Brown Group Regulatory News (BWNG)

20 April 2016

FULL YEAR RESULTS FOR THE 52 WEEKS ENDED 27 FEBRUARY 2016

DOUBLE-DIGIT PROFIT GROWTH IN H2

N Brown Group Plc, the leading multi-channel, specialist fit fashion retailer today announces results for the full year to 27 February 2016.

Financial highlights:

· Total group revenue +3.5% to £866.2m (FY15: £837.2m)

· Product revenue +4.1% and Financial Services revenue +2.1%

· Product gross margin -20bps, at the top end of guidance, and Financial Services gross margin +20bps

· Underlying operating profit excluding exceptionals -1.3% to £92.6m (FY15: £93.8m)

· Underlying profit before tax* -2.0% yoy to £84.5m (FY15: £86.2m), in line with expectations

· H2 underlying profit before tax* +11.0% to £49.5m

· Statutory profit before tax -7.8% to £72.2m (FY15: £78.3m), reflecting exceptional costs largely incurred in the first half

· Adjusted** earnings per share from continuing operations 24.02p (FY15: 24.61p)

· Statutory earnings per share from continuing operations 19.45p (FY15: 21.84p)

· Proposed final dividend flat year on year at 8.56p, taking full year dividend to 14.23p, also unchanged on last year

· Net debt £289.7m (FY15: £246.6m)

· As announced in February we have restated our debtor impairment provision following a review of the application of IAS39

*Underlying is defined as excluding exceptionals, unrealised FX movement and the impact of the IAS39 restatement

**Adjusted is defined as excluding exceptionals and unrealised FX movement

Operational highlights:

· Transformation from direct mail-led to digital-first retailer continues:

o Online penetration 65%, +6ppts yoy

o Online revenue up 15% yoy

o Online penetration of new customers up 7ppts to 72%

o 66% of all traffic from mobile devices

· Power Brands performing very strongly, with Power Brand revenue up 10.0%, driven by further improvements to our product offering and innovative digital marketing campaigns:

o Power Brands active customers +6.9%

o JD Williams Brand product revenue +4.7% to £151.2m

o Simply Be product revenue +15.6% to £103.9m

o Jacamo product revenue +14.6% to £62.8m

· USA revenue +29% (+20% constant currency) and dollar profit made in H2

· Financial Services back into growth in H2; FCA application progressing

· Fit 4 the Future systems transformation project on track

Angela Spindler, Chief Executive, said:

"It has been a very busy year for N Brown as we continue to transform the way we operate as a fashion retailer - from being mail-order led, to a business that puts digital first. We are mid-way through this journey and are delighted to see the benefits coming through, importantly delivering 11% profit growth in the second half of the year.

"This progress is being driven by a clear focus on our three fashion Power Brands - JD Williams, Simply Be and Jacamo. Revenue from these brands is up 10% year-on-year and almost two-thirds of sales are now online, reflecting our digital focus. We are taking decisive actions to improve the performance of our Traditional segment which remains an important, profitable part of the Group.

"We continue to roll-out our systems investment programme, 'Fit 4 the Future', and all areas of the business are focused on ensuring this lands on time and with minimal disruption. So far we are very pleased with our progress and we remain on track and within budget.

"Looking forward, whilst we face challenging market conditions for the fashion sector overall, and trading since the year end has been subdued, we remain confident in our ability to make further progress this year. This is based on the strong appeal of our specialist fit proposition, continuous improvement in the customer experience and changes in customer shopping behaviour, driven by targeted marketing."

Andrew Higginson, Chairman, said:

"The Board is pleased with today's results, particularly against the backdrop of significant ongoing transformation within the business.

"This year will be a very important one for the Group. Our new IT platform will be implemented, bringing necessary and significant improvements to all areas of our business. However experience suggests that a programme of this scale will bring some unexpected bumps in the road. A huge amount of effort has gone into planning and preparing to mitigate these risks.

"Our Group is strong, with loyal customers and good margins. Once delivered, Fit 4 the Future will give us the robust platform we need for growth in the future".

Meeting for analysts and investors:

Management is hosting a presentation for analysts and investors at 9.30am. Please contact Nbrown@mhpc.com for further information. A live webcast of the presentation will be available at: www.nbrown.co.uk.

