

Pension contributions less income statement charge

 

(40)

(2,500)

Operating cash flows before movements in working capital

 

46,716

44,233

Decrease in inventories

 

5,618

4,547

Increase in receivables

 

(26,549)

(20,573)

Increase in payables

 

5,522

3,894

Decrease in provisions

 

(8,951)

(20,662)

Cash generated from operations

 

22,356

11,439

Income taxes (paid)/refunded

 

(1,931)

581

Interest paid

 

(10,017)

(8,482)

Net cash from operating activities

 

10,408

3,538

Investing activities

 

 

 

Interest received

 

-

177

Proceeds on disposal of property, plant and equipment

 

-

50

Purchases of property, plant and equipment, software and IT development costs and intangible assets

 

(11,545)

(10,595)

Acquisition of subsidiary, net of cash acquired

 

-

(450)

Net cash used in investing activities

 

(11,545)

(10,818)

Financing activities

 

 

 

Repayments of obligations under finance leases

 

(571)

(545)

Bank loans repaid

 

(5,000)

(10,000)

Securitisation loan drawn

 

18,041

14,970

Net cash from financing activities

 

12,470

4,425

Net increase/(decrease) in cash and cash equivalents

 

11,333

(2,855)

Cash and cash equivalents at the beginning of the period

 

26,244

29,173

Effect of foreign exchange rate changes

 

26

(74)

Cash and cash equivalents at the end of the period

 

37,603

26,244

 

 

 

 

 

The accompanying notes are an integral part of this consolidated cash flow statement.

Consolidated Statement of Changes in Equity

52-week period ended 29 March 2019

 

Share capital

Translation reserve

Hedging reserve

Accumulated losses

Total equity

 

£000

£000

£000

£000

£000

At 31 March 2017 (as reported)

48,644

824

(51)

(32,714)

16,703

Effect of adopting IFRS 15 (note 1)

-

-

-

(490)

(490)

At 31 March 2017 (restated)

48,644

824

(51)

(33,204)

16,213

Total comprehensive income

 

 

 

 

 

for the period (restated)

-

293

16

22,472

22,781

Share-based payments

-

-

-

199

199

At 30 March 2018 (restated)

48,644

1,117

(35)

(10,533)

39,193

Adjustment on initial application of IFRS 9 (net of tax)

-

-

-

(17,785)

(17,785)

Restated balance at 30 March 2018

48,644

1,117

(35)

(28,318)

21,408

Total comprehensive income

 

 

 

 

 

for the period

-

(353)

(19)

21,558

21,186

Share-based payments

-

-

-

926

926

At 29 March 2019

48,644

764

(54)

(5,834)

43,520

 

The total equity is attributable to the equity shareholders of the parent company Findel plc.

The accompanying notes are an integral part of this consolidated statement of changes in equity.

  

 

Findel plc

Notes to the Group Financial Information

1 Basis of preparation of consolidated financial information

 

The financial information set out herein does not constitute the Company's statutory financial statements for the periods ended 29 March 2019 or 30 March 2018, but is derived from those financial statements. Statutory financial statements for 2018 have been delivered to the Registrar of Companies, and those for 2019 will be delivered in due course. The financial statements were approved by the Board of directors on 4 June 2019. The auditors have reported on those financial statements; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

 

Copies of the Company's statutory financial statements will be available on the Group's corporate website. Additional copies will be available upon request from Findel plc, Church Bridge House, Accrington, BB5 4EE.

 

The Group financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use within the European Union and in accordance with the accounting policies included in the Annual Report for the period ended 30 March 2018 except as stated below.

 

Going concern

In determining whether the Group's financial statements for the period ended 29 March 2019 can be prepared on a going concern basis, the Directors considered all factors likely to affect its future development, performance and its financial position, including its cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities in the current economic climate.

The Directors have reviewed the Group's trading and cash flow forecasts as part of their going concern assessment, including considering the potential impact of reasonably possible downside sensitivities which take into account the uncertainties in the current operating environment, including, amongst other matters, demand for the Group's products, its available financing facilities, and regulatory licensing and compliance. Although at certain times, under the downside sensitivities, the level of facility and/or covenant headroom reduces to a level which requires cash flow initiatives to be introduced to ensure that the funding requirements do not exceed the committed facilities or result in non-compliance with covenants, management are confident that such actions are supportable, and that further controllable mitigating actions are available that could be implemented if required. The Group's current banking facilities mature in December 2020.

Taking into account the above circumstances, the Directors have formed a judgement that there is a reasonable expectation, and there are no material uncertainties, that the Group and the Company have adequate resources to continue in operational existence for a period of at least 12 months.

Accordingly, they continue to adopt the going concern basis in preparing the Group's annual consolidated financial statements.

 

 

Impact of accounting standards that have become effective during the current period

The Group has initially applied IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers with effect from 31 March 2018, being the first day of the current accounting period.

·    IFRS 9 'Financial Instruments' ("IFRS 9")

IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.

As a result of the adoption of IFRS 9, the Group has adopted consequential amendments to IAS 1 Presentation of Financial Statements, which require separate presentation in the Consolidated Income Statement of interest income calculated using the effective interest rate method and impairment of financial assets. Previously, the Group's approach was to include interest income calculated using the effective interest rate method within revenue and impairment of financial assets within cost of sales. Consequently, the Group has reclassified interest income of £98,119,000 (2018: £91,911,000) from revenue to "credit account interest" and £36,623,000 (2018: £28,156,000) from cost of sales to "impairment losses on customer receivables" in the consolidated income statement.

i) Classification - financial assets and liabilities

IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics.

IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income ("FVOCI") and fair value through profit and loss ("FVTPL"). The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.

A financial asset will be measured at amortised cost if both the following conditions are met and it has not been designated as at FVTPL:

·      the asset is held within a business model whose objective is to hold the asset to collect its contractual cash flows; and

·      the contractual terms of the financial asset give rise to cash flows on specified dates that represent payments of solely principal and interest on the outstanding.

IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities.

