Brown Group Regulatory News (BWNG)

26th April 2018

FULL YEAR RESULTS FOR THE 52 WEEKS ENDED 3 MARCH 2018

REVENUE AND PROFIT GROWTH IN A CHALLENGING RETAIL MARKET

N Brown Group Plc, the online, specialist fit, fashion retailer today announces results for the 52 weeks to 3 March 2018 (FY17: 53 weeks to 4 March 2017).

* Please refer to page 4 for an explanation of the 52 week basis

**Adjusted EBITDA is defined as operating profit, excluding exceptionals, with depreciation and amortisation added back, refer to page 16

*** Defined as excluding exceptionals and unrealised FX movement and therefore represents the underlying trading performance, refer to page 16

Review of FY18:

All year on year growth rates are against FY17 on a 52 week basis

· Power Brand performance, revenue +8.0%

o JD Williams revenue +3.2% (excluding migrated Fifty Plus customers, JD Williams revenue up double-digit)

o Simply Be +16.3%

o Jacamo +5.1%

· Good performance across all categories, driven by Footwear and Accessories

· Strong online metrics:

o Online revenue +10% yoy; online revenue of Power Brands +17%

o Online penetration 73%, +4ppts yoy

o 76% of all traffic from mobile devices

· Strong Financial Services performance, driven by continued improvement in the quality of the loan book, together with a reduction in arrears as a result of minimum payment changes. The loan book is a significant asset, now standing at £598.8m on a net basis

· International expansion progressing well, with USA revenue +21% (constant currency) in the second half, and Global Ship Anywhere now launched

· Refinancing completed to underpin future growth

· Statutory profit outcome a result of exceptional costs of £56.9m predominantly relating to customer redress for historic general insurance products and store closures, as previously announced

Angela Spindler, Chief Executive, said:

"Against a challenging market backdrop I am delighted to be reporting profit growth, with Simply Be the standout brand. The second half was difficult for the fashion sector. A good performance in Financial Services provided the Group with resiliency to enable us to continue to invest in our customer offer, successfully driving revenue and market share growth.

"Our strategy continues to deliver results, with market share gains in the UK, USA revenue up 21% in the second half, new partnerships underway and almost three quarters of our revenues now coming online.

"March was a challenging month for fashion retail, however, trade is improving through April, and at this early stage in the new financial year our overall expectations are unchanged."

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.

For further information:

About N Brown Group:

An expert in fashion that fits and flatters, N Brown is one of the UK's leading online retailers. Our key retail brands are JD Williams, Simply Be and Jacamo. We are all about democratising fashion and are size inclusive, focusing on the needs of underserved customer groups - size 20+ and age 50+. We offer an extensive range of products, predominantly clothing, footwear and homewares, and our Financial Services proposition allows customers to spread the cost of shopping with us.

We are headquartered in Manchester where we design, source and create our product offer and we employ over 2,600 people across the UK.

Next reporting date

The next reporting date is the Q1 trading statement on 14th June 2018.

FY17 53 week year

In the current year we are reporting on the 52 week period to 3rd March 2018. In FY17, the statutory result reported on the 53 week period to 4th March 2017. In order to provide a meaningful comparison, all FY17 P&L financial movements are reported on a 52 week basis, excluding the 53rd week, unless otherwise stated. The 53 week statutory results for FY17 are set out on page 15, together with an assessment of how the 52 weeks result for the comparative period has been derived. All comparative balance sheet figures are reported as at the year-end date and cash flow figures are for the 53 week statutory period.

Full year overview

(52 weeks ended 3 March 2018 vs 52 weeks ended 25 February 2017)

Group revenue was up 3.9% to £922.2m, with Product revenue up 4.1% and Financial Services revenue up 3.5%. Our three Power Brands continue to outperform the wider brand portfolio, in line with our strategy. Simply Be continues to be the standout brand, with revenue up 16.3%. We relaunched the JD Williams brand at the start of the second half, which resonated well and drove a 21% increase in new customers following the relaunch. The overall JD Williams revenue performance was impacted by a reduced conversion rate for the recently migrated Fifty Plus customer group. Excluding this impact, JD Williams revenue was up double-digit. Actions have been taken to address the underperformance of the Fifty Plus customer file, with encouraging early signs.