About N Brown Group:

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

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

N Brown is headquartered in Manchester where it designs, sources and creates its product offer, and employs over 2,800 people across the UK.

Next reporting date

The next reporting date is our Q1 trading statement on 16 June 2016.

For further information: 

CEO REVIEW

Overview

The transformation of our business model from direct mail-led to digital-first continues apace, and we are particularly pleased with the strong online metrics we are delivering, with online penetration at a new record 65%.

Our performance in FY16 was in line with expectations, with strong 11% profit growth achieved in H2, as we annualised a number of changes made to the business in FY15. We had a good Christmas period and for the first time were able to be truly agile in our trading approach, particularly for our digital brands.

In late February we announced that we would be restating our debtor impairment provisions as a consequence of a review of the application of IAS 39; the year on year movement of the restated provisions has resulted in an increase to profit before tax in both FY16 and FY15 of £3.8m and £2.0m respectively. Further details are on page 12. Importantly, this change in the technical interpretation of this accounting standard has no effect on the way in which we have operated or will operate our business.

The 7.8% decline in statutory PBT reflects exceptional costs of £17.2m, predominantly in H1, as a result of the closure of our clearance stores, re-organisation costs and VAT related legal and professional fees. The Board has decided to hold the final dividend flat on last year.

Our strategy

Our vision is to be the universally loved experts in fashion that fits, helping our customers look and feel amazing through our trusted family of fashion brands.

We operate in attractive market niches - plus-size and age 50-plus - which we believe to be under-served by the fashion industry overall, providing our customers with high quality and competitive product offerings, fit-specialism and a strong delivery proposition. We are predominantly focused on three Power Brands - JD Williams, Simply Be and Jacamo - which we expect to continue to grow as a proportion of our overall business.

We are mid-way through a significant transformation which will allow us to deliver sustainable, profitable growth over the long term, driven by our four strategic foundations:

· Product - Fantastic quality and fit fashion, home ranges, and relevant financial services

· Price - Great prices and flexible ways to pay

· People - Obsessed with customers, enriched with data and powered by technology

· Place - Whatever you want, wherever you are, whenever you want it, we make it easy

We have already fundamentally changed the way we operate as a business - from a direct mail-led, to a digital-first model. This has required very significant programmes of change in three main areas: people, process and systems.

The majority of the people and process changes are now complete including, but not limited to, a new operating board, an in-house design team, new buying and merchandising processes, much stronger digital marketing capabilities, an in-house digital centre of excellence and outsourced contact centre management, creative production functions and IT Services.

This coming year is a key one for our systems investment programme, called 'Fit 4 the Future', the main outputs of which go live early in the calendar year 2017. The investment we are making will give us a new, more agile, global web platform; new financial services systems allowing us to offer a far more personalised product offering to both existing and new customers; and a new planning tool allowing us to buy more efficiently and reduce markdowns.

The KPIs around online penetration and conversion that we are reporting today demonstrate the progress we are making with our digital-first model, and give us cause for real confidence.

There remains much to do to complete our transformation but we are excited about the opportunities that lie ahead.

KPI performance

At our half year results we introduced a list of granular KPIs which we feel best allow external stakeholders to judge our progress against our strategy. This list is below. Following feedback we have decided to give further disclosure on Power Brands, and therefore are now providing the absolute number of active customer accounts as below (as opposed to only its growth).

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

**UK Institute of Customer Service survey (UKICS)

***Last six months, rounded figures. Rollers are those customers who roll a credit balance.

Market shares are calculated using internal and Kantar data, 24 weeks ending 14th February

Customers

Our active customer file increased by 2.2% over the year. In line with our strategy of growing our Power Brands ahead of our Traditional and Secondary brands, Power Brands active customers grew by 6.9% year on year, and now exceed two million customer accounts.

Our most loyal customers shop more frequently with us, across a range of categories and, as with any retailer, are our most profitable customers. This group of customers (defined as those who have ordered at least one item in each of the last four seasons) was marginally down in the period, as a result of the headwind of our Traditional segment. We are taking actions to improve performance here.