 

 

 

The adoption of IFRS 9 has not had a significant effect on the Group's accounting policies related to financial liabilities and derivative financial instruments. The impact of IFRS 9 on the classification and measurement of financial assets at 31 March 2018 is set out in the table below:

 

Original classification under IAS 39

New

classification

under

IFRS 9

Original

carrying

amount

under

IAS 39

New carrying

amount

under

IFRS 9

 

Financial Assets

£000

£000

£000

£000

Trade receivables

Loans and

receivables

Amortised cost

212,897

191,469

Other receivables and prepayments

Loans and

receivables

Amortised cost

17,905

17,905

Cash and cash equivalents

Loans and

receivables

Amortised cost

26,244

26,244

 

The following table reconciles the carrying amounts of financial assets under IAS 39 to the carrying amounts under IFRS 9 on transition on 31 March 2018:

 

Carrying

amount

under

IAS 39 at 30 March 2018

 

Remeasurement

Carrying

amount

under

IFRS 9 at 31 March 2018

 

Financial Assets

£000

£000

£000

Trade receivables

212,897

(21,428)

191,469

Other receivables and prepayments

17,905

-

17,905

Cash and cash equivalents

26,244

-

26,244

 

  

 

Studio's trade receivables that were classified as loans and receivables under IAS 39 are now classified at amortised cost. An increase in the allowance for impairment over these trade receivables of £21,428,000 was recognised in opening accumulated losses at 31 March 2018 as a result. A corresponding deferred tax asset of £3,643,000 was also recognised in accumulated losses at 31 March 2018.

Financial assets classified at amortised cost are subsequently measured at amortised cost using the effective interest method. The amortised cost is reduced by impairment losses (see point ii) below). Interest income, foreign exchange gains and losses and impairment are recognised in profit and loss. Any gain or loss on derecognition is recognised in profit or loss.

ii) Impairment of financial assets

IFRS 9 replaces the incurred loss model in IAS 39 with a forward-looking expected credit loss ("ECL") model and therefore materially changes the way in which the Group calculates its provision for impairment in respect of Studio Retail's trade receivables. Under IFRS 9, credit losses are recognised earlier than under IAS 39.

As the Group has determined there is a significant financing component, the ECL model introduces the concept of staging:

 

·      Stage 1: Where there is no evidence of significant increase in credit risk since the origination of the financial asset. Stage 1 applies from the initial recognition of the financial asset unless it was credit impaired when purchased or originated;

·      Stage 2: Where there is evidence of significant increase in credit risk since origination of the financial asset; and

·      Stage 3: Where the financial asset becomes credit impaired.

 

Under IFRS 9, loss allowances are measured on the following bases:

·      12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and

·      lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument.

12-month ECLs are used for Stage 1 performing assets and a lifetime ECL is used for stages 2 and 3. An asset will move from Stage 1 to Stage 2 when there is evidence of significant increase in credit risk since the asset originated and into Stage 3 when it is credit impaired. Should the credit risk improve so that the assessment of credit risk at the reporting date is considered not to be significant any longer, assets return to an earlier stage in the ECL model.

The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due, has been placed on an arrangement to pay less than the standard required minimum payment or has had interest suspended.

The Group considers a financial asset to be in default when it is more than 120 days past due and/or when the borrower is unlikely to pay its obligations in full.

When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis based on the Group's historical experience and informed credit assessment including forward looking information.

Estimation uncertainty

The key assumptions in the ECL calculations are:

Probability of Default ("PD") - an estimate of the likelihood of default over 12 months and the expected lifetime of the debt;

Exposure at Default ("EAD") - an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by the contract or otherwise and accrued interest from missed payments; and

Loss Given Default ("LGD") - an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the Group would expect to receive, discounted at the original effective interest rate.

 

Incorporation of forward-looking information

The Group incorporates forward-looking information into its measurement of ECLs. This is achieved by developing four potential economic scenarios and modelling ECLs for each scenario. The outputs from each scenario are combined; using the estimated likelihood of each scenario occurring to derive a probability weighted ECL.

Management judgement is required in setting assumptions around probabilities of default and the weighting of economic scenarios in particular which have a material impact on the results indicated by the ECL model.

 

Presentation

Loss allowances for financial assets are deducted from the gross carrying amount of the asset. Impairment losses related to Studio Retail's trade receivables are separately in the consolidated income statement.

 

Impact of new impairment model

The Group has determined that the application of IFRS 9's impairment requirements at 31 March 2018 results in an additional impairment provision in respect Studio Retail's trade receivables as follows:

 

 

 

 

£000

Impairment provision at 30 March 2018 under IAS 39

(55,084)

Additional impairment provision recognised on adoption of IFRS 9

(21,428)

Impairment provision at 31 March 2018 under IFRS 9

(76,512)

 

 

 

iv) Transition

Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except that the Group has taken an exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Differences in the carrying amounts of financial assets resulting from the adoption of IFRS 9 are recognised in accumulated losses as at 31 March 2018. Accordingly, the information presented for the period to 30 March 2018 reflects the requirements of IAS 39 rather than IFRS 9. 

 

·    IFRS 15 'Revenue from Contracts with Customers' ("IFRS 15")

IFRS 15 replaced IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations, and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards.

 

The standard introduces a five-step approach to the recognition of revenue as follows:

1. Identify the contract(s) with a customer;

2. Identify the performance obligations in the contract;

3. Determine the transaction price;

4. Allocate the transaction price to the performance obligations in the contract; and

5. Recognise revenue when (or as) the entity satisfied a performance obligation.

 

The Group has performed a detailed impact assessment, identifying all current sources of revenue in scope of the new standard and assessing their treatment under the five-step model.

The principal impact of adopting the new standard is a change in the point at which revenue is recognised in respect of the supply of products to customers (including delivery charges) from the point of despatch to the point of delivery. This is on the basis that the performance obligations identified in these transactions are the supply and delivery of products and that these obligations are not deemed to be completed until the customer obtains control of the products (i.e. on delivery). The supply and delivery of products are not deemed to be separable performance obligations as the customer is obliged to make use of the Group's delivery arrangements in most cases.

The impact of this change is to delay the recognition of revenue (and gross profit) by an average of 1 to 3 days, reflecting the Group's standard delivery timeframes.

The Group has adopted IFRS 15 using the fully retrospective method of adoption. Consequently, the comparative Consolidated Income Statement for the period ended 30 March 2018 and the Consolidated Balance Sheets at 31 March 2017 and 30 March 2018 have been restated to reflect the requirements of IFRS 15. The impact of adopting IFRS 15 on the current and comparative periods shown is summarised in the following tables.