Product gross margin was 52.2%, down 250bps for the year as a whole, and down 320bps in the second half. There are two primary drivers for this move. Firstly, as expected, exchange rate differences year on year represent a headwind to our buying in margin. Secondly, we strategically chose to invest more in promotions and value for money through the course of the second half than initially planned, in order to maintain our trading momentum and market share gains.

The investment in product gross margin was enabled by a strong performance in Financial Services gross margin, which increased by 550bps to 61.2%. This was driven by the continuing improvement in the quality of the customer loan book, together with a reduction to minimum payments.

Operating costs continue to be tightly controlled, increasing by 3.9% for the year, and 2.7% in the second half. We saw particularly good efficiency from marketing costs, which improved as a ratio of Group revenue from 18.3% to 17.8%. Warehouse and fulfilment costs saw the largest increase, up 7.8%, as we continued to invest in our speed of service and delivery proposition. Depreciation and Amortisation increased by 1.9% to £28.1m, slightly below our previous guidance due to timing factors.

Adjusted trading profit before tax was £81.6m, up 1.3% year on year. The statutory profit for the year of £16.2m was heavily impacted by exceptional costs of £56.9m (discussed in more detail on page 17) which largely relate to legacy issues.

The Board recognises the importance of the dividend to shareholders, and accordingly is proposing to hold the full year dividend consistent with last year, at 14.23p.

We have recently signed the binding documents in respect of new Balance Sheet financing facilities, to underpin future growth. The new facilities are made up of a £500m securitisation facility and an extension of our £125m RCF, and are secured until September 2021. Further detail is on page 18.

FY19 Guidance

We are today providing the following guidance for FY19:

· Product gross margin flat to +100bps

· Financial Services gross margin -100bps to -200bps

· Group operating costs +1.5% to +3.5%

· Depreciation & Amortisation £32m to £33m

· Net interest £12m to £13m, reflecting our new extended financing facilities

· Tax rate c.22%

· Capex c.£40m

· Net debt £425m to £450m, which assumes £25m to £50m growth in the Financial Services customer loan book

· Exceptional costs c.£4m, related to advisory fees associated with our ongoing legacy tax cases

Full year review

(52 weeks ended 3 March 2018 vs 52 weeks ended 25 February 2017)

Future growth levers

At the half year results in October we laid out our three growth levers, which incrementally build over time. We have made good progress against these levers, as highlighted below.

Gain share in the UK

We are focused on continual improvement in our customer experience, further development of our product offer and enhancing our brand cut-through. This growth lever is further driven by increasing the number of third-party brands on our websites, many of which are extended to larger sizes on an exclusive basis, offering more choice to our customers.

During the year we gained market share in the UK in both ladieswear and menswear. We continue to improve the flexibility of our supply chain, reducing lead times and our speed to market. Our websites offer customers a wide range of brands, allowing them to shop for every occasion; we have recently added brands including Monsoon, Quiz, Jack & Jones, Ted Baker, Lyle & Scott, Radley and Superga.

International expansion

The USA is our first priority, however, we also intend to expand to other countries, initially through Global Ship Anywhere technology, which recently went live. In order to achieve our international ambitions we will leverage our current organisational capabilities and embed a global culture throughout our business. USA revenue accelerated through the year, growing by 21% in the second half, driven by our new digital-first marketing approach and enabled by our new web platform.

Partnerships

This includes selling capsule ranges on other retailers' sites, on both a wholesale and marketplace basis. We also see a significant growth opportunity in influencer marketing, working together with bloggers and opinion formers to enable our brands to reach new audiences and further strengthen customer engagement.

During the second half we went live on ASOS and Zalando, and have recently signed partnership deals with The Iconic (Australia) and Lamoda (Russia). All of our partnerships involve us selling capsule collections of our brands on our partners' sites. We are pleased with the performance to date.

We have increased our use of influencer marketing, most notably in the USA. These activities have been very successful in strengthening our customer relationships, increasing our share of voice and driving sales. Examples of recent influencer collaborations include Sarina Novak (@SarinaNovak; 372k followers) who worked with us on the Simply Be USA relaunch, La'Tecia Thomas (@lateciat; 806k followers) for our Swim and Spring Break campaigns and Kelly Augustine (@kellyaugustineb; 63k followers) for our Valentines Day activity.