We are very proud of our results in the Institute of Customer Service surveys, where we continue to be ranked third in the UK retail sector behind only Amazon and John Lewis. Our score of 85.8% is over 4ppts higher than the retail sector average.

Product

We saw a flat market share in Ladieswear (16+); within this, we gained share in younger Womenswear, driven by Simply Be, and saw a small decline in the older age groups as a result of the underperformance of our Traditional segment. We are pleased to report a 20bps increase in Menswear (44"+) market share, which was driven by Jacamo.

We have made further strides in improving our products. Our new in-house design team has been an important part of ensuring we are offering our customers cohesive, on trend product collections. We continue to expand this team, with recruits in Footwear, Accessories, Menswear and a dedicated print designer all recently joining.

Another area of focus from a product perspective is expanding our offering of third-party brands, which is typically extended to larger sizes on an exclusive basis. We view these relationships as mutually beneficial - brands benefit from our industry-leading fit capabilities, and we are able to offer our customers even greater choice. Our ranges with Sprinkle of Glitter and Coast continue to perform particularly strongly, and in the last six months we have launched collections from Scarlet & Jo, Studio 8 by Phase 8, Eden Row and Luke.

In March, we launched our first homewares range with JD Williams brand ambassador Lorraine Kelly, building on the success of her Womenswear and footwear ranges. The range consists of interior accessories across two trend collections and includes bedlinens, lighting, soft furnishings and home accessories

A measure of customer satisfaction with our products, in our view, is our returns rate and during the period this improved by 120bps to 27.4%. Product mix (the relative outperformance of Homewares and Menswear), further improvements to our product quality and fit, and the increase in cash customers all contributed to the decline in our returns rate, in roughly equal measure.

Inventory clearance across the industry is moving online at a pace, and as a result of this dynamic we closed our clearance stores in H1. We are developing new online clearance tools, and will be taking the opportunity to leverage these capabilities, and de-risk our balance sheet, by reducing our aged inventory position during the course of FY17.

Digital

Online is our largest customer channel by some distance, and we have worked very hard over the past year to transform into a digital-first retailer, prioritising online in every business process, whilst trying to preserve the traditional part of our Group. There are also efficiencies when comparing the online and offline parts of our business, such as higher basket sizes and lower costs of marketing and order processing.

We delivered a very encouraging performance online throughout FY16, with online revenue up 15% and online active customer numbers up 13% yoy.

Online penetration, that is the proportion of sales which were generated online, stood at 65% for the year as a whole, a 6ppts increase on last year. The online penetration of new customers, a leading indicator for the group overall, was 72%, up 7ppts. Mobile devices (smartphones and tablets) now account for two-thirds of our online traffic, an increase of 10ppts. Within this, we have seen a 65% increase in smartphone sessions, and this is now the leading device type by traffic. We continue to optimise our already strong mobile proposition.

Our conversion rate was flat at 5.8%, significantly above the industry average. Within this, the conversion rate for all three device types (PC, smartphone and tablet) increased significantly, with the overall rate affected by the naturally lower conversion rate experienced on mobile devices due to consumers' tendency to use these for browsing activity in addition to purchasing. Our abandonment rate was reduced by over 4% yoy for each device type, and over 2% overall, a very pleasing result.

To further drive our digital capabilities we are launching an innovation incubator this summer, called JDWorks. This will connect us with digital start-up companies, across the world, to accelerate our adoption of new ideas and technologies. In turn, the start-ups will benefit from all that we have to offer as one of the UK's leading multichannel retailers.

Financial Services

Financial services performed well during FY16 and continues to be an important enabler of our business. Financial Services revenue was up 2.1% to £259.6m. This includes the £19.0m increase to revenue as a result of the IAS39 restatement (FY15: £19.2m).

Credit arrears (>28 days) stood at 10.9% for FY16, an increase of 60bps from 10.3% last year, driven by new customer recruitment. As previously announced and discussed in detail on page 12, we restated our debtor impairment provision due a review of the application of IAS39. On this restated basis the provision rate was 18.3% in FY14 and 16.1% in FY15. In FY16 this provision rate improved further to 15.6%. The improving trend is a direct result of the work we have done over the past two years to both tighten our credit policies and help customers in financial difficulties, putting them on payment plans to rehabilitate them. In FY17 we expect both our provision rate and our arrears rate to reflect increased levels of customer recruitment and therefore to increase slightly.