 

Impact on the Consolidated Income Statement and Comprehensive Income

 

52-week period ended 29 March 2019

 

 

Amounts prior to adoption of IFRS 15

Impact of IFRS 15 adoption

As reported

 

 

£000

£000

£000

Continuing operations

 

 

 

 

Revenue

 

408,071

617

408,688

Credit account interest

 

98,119

 

98,119

Total revenue (including credit interest)

 

506,190

617

506,807

Cost of sales

 

(260,866)

(511)

(261,377)

Impairment losses on customer receivables

 

(36,623)

 

(36,623)

Gross profit

 

208,701

106

208,807

Trading costs

 

(174,424)

(124)

(174,548)

Analysis of operating profit:

 

 

 

 

- EBITDA*

 

45,882

(18)

45,864

- Depreciation and amortisation

 

(11,605)

-

(11,605)

Operating profit

 

34,277

(18)

34,259

Finance costs

 

(9,656)

-

(9,656)

Profit before tax and fair value movements on derivative financial instruments

 

24,621

(18)

24,603

Fair value movements on derivative financial instruments

 

4,750

-

4,750

Profit before tax

 

29,371

(18)

29,353

Tax expense

 

(6,064)

-

(6,064)

Profit for the period

 

23,307

(18)

23,289

Total comprehensive income for the period

 

21,204

(18)

21,186

 

 

 

 

 

Earnings per ordinary share

 

 

 

 

Basic

 

27.00p

(0.02)p

26.98p

Diluted

 

27.00p

(0.02)p

26.98p

           

 

*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments.

 

 

 

52-week period ended 30 March 2018

 

 

Amounts prior to adoption of IFRS 15

Impact of IFRS 15 adoption

As reported

 

 

£000

£000

£000

Continuing operations

 

 

 

 

Revenue

 

387,048

654

387,702

Credit account interest

 

91,911

 

91,911

Total revenue (including credit interest)

 

478,959

654

479,613

Cost of sales

 

(253,020)

(530)

(253,550)

Impairment losses on customer receivables

 

(28,156)

 

(28,156)

Gross profit

 

197,783

124

197,907

Trading costs

 

(161,832)

(99)

(161,931)

Analysis of operating profit:

 

 

 

 

- EBITDA*

 

46,370

25

46,395

- Depreciation and amortisation

 

(10,419)

-

(10,419)

Operating profit

 

35,951

25

35,976

Finance costs

 

(9,130)

-

(9,130)

Profit before tax and fair value movements on derivative financial instruments

 

26,821

25

26,846

Fair value movements on derivative financial instruments

 

(4,701)

-

(4,701)

Profit before tax

 

22,120

25

22,145

Tax expense

 

(2,542)

(23)

(2,565)

Profit for the period

 

19,578

2

19,580

Total comprehensive income for the period

 

22,779

2

22,781

 

 

 

 

 

Earnings per ordinary share

 

 

 

 

Basic

 

22.68p

0.00p

22.68p

Diluted

 

22.68p

0.00p

22.68p

           

 

*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments.
 

Impact on the Consolidated Balance Sheet

 

at 29 March 2019

 

 

Amounts prior to adoption of IFRS 15

Impact of IFRS 15 adoption

As reported

 

 

£000

£000

£000

Non-current assets

 

81,025

-

81,025

Current assets

 

 

 

 

Inventories

 

47,526

1,231

48,757

Trade and other receivables

 

237,751

(1,828)

235,923

Derivative financial instruments

 

604

-

604

Cash and cash equivalents

 

37,603

-

37,603

 

 

323,484

(597)

322,887

Total assets

 

404,509

(597)

403,912

Current liabilities

 

 

 

 

Trade and other payables

 

(72,592)

-

(72,592)

Obligations under finance leases

 

(498)

-

(498)

Provisions

 

(3,325)

-

(3,325)

Current tax liabilities

(1,853)

91

(1,762)

 

 

(78,268)

91

(78,177)

Non-current liabilities

 

(282,215)

-

(282,215)

Total liabilities

 

(360,483)

91

(360,392)

Net assets

 

44,026

(506)

43,520

Equity

 

 

 

 

Share capital

 

48,644

-

48,644

Translation reserve

 

764

-

764

Hedging reserve

 

(54)

-

(54)

Accumulated losses

 

(5,328)

(506)

(5,834)

Total equity

 

44,026

(506)

43,520

 

 

 

at 30 March 2018

 

 

Amounts prior to adoption of IFRS 15

Impact of IFRS 15 adoption

As reported

 

 

£000

£000

£000

Non-current assets

 

 

 

 

Intangible assets

 

25,175

-

25,175

Property, plant and equipment

 

45,350

-

45,350

Derivative financial instruments

 

41

-

41

Retirement benefit surplus

 

2,205

-

2,205

Deferred tax assets

 

8,813

91

8,904

 

 

81,584

91

81,675

Current assets

 

 

 

 

Inventories

 

53,091

1,284

54,375

Trade and other receivables

 

232,665

(1,863)

230,802

Derivative financial instruments

 

6

-

6

Cash and cash equivalents

 

26,244

-

26,244

Current tax receivable

 

451

-

451

 

 

312,457

(579)

311,878

Total assets

 

394,041

(488)

393,553

Current liabilities

 

(81,190)

-

(81,190)

Non-current liabilities

 

(273,170)

-

(273,170)

Total liabilities

 

(354,360)

-

(354,360)

Net assets

 

39,681

(488)

39,193

Equity

 

 

 

 

Share capital

 

48,644

-

48,644

Translation reserve

 

1,117

-

1,117

Hedging reserve

 

(35)

-

(35)

Accumulated losses

 

(10,045)

(488)

(10,533)

Total equity

 

39,681

(488)

39,193

 

 

 

at 31 March 2017

 

 

Amounts prior to adoption of IFRS 15

Impact of IFRS 15 adoption

As reported

 

 

£000

£000

£000

Non-current assets

 

 

 

 

Intangible assets

 

26,186

-

26,186

Property, plant and equipment

 

44,416

-

44,416

Derivative financial instruments

 

32

-

32

Deferred tax assets

 

8,410

114

8,524

 

 

79,044

114

79,158

Current assets

 

 

 

 

Inventories

 

57,108

1,302

58,410

Trade and other receivables

 

212,648

(1,906)

210,742

Derivative financial instruments

 

556

-

556

Cash and cash equivalents

 

29,173

-

29,173

Current tax receivable

 

1,748

-

1,748

 

 

301,233

(604)

300,629

Total assets

 

380,277

(490)

379,787

 Current liabilities

 

(91,789)

-

(91,789)

 Non-current liabilities

 

(271,785)

-

(271,785)

Total liabilities

 

(363,574)

-

(363,574)

Net assets

 

16,703

(490)

16,213

Equity

 

 

 

 

Share capital

 

48,644

-

48,644

Translation reserve

 

824

-

824

Hedging reserve

 

(51)

-

(51)

Accumulated losses

 

(32,714)

(490)

(33,204)

Total equity

 

16,703

(490)

16,213

 

 

The adoption of IFRS 15 did not have a material impact on the Group's cash flows in either the current or comparative periods.

 

 

Impact of accounting standards not yet effective

·      IFRS 16 'Leases' ("IFRS 16")

IFRS 16 is effective for all accounting periods beginning on or after 1 January 2019. For Findel plc the first reported accounting period under IFRS 16 will be the 2019/20 financial year.