KPI performance

(52 weeks ended 3 March 2018 vs 52 weeks ended 25 February 2017)

* 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 estimated using internal and Kantar data, 52 weeks ended 11th February 2018 compared to 52 weeks ended 12th February 2017.

Customer K PI' s

Our active customer file increased by 3.6% to 4.45m. We saw a strong first half and then a softer second half against both a tough comparative and competitive backdrop. The active customer file of Power Brands increased by 2.4%, with a similar shape through the year. This includes the drag from recently migrated Fifty Plus customers.

Our most loyal customers, being those who have ordered in each of the last four seasons, was broadly flat year on year. This is against a strong performance last year, up 3.6%, driven by reactivation activity in our Traditional segment.

Our most recent customer satisfaction score from the UK Institute of Customer Service was 85.8%, an improvement of 210bps on the prior year rating. This places us second-highest in the non-food retail sector, behind only Amazon. Our score is almost 4ppts higher than the retail sector average.

 Pr od u ct K PI's

In the 52 weeks to 11th February we gained 60bps of market share in Ladieswear (size 16+) and 30bps in Menswear (chest 44"+), to 5.6% and 2.7% respectively. In Ladieswear sizes 20 and above we gained almost 200bps of market share over the same period, to over 15%, reinforcing our leadership in the UK plus-size market.

We saw a slight increase in our returns rate, up 30bps to 27.1%, after several years of decline. The main driver of this was the relative performance of womenswear, together with the increase in participation of sub-categories such as third-party brands and occasionwear, as these all naturally incur higher returns rates.

Online K PI's

Online revenue was up 10% year on year, with online revenue of Power Brands exceeding this, up 17%. Online accounted for 73% of our revenue during the year, up 4ppts. 81% of sales from new customers were generated online, up 4ppts. By brand, JD Williams again saw the most significant increase in new customer online penetration, from 80% to 95%.

Mobile devices (smartphones and tablets) accounted for 76% of online traffic in the year, up 5ppts. Within this, smartphones remain the device of choice for customers, with web sessions here increasing by 44% to account for 54% of all traffic. We were pleased to drive an increase in the conversion rate for smartphones year on year. The ongoing increase in mobile devices, both smartphone and tablet, as a proportion of traffic represents a natural drag on overall conversion rates however at 5.3% our conversion rate remains materially above the industry standard.

Technology and innovation

Our systems investment programme remains on track. We are pleased with the performance of the High & Mighty and USA sites, which are both on the new Hybris platform. Since the sites go-lives we have been releasing regular updates to add further functionality and optimise performance. We are targeting the second half of FY19 for Fashion World to migrate onto the new platform. We will optimise the timing of these migrations to minimise commercial disruption.

At the start of the new financial year we went live with Global Ship Anywhere. This is the key enabler for wider international growth outside of our current USA and Ireland sites. This functionality translates currency and overlays our site with local delivery and payment options.

We have seen some encouraging results with our Simply Be iOS and Android apps, with over 100,000 downloads across both platforms. Update releases to our apps have enabled us to continue to improve our offering, including features such as recently viewed items and predictive search, further improving the experience for our customers. Our App store rating is currently 4.8 out of 5. In February, we launched the JD Williams app; our first app on our own platform and an important step in bringing our app development capabilities in-house. By investing in our in-house app development capabilities we can embed fortnightly releases to improve the functionality and features of our apps and plan to roll out apps onto our other brands in the future.

Financial Services

Financial Services delivered a good performance during the year, driven by continued improvement in the quality of the customer loan book together with some initiatives launched during the year. Financial Services revenue was up 3.5% year on year. Within this, interest payments were up mid-single digit, whilst non-interest lines were down high single- digit.

Gross margin was up 550bps year on year to 61.2%. There are three broadly equal drivers of this increase; the continued improvement in the underlying quality of the loan book, a change we made to minimum payments at the end of the first half, and the effect of other initiatives such as our trials on variable APR.