Our aim is to grow two key customer bases - customers who utilise their account (internally termed our 'rollers') and cash customers, who pay immediately on a credit or debit card. Currently half of new customers opt to open a credit account, and half are cash customers. Whilst less profitable, cash customers generate attractive returns, and are important in terms of driving our growth, broadening our appeal and enabling us to gain economies of scale. Once our new financial services offering is live we will aim to convert some of our new and existing cash customers to account customers; this is not currently a focus given our relatively inflexible offering.

At the half year results we reported an increase in new credit customer recruits who roll a balance, the first such increase for three years. We are pleased to report that this trend has continued, up 2% in H2. This is a slowdown on the figure reported in H1, however, primarily as a result of tightened fraud rules in H2. We continue to believe that the primary driver of an increase in new credit customers is our improved product proposition.

Over Christmas we ran a small trial on a few of our brands offering 0% interest to new customers. The initial results of this trial are positive, although we need to assess the behaviour of customers who took up the offer over the course of the current season before we will be able to fully judge the result.

Our new Financial Services Director Steve Johnson joined in February and is already making a significant contribution in improving and modernising our operations. We are assessing our approach to data capture and processes, and believe there are changes we could make to not only improve our efficiency, but also the customer experience.

The Credit release of Fit 4 the Future goes live from Autumn 2016, with the main brands moving onto the new credit platform in early calendar 2017. The new platform will allow us to charge variable APRs for the first time, as well as offer promotional interest free periods and other new credit products. This will broaden our appeal and further enable future growth.

In common with the wider industry, we are now regulated by the FCA, having historically being regulated by the OFT. Our FCA application is progressing in line with expectations.

Performance by brand

New revenue by brand categorisation

In order to clearly show the performance of our business and brands, we have moved revenue from Ambrose Wilson out of the JD Williams group, as we no longer plan to migrate this title into JD Williams. We have also realigned our revenue breakdown outside of the Power Brands into two groups - Traditional segment and Secondary brands. The Traditional segment consists of Ambrose Wilson, House of Bath, Premier Man and Julipa, and our main Secondary brands are Fashion World, Figleaves, Marisota and High & Mighty. This new categorisation is shown in the table on page 13.

JD Williams

The JD Williams brand continues to perform well, as the improvements we are making to our products, our PR activity and our digital marketing campaigns continue to yield strong results. This season we significantly extended the menswear range within JD Williams, which is called Williams and Brown, and performance has exceeded expectations. Our JD Williams VIP scheme, first launched in May 2015 and offered to our most loyal JD Williams customers, continues to drive encouraging results in both frequency of spend and customer retention.

In February, on the eve of London Fashion Week, we hosted a JD Williams fashion show dedicated to females over 50 in partnership with the London College of Fashion. This was live-streamed onto JDWilliams.co.uk and received significant press coverage, further building brand awareness.

JD Williams' product revenue was £151.2m in FY16, up 4.7% yoy. For the JD Williams brand specifically there were some very pleasing digital metrics, with online penetration up 6ppts to 51%, and, importantly, online penetration of new customers up 13ppts to 65%.

Simply Be product revenue was up 15.6% yoy to £103.9m. The online penetration of Simply Be is 89%, and 97% of new customer orders (excluding stores). We continue to improve our digital marketing expertise and social engagement, championing size inclusivity and body confidence. Our new SS16 campaign has been very well received and we are excited about the global growth opportunity that Simply Be represents.

Jacamo product revenue was up 14.6% to £62.8m. Online penetration stands at 90%, and 97% of new customer orders (excluding stores). We have made significant product improvements during the quarter, focused particularly on broadening the brand appeal, the styling of the product range and the fit of our smaller sizes, which has resulted in strong sales and an encouraging reduction in the returns rate of these sizes.