On the adoption of IFRS 16, lease agreements will give rise to both a right of use asset and a lease liability for future lease payables. The right of use asset will be depreciated on a straight-line basis over the life of the lease. Interest will be recognised on the lease liability, resulting in a higher interest expense in the earlier years of the lease term. The total expense recognised over the life of the lease will be unaffected by the new standard. However, IFRS 16 will result in the timing of lease expense recognition being accelerated for leases which would be currently accounted for as operating leases. It will also affect presentation of costs in the Consolidated Income Statement.

 

The adoption of IFRS 16 has no effect on how the business is run, nor on the overall cash flows for the Group.

 

Transition

The Group has decided to adopt the modified retrospective transition approach. The Group will apply the practical expedient to grandfather the definition of a lease on transition and apply the recognition exemption for both short term and low value assets.

Findel plc has established a working group to ensure we take all necessary steps to comply with the requirements of IFRS 16, reporting regularly to the Audit Committee. Significant work has been completed, including collection of relevant data, changes to processes, and the determination of relevant accounting policies.

At March 2019 the weighted average discount rate, based on incremental borrowing rates, across the Group lease portfolio is approximately 3.6%. This is on the basis that the Group's borrowings are secured by fixed and floating charges and would therefore be similar in risk profile to lending secured against a leased asset.

 

Impact to financial statements

The modified retrospective approach does not require a restatement of the prior period comparatives. There will be no adjustment to FY20 opening retained earnings, but Findel plc will recognise an opening right of use asset in the region of £42m and a lease liability in the region of £50m. The models and business processes used to calculate these indicative figures are still under development. They therefore reflect management's best estimates at this stage and as such, are subject to final verification.

The opening right of use asset is lower than the opening lease liability as it takes into account onerous lease provisions which are reflected as impairments of the opening right of use asset. On an ongoing basis, if indicators of impairment exist, then the right of use lease asset will be tested for impairment as per IAS 36.

We do not expect the adoption of IFRS 16 to have a material impact on the Group's effective tax rate.

There will be no impact on cash flows, although the presentation of the Cash Flow Statement will change significantly, with an increase in net cash inflows from operating activities being offset by an increase in net cash outflows from financing activities (interest paid).

 

Segmental reporting

IFRS 8 requires operating segments to be identified on the basis of the internal financial information reported to the CODM who is primarily responsible for the allocation of resources to segments and the assessment of performance of the segments. The CODM is the Board of Findel plc.

The Group's operations are organised into a central cost centre and two operating segments as follows:

 

·      Studio (formerly Express Gifts); and

·      Education.

 

The CODM assess the operating performance of each segment by reference to revenue and gross margin by revenue stream, and operating profit after distribution, marketing and administration costs, depreciation and amortisation.

 

Critical accounting judgements and key sources of estimation uncertainty

In the course of applying the Group's accounting policies, no judgements have been made that have had a significant effect on the reported amounts of assets, liabilities, income and expenses, other than those involving estimations stated below.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:

 

Studio's trade receivables

Studio's trade receivables are recognised on the balance sheet at amortised cost (i.e. net of provision for expected credit loss). At 29 March 2019 trade receivables with a gross value of £295.5m (2018 restated: £259.1m) were recorded on the balance sheet, less a provision for impairment of £87.9m (2018: £55.1m).

An appropriate allowance for expected credit loss in respect of trade receivables is derived from estimates and underlying assumptions such as the Probability of Default and the Loss Given Default, taking into consideration forward looking macro-economic assumptions. Changes in the assumptions applied such as the value and frequency of future debt sales in calculating the Loss Given Default, and the estimation of customer repayments and Probability of Default rates, as well as the weighting of the macro-economic scenarios applied to the impairment model could have a significant impact on the carrying value of trade receivables.

As a result, these assumptions are continually assessed for relevance and adjusted appropriately. Revisions to estimates are recognised prospectively.

 

Valuation of indefinite-lived intangibles

The Group has significant investments in indefinite lived intangible assets at 29 March 2019 as a result of acquisitions of businesses and purchases of such assets. The carrying value of indefinite-lived intangible assets at 29 March 2019 was £17.3m (2018: £17.3m). These assets are held at cost less provisions for impairment and are tested annually for impairment. Tests for impairment are primarily based on the calculation of a value in use for each cash generating unit. This involves the preparation of discounted cash flow projections, which require an estimate of both future operating cash flows and an appropriate discount rate.

Other key accounting estimates which, although important estimates, are not considered to be a significant risk of resulting in a material adjustment within the next financial year are as follows:

Inventory provisioning

The Group carries significant amounts of inventory against which there are provisions for slow moving and delisted products. At 29 March 2019 a provision of £2.5m (2018: £1.9m) was held against a gross inventory value of £51.2m (2018 restated: £56.3m).

Provisions are made against inventory based upon its location, the planned method of sale and the level of holding compared to forecast sales levels. The provisioning calculations require a high degree of judgement in assessing which lines require provisioning against and the use of estimates around historical recovery rates for slow moving and delisted products.

If a further 10% of lines were assessed as being slow moving, then the provision required would increase by approximately £250,000. If the recovery rate assumed decreased by 10% then the provision would increase by approximately £800,000. These sensitivities reflect management's assessment of reasonably possible changes to key assumptions which could result in adjustments to the level of provision within the next financial year.

 

 

Provisions for Financial Services redress

At 29 March 2019 a provision of £2.2m (2018: £8.6m) remains provided in the balance sheet in respect of redress and refunds for flawed financial services products.

Provisions totalling £29m were built up in FY16 and FY17 in relation to the anticipated refund of premiums and interest to customers in respect of historic flawed credit and insurance products. Those provisions contained assumptions and judgements on the likely level of customer response and the quantum of refund due to each responding customer.  This programme has also been refined over the last two years to include new guidance from the FCA on refund matters, including the treatment of commissions following the "Plevin" ruling.  This refined scope, together with slightly higher response levels than originally anticipated, has led to an increase in the provision required at 29 March 2019 of £4,157,000. This has been partially offset by the recognition of a receivable balance of £1,239,000 (recorded in other debtors) in respect of contributions expected to be received from underwriters and the recovery of VAT on the operational costs of the exercise which were originally assumed to be irrecoverable. The net charge to the Consolidated Income statement in the current period is therefore £2,918,000. Due to the scale of the charge incurred, and the fact that the issues to which the redress and refund programmes relate did not arise in the current period, management have concluded that the additional charge should be separately disclosed as an individually significant item in the Consolidated Income Statement.