Given continued cost of living pressures and in order to give our customers greater choice of flexibility in managing their finances, we made the decision to reduce our minimum payment rate from 5% to 4% during the period. The change had a positive impact on the number of customers who were in arrears, down 6%. In addition, it also meant that those customers who didn't change their monthly payment paid above the minimum amount, which will result in these customers paying off their balances faster. We have seen a 10% increase in the proportion of customers who pay above the minimum amount, to approximately 60% of our customer base. The change in minimum payments did result in a cashflow headwind in the year, with the average proportion of customer balances being paid each month decreasing by 1ppts. The cash flow impact is expected to normalise over the next 12 months.

Credit arrears (>28 days) were down 120bps to 8.7% driven by the improvements in the underlying quality of the book and the impact of the change in minimum payments which directly increased the affordability of the minimum payment to our customers.

The provision rate was 7.5%, down 330bps versus last year. As in FY17, this benefited from the sale of some high risk payment arrangement debt, which we were able to sell for a slightly better rate than book value. It also benefitted, to a lesser extent, from the minimum payment changes and the underlying improvement in the quality of the book.

During the second half we recruited 122k new credit customers who rolled a balance, down 5% versus the prior year period. Although over the long-term we aim to increase new credit rollers, the key enabler of this will be our new Financial Services products within our new systems implementation programme. The decline in the second half was in line with a weaker trading performance, and followed an increase in this metric during the first half. For the year as a whole we added 257,000 new credit rollers, an increase on the prior year.

During the second half of the year we commenced our variable rate trials for new customers and a small proportion of our existing customer base. Whilst the trials are still ongoing, early indications are positive and approximately 50% of trial customers have seen a rate decrease.

During the first half we announced a potential customer redress related to historic general insurance products. This was as a result of identifying flaws in certain products which were provided by a third party insurance underwriter and sold by the Group to its customers between 2006 and 2014 and followed a review prompted by an industry-wide request from the FCA that firms ensure that general insurance products and add-ons offer value for their customers. The vast majority of these products were sold to the Group's customers in the period leading up to, and including, 2011. Sales of the relevant products ceased in early 2014. As a result we incurred an exceptional cost of £40m in the first half. We continue to explore mitigating actions to reduce the overall net cost although we expect these actions to take some time to be resolved. We expect the vast majority of the cashflow impact to occur during FY19.

IFRS9

IFRS9 replaces the current standard IAS39 and is effective from FY19 onwards. IFRS9 significantly increases our provision for receivables. Importantly, it has no cash flow impact and neither does it materially change how we operate our Financial Services business.

There are three main areas where the two standards differ in approach:

· Under IAS39, a provision is only made where there has been objective evidence of impairment, such as a customer falling into arrears or moving onto a payment plan. A large proportion of customers are therefore not included in the provision calculation. Under IFRS9, a provision will be made to some extent against every credit customer, including those customer balances which are up to date and trading normally.

· Under IAS39 we only provide against a customer's current balance, whilst IFRS9 requires us to take into consideration a customer's expected future balance, incorporating expected future account limit increases. Our strategy in Financial Services has always been to initially extend low account limits to customers, and then increase the limit over time in accordance with a customer's payment behaviours and risk profile. Basing our provision calculation on a customer's expected future balance is therefore again a significant change in approach.

· Under IAS39 there is no macro-economic overlay in our provision calculation, whilst under IFRS9 we are required to reflect potential changes in the macro-economic environment and the impact they could have on our customer loan book.

Our modelling and analysis is still being finalised ahead of the new standard coming into effect in FY19. However, we currently estimate that the provision rate could increase from the 7.5% reported in FY18 to a maximum of 27%. We would, therefore, expect to see an increase of up to £120m in the provision, and a reduction in net assets of the same amount in FY19.

One of the final aspects of the modelling and analysis being done relates to whether or not undrawn credit balances should be included or excluded from the calculation of the provision. Views of what the new standard requires differ in this regard and, working with our auditors, we are still assessing the treatment of undrawn credit balances under IFRS9. The exclusion of undrawn credit balances would materially reduce the IFRS9 provision, by, we estimate, approximately half the potential increase.

The charge to the income statement is based upon the year on year movement in the provision. In the absence of significant macro-economic changes, changes in the quality of the book or the risk profile of new customers, we expect the P&L impact in FY19 to be broadly neutral versus the FY18 restated results. We do, however, expect to see a shift in the phasing of the charge, with H1 expected to see a positive impact and H2 a negative impact, reflecting the seasonality in our customer recruitment and arrears rates.