Traditional segment

Whilst not a future growth driver, the traditional segment remains relevant to the Group's overall portfolio. We have loyal customers who we know well, and long-established internal skillsets and capabilities in serving these customers. It is an attractive and accessible market, underserved by other retailers, and we generate a good financial return. In addition, our central approach to running our portfolio of brands means that operating these traditional titles is highly efficient for us.

As we have previously announced, our traditional titles have seen a disappointing revenue performance during FY16, with revenue down 5.5%. We believe that we could serve these customers better, and have therefore taken a number of actions to improve performance. These actions include establishing a dedicated marketing team, changing our approach to promotions and giving a renewed focus on ensuring our product offering inspires and delights these customers. The low online penetration of this segment means that it is likely to take until the Autumn season before performance is improved, although we are confident that the actions we are taking will yield results.

Investing in new systems and infrastructure

Fit 4 the Future

Our systems transformation project, Fit 4 the Future, is progressing well. During the half we launched our Simply Be Euro website (the first phase of our Global Multi-channel release) and Powercurve (the foundation of our Credit release). Both launches were on-time and results continue to be encouraging.

Fit 4 the Future is the largest project of its kind ever undertaken by the Group, and as such there are inevitably risks associated, but we continue to do everything possible to ensure that risks and business disruption are minimised and the future benefits of the investment are maximised. Both the cost of the project, and the benefits we expect to generate as a result (including cost reductions, increased demand, improved margin and cost avoidance), are unchanged. We expect these benefits to start to ramp up from FY18 onwards. As previously disclosed, some of these benefits will be reinvested back into the business.

The timetable for Fit 4 the Future remains unchanged to that announced as part of our Q3 trading statement in January. This August we plan to start the roll-out of our new web platform and new financial services systems, initially to the USA, and then to a number of our smaller UK brands in September. Our main brands will move onto the new systems in early 2017, after peak trading.

Next month, in May, the roll-out of the first phase of our Planning transformation will be completed, giving us improved tools for assortment and range planning. This will allow us greater visibility, control and consistency. The second phase of the Planning release, which will give us item-level forecasting tools, improving markdown efficiency, will go live in early 2017.

Major Warehouse extension

We are pleased to report that the warehouse extension at our main Warehouse facility, in Shaw, is now complete and in the process of coming on stream. The project was completed on time and to budget. The new facility has doubled our through-put, ensuring we continue to operate efficiently. Importantly it will also materially improve our next day availability.

International

USA

We are pleased with our performance in the USA, with revenue of £14.3m, up 29% year on year and 20% in constant currency terms. We reduced the operating loss significantly, from £2.5m last year to £1.0m this year.

In H2 we made a profit for the first time on a constant currency basis, of $0.2m compared to a loss of $0.9m in H2 FY15. This marks an important milestone for our USA operations. The significant improvement year on year was driven by a combination of factors, including the loyalty of our customer base, continued marketing efficiency, a small amount of financial income as a result of our relationship with Alliance Data, an improvement in promotional efficiency and a small change to our delivery offering.

In March 2016 we launched the JD Williams brand in the USA and, whilst early days, the initial performance has been very encouraging.

Our new international web platform goes live in the USA in August. This will give us much improved personalisation tools and a more agile site from an operations perspective. Until this platform is live we will remain in cautious expansion mode in the USA, with a focus on further improving customer loyalty, building brand awareness and increasing profitability. We will share our plans for global expansion early next year.

Ireland

Our Ireland business delivered a good performance in FY16, with revenue growth of 4% in constant currency terms. We have a well-established and loyal customer file in Ireland, and, encouragingly, the revenue growth in FY16 was also driven by new customers, who are responding well to our improved product offering. In sterling terms Ireland revenues were £13.4m in FY16, down 7% year on year.

Stores

Stores remain a small part of our overall Group, although we see them as an important enabler of our overall growth strategy. Sales from our store estate were up 18% to £27.0m. The operating loss was £1.0m versus £0.8m last year. There remains more to do in terms of improving the efficiency of our store estate.

We have 14 dual-fascia Simply Be and Jacamo stores. Our long-term strategy here is unchanged - we plan to ultimately have 25 stores in total, covering 85% of the population. We continue to see a positive halo effect from our store portfolio and they are also important in terms of serving customers and building brand awareness.