Whilst the refund programme is now substantially concluded, the amount that remains provided, particularly in respect of the treatment of commissions following the Plevin ruling, is based on an assumed response rate to a mailing exercise completed after the year end. An increase of 5% in this assumed response rate would increase the provision required by c.£0.1m. This sensitivity analysis reflects management's assessment of a reasonably possible change to key assumptions which could result in adjustments to the level of provision within the next financial year.

 

Provisions for onerous leases

At 29 March 2019 a provision of £8.8m (2018: £11.4m) was recorded in the balance sheet in respect of onerous leases for unoccupied areas of the Group's premises at Enfield and Hyde. The provisions represent the net of the remaining unavoidable lease rentals, less an assumed level of sublet income over the remaining terms of the leases of between nine and fifteen years. Because of the long-term nature of the liabilities, the cash flows have been discounted using a discount rate that reflects the risks inherent in the future cash flows. Cash outflows have been discounted at a risk-free rate of 3%, inflows from subleases that have been agreed at 29 March 2019 have been discounted at 4%, whilst assumed inflows from future subleases that have yet to be agreed have been discounted at 6%.

Management have made estimates as to the timing and quantum of sublet income expected to be received based on an assessment of subleases agreed at the balance sheet date and local market conditions, as well as applying judgement in discounting the cash inflows at between 4% and 6%. During the year an agreement was reached to sublease the vacant property at Enfield. Since the level of sublet income was higher than anticipated, and the reduced risk around the sublease inflows has led to a reduced 4% discount rate being applied, a reduction in provision of £1.2m was indicated. Consequently, a credit has been recorded in the Consolidated Income Statement in this regard. Since this item does not relate to trading in the current period and the original provision was created as the result of costs classified as individually significant items, management have concluded that the credit should be separately disclosed as an individually significant item in the Consolidated Income Statement.

The level of provision required is sensitive to the key assumptions set out above. If the Hyde property remained vacant for one further year than planned then the provision required would increase by approximately £1.4m, whilst 1% increase in the discount rate applied to the assumed sublease income would increase the provision by approximately £0.7m. These sensitivities reflect management's assessment of reasonably possible changes to key assumptions which could result in adjustments to the level of provision within the next financial year.

Discount rate for pension scheme liabilities

At 29 March 2019 the Group's defined benefit pension scheme showed a deficit of £0.1m (2018: surplus of £2.2m). Management makes use of the PwC Single Agency corporate bond yield curve to derive the discount rate applied to the scheme's projected cash flows, in the calculation of its liabilities under IAS 19. Changes to the discount rate applied could lead to significant changes in the level of liabilities recognised.

The carrying amounts of the assets and liabilities detailed above are sensitive to the underlying assumptions used by management in their calculation. It is reasonably possible that the outcomes within the next financial year could differ from the assumptions made, which would impact upon the carrying values assumed.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any of the future periods affected.

 

2 Segmental analysis

52 weeks ended 29 March 2019

 

Studio

Education

Central

Total

 

£000

£000

£000

£000

Product revenue

307,249

82,081

-

389,330

 

 

 

 

 

Other financial services revenue

19,332

-

-

19,332

Credit account interest

98,119

-

-

98,119

Financial services revenue

117,451

-

-

117,451

Sourcing revenue

26

-

-

26

Reportable segment revenue

424,726

82,081

-

506,807

 

 

 

 

 

Product cost of sales

(208,344)

(53,015)

-

(261,359)

Financial services cost of sales

(36,623)

-

-

(36,623)

Sourcing cost of sales

(18)

-

-

(18)

Total cost of sales

(244,985)

(53,015)

-

(298,000)

 

 

 

 

 

Gross profit

179,741

29,066

-

208,807

Marketing costs

(39,694)

(2,803)

-

(42,497)

Distribution costs

(38,396)

(8,836)

-

(47,232)

Administrative costs

(53,723)

(12,552)

(2,781)

(69,056)

EBITDA*

47,928

4,875

(2,781)

50,022

Depreciation and amortisation

(8,480)

(1,658)

(1,467)

(11,605)

Operating profit/(loss) before individually significant items

39,448

3,217

(4,248)

38,417

Individually significant items

(2,918)

526

(1,766)

(4,158)

Operating profit/(loss)

36,530

3,743

(6,014)

34,259

Finance costs

 

 

 

(9,656)

Profit before tax and fair value movements on derivative financial instruments

 

 

 

24,603

Fair value movements on derivative financial instruments

 

 

 

4,750

Profit before tax

 

 

 

29,353

*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments.

 

 

 

52 weeks ended 30 March 2018 (restated)

 

Studio

Education

Central

Total

 

£000

£000

£000

£000

Product revenue

284,965

86,336

-

371,301

 

 

 

 

 

Other financial services revenue

16,205

-

-

16,205

Credit account interest

91,911

-

-

91,911

Financial services revenue

108,116

-

-

108,116

Sourcing revenue

196

-

-

196

Reportable segment revenue

393,277

86,336

-

479,613

 

 

 

 

 

Product cost of sales

(198,021)

(55,251)

-

(253,272)

Financial services cost of sales

(28,156)

-

-

(28,156)

Sourcing cost of sales

(205)

(73)

-

(278)

Total cost of sales

(226,382)

(55,324)

-

(281,706)

 

 

 

 

 

Gross profit

166,895

31,012

-

197,907

Marketing costs

(40,741)

(3,393)

-

(44,134)

Distribution costs

(35,183)

(10,013)

-

(45,196)

Administrative costs

(47,189)

(13,183)

(1,810)

(62,182)

EBITDA*

43,782

4,423

(1,810)

46,395

Depreciation and amortisation

(7,455)

(1,488)

(1,476)

(10,419)

Operating profit/(loss) before individually significant items

36,327

2,935

(3,286)

35,976

Individually significant items

-

-

-

-

Operating profit/(loss)

36,327

2,935

(3,286)

35,976

Finance costs

 

 

 

(9,130)

Profit before tax and fair value movements on derivative financial instruments

 

 

 

26,846

Fair value movements on derivative financial instruments

 

 

 

(4,701)

Profit before tax

 

 

 

22,145

*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments.