Performance by brand

(52 weeks ended 3 March 2018 vs 52 weeks ended 25 February 2017)

FY17 product revenue by brand on a statutory 53 weeks basis is shown in note 4 on page 27

JD Williams

JD Williams' product revenue was £163.4m, up 3.2% year on year. As announced in our Q3 trading statement in January, we experienced lower than forecast response rates from the recently migrated Fifty Plus customers during the second half. If Fifty Plus customers are excluded, JD Williams saw revenue up double-digit for the year as a whole.

The lower response rates from migrated Fifty Plus customers reflects their fashion attitude rather than their channel preference. They are online shoppers, however, they typically purchase less contemporary fashion items, and the relaunched JD Williams site did not therefore resonate with them as effectively as anticipated. Actions have been taken to address this, most importantly through personalising the site for this customer group to ensure that they are presented with the most appropriate product selection given their preferences. Whilst it is still very early days, the initial results are encouraging.

During the Autumn Winter season we relaunched the JD Williams brand proposition, launching JD Williams "The Lifestore". The JD Williams Lifestore brand aims to celebrate the attitudes, interests and ambitions of our female customers and positions the brand as a modern online department store for the 45 - 60 year old woman. The brand relaunch was a success, with a 13% increase in brand awareness during the season, a significant increase in social media fans (up 19% on facebook and 58% on Instagram) and website sessions up materially.

The JD Williams' Don't Tell Me I Can't partnership with Time Inc, which offered four women the chance to be mentored by experts in a new career, culminated in a 200-strong customer event held at Manchester's Lowry Theatre. The partnership was all about encouraging women to embrace new life adventures and highlighting that age is not a barrier to pursuing your dreams.

Simply Be continues to grow apace, with revenue up 16.3% to £132.8m year on year and active customers up over 20%. The brand is the go-to destination for fashionable size 12-32 customers, offering a range of own-brands and third party brands, often available in larger sizes on an exclusive basis, reinforcing our plus-size credentials.

We have recently rolled out our Simply Be loyalty scheme, 'Perks', which gives customers personalised rewards in return for engagement. This rewards programme initially went live to a small group of customers in October, with the average number of sessions and demand both up double-digit compared to non-members. The rewards programme harnesses customer data, offering members personalised rewards to suit their buying preferences and behaviours.

Our new Spring Summer campaign, called 'Rules Rewritten', includes a fashion TV ad which is proudly unapologetic, championing women's natural beauty and reflecting all women's shapes and sizes. As part of the campaign launch, we held a London Fashion Week 'Rules Rewritten' protest, with a group of lingerie-clad models, ranging from size 12 to 26, led by Hayley Hasselhoff. The protest encouraged everyone to celebrate curves and had strong traction with our customers across social media.

Jacamo caters for 25-45 year old men of all body shapes and sizes, from small to 5XL. Jacamo product revenue was up 5.1% to £68.6m, with active customer growth up high single-digits.

Our Spring Summer campaign, called 'Live Your Moment', features world class high jumping champion Mike Edwards and celebrity chef, Tommy Banks, who became Britain's youngest Michelin star chef at just 24. 'Live Your Moment' is based around men's lives being made up of amazing moments.

Secondary brands revenue decreased by 3.8% to £149.2m. The largest brand within this, Fashion World, was up in the first half but down double-digit in the second half, as we diverted marketing investment into our Power Brands. Figleaves revenue was down low single-digit as expected, with the brand part-way through its turnaround, led by its new management team. We remain confident in the long-term success of this business.

The remaining two brands within this category are High & Mighty and Marisota. High & Mighty, the smallest brand by some measure, was down double-digit, driven by disappointing footfall in its small store estate. Marisota was broadly flat, and is increasingly used as a product brand through JD Williams.

The Traditional segment recorded revenue growth of 3.3% year on year to £138.6m. Our Traditional segment has an online penetration of just under 40%, with online growing as a channel and offline (catalogues) declining significantly. Going forward, we will focus our efforts on the online channel within Traditional, and would expect the offline element to therefore reduce over time. This will ensure that we continue to offer customers a great product offering, whilst allowing us to generate efficiencies.