FY17 Guidance

We are providing guidance for FY17, which is as follows:

· Product gross margin -50bps to -150bps driven by buying in gains, more than offset by FX headwind, clearance of aged inventory and tactical price activity to drive share growth in a challenging market

· Financial Services gross margin +50bps to -50bps, with the ongoing improvement in our credit book broadly offset by the impact of new customer recruitment

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

· Depreciation & Amortisation £29-30m

· Net interest £8-9m

· Capex £38-40m

· Tax rate c.20%

· Exceptional costs of c.£2m linked to our ongoing tax disputes with HMRC

Current trading and outlook

Trading since the year end has been subdued, with sales lower year on year. This is the result of two factors. Firstly, the industry backdrop has been more challenging since January. Secondly, we adjusted our marketing approach this season, shifting from large TV campaigns to a more phased approach across the half, with increased investment in digital channels. This new approach delivers a better ROI on our marketing investment when viewed across the season as a whole. We expect, therefore, to see performance strengthen over the half.

From a non-trading perspective, FX rates represent a significant challenge year on year. At the current $/£ exchange rate, and taking into account our hedging position, there is a c.£3m PBT headwind in FY17; this is included within the above Product gross margin guidance. More detail on the sensitivity of profits to movements in FX are on page 15. We have also decided to undertake a one-off exercise to clear legacy aged inventory this year, enabled by our new online clearance tools. This investment is also reflected in the product gross margin guidance we have provided today.

Overall, we remain confident in our ability to make further progress this year. This is based on the strong appeal of our specialist fit proposition, continuous improvement in the customer experience and changes in customer shopping behaviour, driven by targeted marketing.

FINANCIAL RESULTS

IAS 39 restatement

As referred to previously, we have restated our debtor impairment provision as a result of a review of the application of IAS39. Unless otherwise stated, the following financial results and commentary is inclusive of the impacts as a result of the restatement.

For reference, on a restated basis H1 FY16 Financial Services revenue was £126.1m (reported figure prior to restatement impact: £116.6m) and H1 FY15 £126.6m.

Revenue performance

Total continuing Group revenue was +3.5% to £866.2m.

Product revenue increased by 4.1% to £606.6m. Financial Services revenue increased by 2.1% to £259.6m (FY15: £254.3m).

Revenue performance by quarter was as follows:

The performance in Q4, which is a short period consisting of just 8 weeks, is relatively unchanged from that reported in Q3 when the FY15 comparative figures are taken into account. In FY15 Q4 product revenue was +6.7% and Financial Services -8.8%.

Revenue performance by brand is shown below; as discussed above, we have changed our categorisation to more clearly show externally the performance of our brands.

The performance of both our Power Brands and our Traditional segment is discussed on page 8. Secondary Brands revenue was up 1.9%, a pleasing result. Within this we saw a particularly good result in Fashion World driven by new product ranges.

In line with our strategy of focusing our efforts and marketing spend on our Power Brands, revenue from our Traditional and Secondary Brands combined accounted for 47.6% of product revenue, down 280bps versus last year.

Revenue by category was as follows:

Ladieswear revenue was up 0.9%, with the headwind of our Traditional segment partially offsetting strong growth in both JD Williams and Simply Be. Menswear revenue was up 0.7%, with an improving trend through the year; H1 revenue was down 2.9%, whilst H2 was up 4.5%. Footwear saw strong growth of 5.2% driven by improvements in our products and pricing architecture.

Home and Gift revenue was up 9.3%, with H2 growth below the level recorded in H1 as a result of tougher comparatives and a more subdued performance of House of Bath. Our strategy in Home remains unchanged - we aim to recruit new customers to our Fashion offering, but then see customers using their account to also buy Homewares. Within Homewares we focus on our "Famous Five" categories given their higher gross margin (these are Furniture, Gifting, Home Textiles, Kitchen and Home Décor, and Outdoor Living and Christmas). Famous Five categories were up by 12% yoy, with a particularly strong performance in Furniture.

Gross margin

Product

Product COGS were £265.7m in FY16, compared to £253.9m in FY15. Product gross margin was 56.2%, down 20bps yoy, towards the top of the guidance range. This was driven by the price re-calibration exercise previously disclosed, which impacted H1 gross margin, partially offset by promotional efficiency and bought-in margin gains. H2 gross margin increased by 90bps to 54.7%.