 

3 Individually significant items

An analysis of individually significant items arising during the current period is as follows:

 

2019

 

£000

 

 

Studio financial services redress and refund costs

(2,918)

Reduction in onerous lease provisions

1,220

GMP equalisation adjustment

(2,460)

 

(4,158)

Tax credit in respect of individually significant items

741

Total

(3,417)

 

Individually significant costs totalling £29m were recorded in FY16 and FY17 in relation to the creation of provisions for the anticipated refund of premiums and interest to customers in respect of historic flawed credit and insurance products. Those provisions contained assumptions and judgements on the likely level of customer response and the quantum of refund due to each responding customer.  The refund programme has also been refined over the last two years to include new guidance from the FCA on refund matters, including the treatment of commissions following the "Plevin" ruling.  This refined scope, together with slightly higher response levels than originally anticipated, has led to an increase in the provision required at 29 March 2019 of £4,157,000. This has been partially offset by the recognition of a receivable balance of £1,239,000 (recorded in other debtors) in respect of contributions expected to be received from underwriters and the recovery of VAT on the operational costs of the exercise, which were originally assumed to be irrecoverable. The net charge to the Consolidated Income statement in the current period is therefore £2,918,000.

 

During the current period, an agreement was reached to sublease the vacant property at Enfield. Since the level of sublet income was higher than anticipated, and the reduced risk around the sublease inflows has led to a reduced 4% discount rate being applied, a reduction in provision of £1.2m was indicated. Consequently, a credit has been recorded in the Consolidated Income Statement in this regard. Please refer to note 1 for further details.

In October 2018, the High Court handed down a judgement involving the Lloyds Banking Group's defined benefit pension schemes.  The judgement concluded that the schemes should be amended to equalise pension benefits for men and women in relation to guaranteed minimum pension ("GMP") benefits.  The issues determined by the judgement arise in relation to many other defined benefit pension schemes, including the Findel Group Pension Fund.  After discussion with the trustees, actuaries and legal advisors of our fund, a past service cost of £2,460,000 has been recognised, increasing the total scheme liabilities by approximately 1.7%, to address this historical issue. 

There were no individually significant items identified in the prior period.

 

 

 

 

4 Current taxation

(a) Tax charged/(credited) in the income statement

 

2019

2018

(restated)

 

£000

£000

Current tax expense/(income):

 

 

Current period (UK tax)

3,879

1,404

Current period (overseas tax)

123

63

Adjustments in respect of prior periods (UK tax) (1)

143

(751)

 

4,145

716

Deferred tax expense:

 

 

Origination and reversal of temporary differences

1,775

328

Adjustments in respect of prior periods (1)

144

772

Effect of tax rate change on opening balance (2)

-

749

 

1,919

1,849

Tax expense

6,064

2,565

 

(1)       The prior period adjustment in FY18 related to the tax treatment of a post balance sheet event recorded in the statutory accounts of Studio Retail Limited, which resulted in the Group's current tax liability for 2016/17 being lower than the level assumed in the FY17 accounts. This led a to a reduction in the level of brought forward losses, which resulted in a corresponding adjustment to deferred tax.

(2)       The prior period figure related to the recognition of deferred tax liabilities in respect of the group section of the Findel Group Pension Fund, which moved into a surplus position during FY18.  Consequently, the deferred tax liability was calculated at a tax rate of 35% in FY18, which reflects the rate of tax payable on any return of defined benefit pension surpluses, rather than the 17% rate assumed in FY17.

 

The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience.

(b) Tax recognised directly in other comprehensive income

 

2019

2018

 

£000

£000

Deferred tax:

 

 

Tax on defined benefit pension plans

(643)

2,335

 

(c) Reconciliation of the total tax charge/(income)

The tax expense in the income statement for the period differs from the standard rate of corporation tax in the UK of 19% (2018: 19%).

The differences are reconciled below:

 

2019

2018

(restated)

 

£000

£000

Profit before tax

29,353

22,145

Tax calculated at standard corporation tax rate of 19% (2018: 19%)

5,577

4,208

Effects of:

 

 

Expenses not deductible for tax purposes

429

264

Higher tax rates on overseas earnings

178

135

Deferred tax asset not previously recognised (3)

(407)

(2,812)

Impact of change in rate of corporation tax

-

749

Adjustments in respect of prior periods

287

21

Total tax expense for the period

6,064

2,565

(3)   In FY18, the group increased the value of deferred tax recognised in respect of tax losses in Education, based on management's judgement that it is probable that Education will have sufficient future taxable profits against which to utilise these losses.

 

 

5 Earnings per share

 

Weighted average number of shares

 

 

 

2019

2018

Ordinary shares in issue

86,442,534

86,442,534

Effect of own shares held

(114,808)

(114,808)

Weighted average number of shares - basic and diluted

86,327,726

86,327,726

 

 

 

 

 

Profit attributable to ordinary shareholders

 

 

 

 

2019

2018

 

 

(restated)

 

£000

£000

Net profit attributable to equity holders for the purposes of basic earnings per share

23,289

 

19,580

Individually significant items (net of tax)

3,417

-

Fair value movements on derivative financial instruments (net of tax)

(3,847)

3,808

Net profit attributable to equity holders for the purposes of adjusted earnings per share

22,859

 

23,388

 

 

 

Earnings per share

 

 

 

Earnings per share - basic

26.98p

22.68p

Earnings per share - adjusted* basic

26.48p

27.09p

Earnings per share - diluted

26.98p

22.68p

Earnings per share - adjusted* diluted

26.48p

27.09p

       

* Adjusted to remove the impact individually significant items and fair value movements on derivative financial instruments.

The earnings per share attributable to convertible ordinary shareholders is £nil. The convertible shares have not converted at 29 March 2019 or subsequently and are therefore not dilutive from an earnings per share perspective.

 

 

 

 

 

6 Intangible assets

(a)   Intangible assets

 

Software and IT

 

Customer

 

 

development costs

Brand names

relationships

Total

 

£000

£000

£000

£000

Cost

 

 

 

 

At 31 March 2017

17,589

21,704

20,940

60,233

Additions

985

-

-

985

At 30 March 2018

18,574

21,704

20,940

61,218

Additions

684

-

-

684

Transfer from tangible assets

1,260

-

-

1,260

At 29 March 2019

20,518

21,704

20,940

63,162

 

 

 

 

 

Accumulated amortisation and impairment

 

 

 

 

At 31 March 2017

15,044

3,913

15,090

34,047

Amortisation for the period

867

109

1,020

1,996

At 30 March 2018

15,911

4,022

16,110

36,043

Amortisation for the period

1,039

108

1,020

2,167

At 29 March 2019

16,950

4,130

17,130

38,210

 

 

 

 

 

Carrying amount

 

 

 

 

 

 

 

 

 

Net book value at 29 March 2019

3,568

17,574

3,810

24,952

Net book value at 30 March 2018

2,663

17,682

4,830

25,175

 

 

 

 

 

 

Brand names, which arise from the acquisition of businesses, and are deemed to have an indefinite life, are subject to annual impairment tests, on the basis that they are expected to be maintained indefinitely and are expected to continue to drive value for the Group. The Spa 4 Schools brand is being amortised over a useful economic life of 5 years.