In line with this strategy, during the second half we commenced the closure of the small Bath office where House of Bath, the largest brand in this segment, has been managed from historically. The buying, merchandising and marketing operations for House of Bath will now be managed by our central teams based in Manchester. This will both reduce operating costs and improve the marketing efficiency across the traditional customer group.

International

(52 weeks ended 3 March 2018 vs 52 weeks ended 25 February 2017)

USA revenue was £17.2m, up 10.9% year on year (up 6.5% in constant currency terms). Revenue growth accelerated as we progressed through the year, with 21.3% constant currency growth in the second half, as our new marketing strategy delivered as expected. We remain very confident in our growth opportunity in the USA.

Ireland delivered revenues of £17.5m, up 8.9% year on year, or 2.7% in constant currency terms.

Stores

(52 weeks ended 3 March 2018 vs 52 weeks ended 25 February 2017)

In our first quarter trading statement we announced the closure of five dual fascia Simply Be and Jacamo stores. Together these five stores contributed £5.0m revenue but accounted for the entire £2.0m operating loss of our store estate in FY17. The store closures were completed at the end of the first half and resulted in an exceptional cost of £13.8m.

Overall, revenue from our store estate was £19.9m (FY17: £23.1m). We currently have 20 stores open, split 12 dual Simply Be and Jacamo stores (FY17: 15), and eight High & Mighty stores (FY17: eight).

The performance of our store estate, in both revenue and profit terms, declined materially in the second half, resulting in a negative profit contribution for the year as whole. This weakness in trading was driven by disappointing footfall, in line with the wider UK high street performance. We remain focused on addressing this underperformance to ensure that our store estate does not represent a drag to Group profitability going forward.

FX sensitivity

For FY19 we expect our annual purchases, net of international revenues, to be c.$140m, on which we have a hedging strategy in place, together with a similar quantum of purchases where we face indirect cost pressures due to the depreciation of sterling. We continue to transition suppliers to dollar denominated purchasing in order to give us greater visibility over our input costs.

For FY19 we have hedged 100% of our net purchases at a blended rate of $/£1.33. At a rate of $/£1.40, and before any mitigating actions, this would result in a c.£3m PBT tailwind compared to FY18 (hedged rate $/£1.29).

For FY20 we have, to date, hedged 43% of our net purchases at a blended rate of $/£1.34. At a rate of $/£1.40, and before any mitigating actions, this would also result in a c.£3m PBT tailwind compared to FY19. Every 5 cents move from this rate in our unhedged position would result in a PBT sensitivity of c.£2m.

FINANCIAL RESULTS

In the current year we are reporting on the 52 week period to 3rd March 2018. In FY17 the statutory result reported on the 53 week period to 4th March 2017. In order to provide a meaningful comparison, all FY17 P&L financial movements are reported on a 52 week basis, excluding the 53rd week, unless otherwise stated. The 53 week statutory results for FY17 are set out on page 15, together with an assessment of how the 52 weeks result for the comparative period has been derived. All comparative balance sheet figures are reported as at the year-end date and cash flow figures are for the 53 week statutory period.

For the 52 weeks to 3 March 2018, Group revenue was £922.2m and PBT was £16.2m. This compares to a statutory result, for the 53 weeks to 4 March 2017, of Group revenue of £900.7m and PBT of £57.6m. For the 52 weeks to 25 February 2017 Group revenue was £887.7m and PBT was £55.6m.

Revenue performance

(52 weeks ended 3 March 2018 vs 52 weeks ended 25 February 2017)

Revenue performance by quarter was as follows:

The prior year figures for Product became comparatively stronger as we progressed through the year, with Q1 FY17 product revenue growth of -1.6% versus +6.9% for the Q4 period. Conversely, the comparatives for Financial Services weakened during the course of the year, with +3.4% in Q1 FY17 and -2.3% in Q4 FY17.

P&P income is included within the Product revenue figures. During the year increased the number of free delivery promotions. This represented a headwind to Product revenue, of 20bps in H1 and 50bps in H2. Delivery costs are within Warehouse and Fulfilment costs, and therefore from a product gross margin perspective, P&P income is effectively recorded as 100% gross margin. This dynamic represented a 30bps headwind for FY18 product gross margin, of which the vast majority was incurred during the second half.