Financial Services

Our gross bad debt was £110.3m (FY15: £109.0m). This bad debt charge, combined with a small number of direct financial services costs, resulted in a Financial Services gross margin of 54.6%, up 20bps yoy (FY15: 54.4%). The improvement was driven by lower write-offs as a consequence of the improved quality of the debtor book. As previously guided, H2 Financial Services gross margin was down year on year.

Operating performance

*Operating profit before exceptionals, continuing basis

Warehouse and Fulfilment costs increased by 3.8% to £76.7m. This was driven primarily by volumes, although these were partially offset by lower fuel costs and efficiency savings.

The 4.5% increase in marketing and production costs was driven by a continued shift into digital channels. Whilst marketing and production costs as a percentage of sales increased, this is skewed by the outsourcing of our creative production function, which resulted in some costs effectively being transferred from payroll into this cost category; this accounted for approximately half of the increase as a percentage of revenue.

Admin and payroll costs continue to be managed tightly, broadly flat at £122.6m, with these costs falling by 3% in H2 specifically. Depreciation and amortisation increased by 18.9% as a result of the investments we have made into the business.

Overall, operating profit before exceptional items was £96.4m. This includes a £3.8m credit (FY15: credit £2.0m) as a result of the IAS39 restatement. Excluding these credits, FY16 operating profit was £92.6m (FY15: £93.8m). In H2, operating profit (prior to IAS39 restatement) increased by 10.7% to £53.8m (FY15: £48.6m).

Net finance costs

Net finance costs were £8.1m compared to £7.6m last year, as a result of a higher debt position.

FX sensitivity guide

Every 0.05 rate move in $/£ (for instance 1.45 to 1.40) represents approximately a £1m impact on PBT. We are significantly less exposed to movements in the €/£ exchange rate, with each 0.05 move representing approximately a £0.3m PBT impact.

Exceptional items

Exceptional costs totalled £17.2m, of which £14.0m was incurred in H1. The split of these costs is shown below.

Discontinued operation - Gray & Osbourn

As previously announced, the Board decided to close the Gray & Osbourn catalogue business in January 2015. Given the decision to close this business it is now classified as a discontinued operation. The loss after tax from this business was £0.6m (FY15: loss of £10.4m).

Taxation

The effective rate of corporation tax for the year is 23.9% (FY15: 21.5%). The FY16 rate was impacted by an adjustment relating to historical periods in respect of outstanding items with HMRC. The tax charge for the year was £17.3m (FY15, £16.8m) which meant that profit from continuing operations was £54.9m (FY15 £61.5m).

Earnings per share

Adjusted earnings per share from continuing operations were 24.02p (FY15: 24.61p). Earnings per share from continuing operations were 19.45p (FY15: 21.84p).

Dividends

The Board proposes a final dividend of 8.56p, flat year on year, taking the full year dividend to 14.23p, also unchanged on last year. This is covered 1.7 times (FY15: 1.7 times).

Capital expenditure

Capitalised expenditure for the year was £58.7m (FY15: £63.3m). The majority of this investment was on our systems transformation programme Fit 4 the Future, with a further £12m spent on the final stage of our warehouse extension.

Balance Sheet and Cash Flow

Inventory levels at the year-end increased by 7.1% to £101.5m (FY15: £94.8m) driven primarily by the timing of the new season intake.

Trade receivables decreased by 0.5% to £624.7m (FY15: £627.9m). The reduction in the provision from £100.9m to £97.6m reflects the improvement in customer arrears profiles.

The group's defined benefit pension scheme has moved from a deficit of £3.3m last year to a surplus of £10.8m. The movement predominately arises from an actuarial gain of £12.5m as a result of an increase in corporate bond yields and a fall in the markets expectations of inflation.

Net cash generated from operations was £86.9m compared to £93.8m last year. After funding capital expenditure, finance costs, taxation and dividends, net debt increased by £43.1m to £289.7m (FY15: £246.6m). Gearing levels increased from 55% to 61%.