The amortisation period for customer relationships, which arose from the acquisition of businesses, is between 2 and 20 years. Management do not consider that any customer relationships are individually material.

Brand names acquired in a business combination are allocated, at acquisition, to the CGUs that are expected to benefit from that business combination. The carrying amount of brand names has been allocated as follows:

 

 

2019

2018

 

£000

£000

 

 

 

Education

17,574

17,682

 

17,574

17,682

 

(b)   Impairment testing

The Group tests indefinite-lived brand names for impairment annually, or more frequently if there are indicators of impairment.

The recoverable amount of the Education CGU was determined from a value in use calculation.

 

Significant judgements, assumptions and estimates

In determining the value in use of the Education CGU it is necessary to make a series of assumptions to estimate the present value of future cash flows. These key assumptions have been made by management reflecting past experience, current trends, and where applicable, are consistent with relevant external sources of information. The key assumptions are as follows:

 

Operating cash flows

Management has prepared cash flow forecasts for a three-year period derived from the approved budget for financial year 2019/20. These forecasts include assumptions around sales prices and volumes, specific customer relationships and operating costs and working capital movements.

 

Risk adjusted discount rates

The pre-tax rate used to discount the forecast cash flows is 17.7% (2018: 17.7%). This discount rate is derived from the Group's weighted average cost of capital as adjusted for the specific risks related to the Education CGU.

 

Long term growth rate

To forecast beyond the detailed cash flows into perpetuity, a long-term average growth rate of 1.6% (2018: 1.6%) has been used. This is not greater than the published International Monetary Fund average growth rate in gross domestic product for the next five-year period in the territories where the CGU operates.

 

Results

 

The estimated recoverable amount of Education CGU exceeded the carrying value by approximately £6,970,000 (2018: £4,931,000) and as such no impairment was necessary.

 

Sensitivity analysis

 

The results of the Group's impairment tests are dependent upon estimates and judgements made by management, particularly in relation to the key assumptions described above. A reasonably possible change in key assumptions could lead to the carrying value of the Education CGU exceeding its recoverable amount. Sensitivity analysis to potential changes in operating cash flows and risk adjusted discount rates has therefore been reviewed.

 

The table below shows the risk adjusted discount rate and forecast operating cash flow assumptions used in the calculation of value in use for the Education CGU and the changes in these assumptions required for the recoverable amount to equal the carrying value: 

CGU

Education

Value in excess over carrying value (£000)

6,970

Assumptions used in the calculation of value in use

 

Pre-tax discount rate

17.7%

Total pre-discounted forecast operating cash flow (£000)

61,684

Change required for the recoverable amount to equal the carrying value

 

Pre-tax discount rate

2.4%

Total pre-discounted forecast operating cash flow

(11,536)

 

 

 

7 Trade and other receivables

 

2019

2018

(restated)

 

£000

£000

Gross trade receivables

304,279

268,106

Allowance for expected credit loss

(88,030)

(55,209)

Trade receivables

216,249

212,897

Other debtors

5,347

2,467

Prepayments

14,327

15,438

 

235,923

230,802

 

Trade receivables are measured at amortised cost. The directors consider that the Group's maximum exposure to credit risk is the carrying value of the trade and other receivables and that their carrying amount approximates their fair value.

Certain of the Group's trade receivables are funded through a securitisation facility arranged by HSBC Bank plc and funded through a vehicle owned by GRE Trust Company (Ireland) Limited. The facility is secured against those receivables and is without recourse to any of the Group's other assets. The finance provider will seek repayment of the finance, as to both principal and interest, only to the extent that collections from the trade receivables financed allows and the benefit of additional collections remains with the Group. At the period end, receivables of £239,620,000 (2018: £221,837,000) were funded through the securitisation facility, and the facilities utilised were £175,545,000 (2018: £157,504,000).

 

Due to the different nature of trade receivables within the Studio operating segment compared to those in the rest of the Group, the following analysis of trade receivables has been split between Studio and the rest of the Group.

 

Studio

The average credit period taken on sales of goods is 212 days (2018 restated: 200 days). On average, interest is charged at 3.1% (2018: 3.1%) per month on the outstanding balance.

Before accepting any new customer, Studio uses an external credit scoring system to assess the potential customer's credit quality and affordability of the credit and defines credit limits by customer. Limits and scoring attributed to customers are continually reviewed. There are no customers who represent more than 1% of the total balance of the Group's trade receivables.

The Group uses a number of forbearance measures to assist those customers approaching, or at the point of experiencing, financial difficulties. Such measures include arrangement to pay less than the minimum payment and the suspension of interest charges to help the customer pay off their debt. We expect customers to resume normal payments where they are able. At the balance sheet date forbearance measures were in place on 16,922 accounts (2018: 19,429) with total gross balances of £10,429,000 (2018: £10,973,000). Provisions are assessed as detailed above.

During the current period, overdue receivables with a gross value of £35,492,000 (2018: £69,889,000) were sold to third party debt collection agencies. As a result of the sales, the contractual rights to receive the cash flows from these assets were transferred to the purchasers.

 

The following tables provide information about the exposure to credit risk and ECLs for trade receivables from individual customers as at 29 March 2019:

 

 

2019

2018 (restated)

 

 

Trade

Trade receivables on forbearance

 

Trade

Trade receivables on forbearance

 

 

 

receivables

arrangements

Total

receivables

arrangements

Total

 

Ageing of trade receivables

£000

£000

£000

£000

£000

£000

 

Not past due

213,568

8,148

221,716

195,282

9,002

204,284

 

Past due:

 

 

 

 

 

 

 

0 - 60 days

25,422

1,837

27,259

25,461

1,967

27,428

 

60 - 120 days

13,727

444

14,171

12,286

4

12,290

 

120+ days

32,327

-

32,327

15,110

-

15,110

 

Gross trade receivables

285,044

10,429

295,473

248,139

10,973

259,112

 

Allowance for expected credit loss

(81,358)

(6,548)

(87,906)

(47,370)

(7,714)

(55,084)

 

Carrying value

203,686

3,881

207,567

200,769

3,259

204,028

 

 

 

 

2019

2018

 

 

Stage 1

Stage 2

Stage 3

Total

Total

 

£000

£000

£000

£000

£000

Gross trade receivables

117,512

113,371

64,590

295,473

259,112

Allowance for doubtful debts

 

 

 

 

 

Opening balance (2019 figure restated to reflect £21,428,000 impact of IFRS 9 adoption)

(8,217)

(30,430)

(37,865)

(76,512)

(83,449)

Impairment charge

(1,043)

163

(35,743)

(36,623)

(28,156)

Utilised in the period

-

-

25,229

25,229

56,521

Closing balance

(9,260)

(30,267)

(48,379)

(87,906)

(55,084)

Carrying value

108,252

83,104

16,211

207,567

204,028

 

Allowance for expected credit loss

An appropriate allowance for expected credit loss in respect of trade receivables is derived from estimates and underlying assumptions such as the Probability of Default and the Loss Given Default, taking into consideration forward looking macro-economic assumptions. Changes in the assumptions applied such as the value and frequency of future debt sales in calculating the Loss Given Default, and the estimation of customer repayments and Probability of Default rates, as well as the weighting of the macro-economic scenarios applied to the impairment model could have a significant impact on the carrying value of trade receivables.

 

Sensitivity analysis

Management judgement is required in setting assumptions around probabilities of default, cash recoveries and the weighting of macro-economic scenarios applied to the impairment model, which have a material impact on the results indicated by the model.

A 1% increase/decrease in the probability of default would increase/decrease the provision amount by approximately £2.1m.

A 1p increase in the assumed recoveries rate would result in the impairment provision decreasing by approximately £1.1m.

Changing the weighting of macro-economic scenarios applied to the impairment model so that the base-case scenario's weighting is doubled at the expense of the various stress scenarios would result in the impairment provision decreasing by approximately £1.0m.

 

These sensitivities reflect management's assessment of reasonably possible changes to key assumptions which could result in a material adjustment to the level of provision within the next financial year.

 

Rest of Group

The average credit period taken on sales of goods is 33 days (2018 restated: 32 days). Trade receivables are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience.

Given the nature of the public-sector customer base within the Education operating segment, it is not considered necessary to utilise formal credit scoring. However, credit references are sought for all new customers prior to extending credit. There are no customers who represent more than 1% of the total balance of the Group's trade receivables.

Included in the rest of the Group's trade receivables balance are debtors with a carrying amount of £123,000 (2018: £125,000) which are past due at the reporting date which are partially provided against. There has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 152 days (2018: 155 days).

The carrying value of not past due trade receivables which are unimpaired is £5,593,000 (2018 restated: £5,336,000).

The aged analysis of the carrying values of past due trade receivables which are unimpaired is as follows:

 

 

2019

2018

 

£000

£000

0 - 60 days

1,909

2,554

60 - 120 days

849

529

120+ days

208

325

Total

2,966

3,408

 

The aged analysis of the carrying values of past due trade receivables which are impaired is as follows:

 

2019

2018

 

£000

£000

0 - 60 days

-

-

60 - 120 days

-

-

120+ days

123

125

Total

123

125

 

Movement in allowance for expected credit losses

 

Studio

Rest of

 

 

Retail

Group

Total

 

£000

£000

£000

Balance at 31 March 2017 (restated)

83,449

184

83,633

Impairment losses recognised

28,156

70

28,226

Amounts written off as uncollectible

(56,521)

(129)

(56,650)

Balance at 30 March 2018 (restated)

55,084

125

55,209

Adjustment to opening balance on adoption of IFRS 9

21,428

-

21,428

Impairment losses recognised

36,623

55

36,678

Amounts written off as uncollectible

(25,229)

(56)

(25,285)

Balance at 29 March 2019

87,906

124

88,030

 

 

 

8 Provisions

 

 

Onerous leases

Studio  financial services redress and refunds

Restructuring provision

Total

 

£000

£000

£000

£000

At 31 March 2017

13,902

25,482

1,153

40,537

Utilised in the period

(2,646)

(16,860)

(1,153)

(20,659)

Unwind of discount

151

-

-

151

At 30 March 2018

11,407

8,622

-

20,029

Released during the period

(1,220)

-

-

(1,220)

Provided during the period

-

4,157

-

4,157

Utilised in the period

(1,344)

(10,544)

-

(11,888)

At 29 March 2019

8,843

2,235

-

11,078

 

2019

 

 

 

 

Analysed as:

 

 

 

 

Current

1,090

2,235

-

3,325

Non-current

7,753

-

-

7,753

 

8,843

2,235

-

11,078

                                                                          

2018

 

 

 

 

 

Analysed as:

 

 

 

 

Current

802

8,622

-

9,424

Non-current

10,605

-

-

10,605

 

11,407

8,622

-

20,029

                   

 

Onerous Leases

A provision was made in prior periods for onerous leases regarding vacated leasehold properties. Refer to note 1 for further details.

Studio financial services redress and refunds

Provisions totaling £29m were built up in FY16 and FY17 in relation to the anticipated refund of premiums and interest to customers in respect of historic flawed credit and insurance products. The amount provided was increased by £4,157,000 in the current period. Refer to note 1 for details. The provision is expected to be utilised within 12 months.

Restructuring provision

A provision was made in FY17 in respect of the restructuring exercise undertaken to relocate the head office function from Hyde to Studio's offices in Accrington. The provision was fully utilised in the prior financial year.
 

 

9 Related parties

 

During the current and prior periods, the Group made purchases in the ordinary course of business from Brands Inc. Limited and Firetrap Limited, subsidiaries of Sports Direct International plc, which is considered to be a related party as it is a significant shareholder in the ultimate parent company, Findel plc. The Group also provided consultancy services to Sports Direct International plc itself in the current period on arm's-length terms. The value of purchases made, and consultancy fees charged in the current and prior periods and amounts owed at the 29 March 2019 and 30 March 2018 were as follows:

Brands Inc. Limited

 

2019

£000

2018

£000

Purchases

196

175

Amounts owed

22

15

 

Firetrap Limited

 

2019

£000

2018

£000

Purchases

176

822

Amounts owed

-

125

 

Sports Direct International plc

 

2019

£000

2018

£000

Consultancy fees received

93

-

Amounts due

-

-

 

Transactions between Findel plc and its subsidiaries, which are related parties of Findel plc, have been eliminated on consolidation and are not discussed in this note. All transactions and outstanding balances between group companies are priced on an arm's-length basis and are settled in the ordinary course of business.

 

Compensation of key management personnel

The remuneration of the Directors including consultancy contracts and share-based payments, who are the key management of the Group, is set out in the audited part of the Directors' Remuneration Report is summarised below.

 

2019

2018

 

£000

£000

Short-term employee benefits

1,730

1,540

Company pension contributions

123

111

Termination payments

7

365

 

1,860

2,016

Share-based payments charge/(credit)

642

138

 

2,502

2,154

 

 

 

By order of the Board

 

 

 

 

P B Maudsley                      S M Caldwell

Group CEO                           Group CFO

4 June 2019                         4 June 2019

 


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