Revenue by category was as follows:

FY17 product revenue by category on a statutory 53 weeks basis is shown in note 4 on page 27

Ladieswear grew by 4.3%, with our own brand ladieswear outperforming, as our new design capabilities continue to yield results and driven by the strong performance of Simply Be. Footwear and accessories performed particularly well, with revenue growth of 8.6% in the year, again driven by our expanded design capabilities. Menswear saw Jacamo again outperform, as expected. Home and Gift revenue was up 2.3%. Our strategy in Home remains unchanged - we aim to recruit new customers to our Fashion offering, but then see customers also buying Homewares.

Gross margin

(52 weeks ended 3 March 2018 vs 52 weeks ended 25 February 2017)

Product

Product cost of goods sold (COGS) were £312.1m, compared to £284.1m in FY17. Product gross margin was 52.2%, down 250bps yoy, in line with our most recent guidance.

The gross margin movement was primarily a result of FX pressures which has resulted in a 280bp headwind either directly due to changes in US dollar exchange rates or indirectly due to our cost pressures on our sterling denominated suppliers who buy their materials in foreign currency. In addition, promotional activity to drive revenue and market share gains against a challenging sector backdrop in the second half resulted in a 50bp decrease.

Financial Services

Our gross bad debt charge declined by 12.3% to £99.5m (FY17: £113.5m). This bad debt charge, together with a small number of other financial services costs, resulted in a Financial Services gross margin of 61.2%, up 550bps year on year. This gross margin performance is discussed in more detail on page 8.

Operating performance

In the current year we are reporting on the 52 week period to 3rd March 2018. In FY17 the statutory result reported on the 53 week period to 4th March 2017. In order to provide a meaningful comparison, all FY17 P&L financial movements are reported on a 52 week basis, excluding the 53rd week, unless otherwise stated. Where applicable, the 53rd week's known result was used as the basis for the adjustment to provide the 52 week result for the comparative period, although a degree of judgement was applied in deriving certain operating costs in respect of the final week. The 53 week statutory results for FY17 are set out below. All comparative balance sheet figures are reported as at the year-end date and cash flow figures are for the 53 week Statutory period

* Adjusted EBITDA is defined as operating profit, excluding exceptionals, with depreciation and amortisation added back

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

Warehouse and fulfilment costs increased by 7.8% to £85.8m. This was driven both by volumes, which were up 3% year on year, together with inflationary cost increases in both fuel and labour, and further investment in our delivery offering, partially offset by continued efficiencies. The increase in Warehouse and Fulfilment was greater during the first half, with +11.3%, compared to the second half increase of +4.7%.

Marketing costs were up 0.9% year on year, significantly below the rate of product revenue growth as we drove efficiency. The increase in Marketing costs was broadly consistent across the two halves. In the second half specifically, roughly two-thirds of the increase in marketing costs relates to a step up in marketing costs in the USA.

Admin and payroll costs increased by 5.3%, weighted towards the first half as we incurred some dual running costs relating to our IT systems development, and increased payroll costs as we invested in recruiting talent and developing our people.

Adjusted* EBITDA increased by 2.3% to £118.6m, with Adjusted* EBITDA margin broadly flat at 12.9% (FY17 13.1%). Depreciation and Amortisation increased by 1.9% reflecting recent investments made in the business. This increase was lower than guidance due to timing between FY18 and FY19, as reflected in the FY19 guidance. Overall, operating profit before exceptional items was £90.5m, up 2.5% year on year, with operating margin broadly flat at 9.8%. Statutory PBT was down 71.9% to £16.2m, as a result of the exceptional costs incurred during the year, together with an unrealised FX movement of negative £8.5m.

Net finance costs

Net finance costs were £8.9m, up 15.6% compared to FY17, due to the increase in net debt driven by good growth in our customer loan book.

Exceptional items

Exceptional costs of £56.9m were primarily incurred during the first half, as previously announced. In the second half we incurred £2.0m relating to our ongoing historic tax cases. A breakdown of full year exceptional costs is shown below.

The customer redress for historic insurance products is discussed on page 9.

The store closure exceptional cost is discussed on page 13.

Taxation

The effective underlying rate of corporation tax is 23.3% (FY17: 23.1%). The overall tax charge was £3.7m (53 weeks to FY17: £13.3m charge).

Earnings per share

Earnings per share from continuing operations was 4.41p (53 weeks to FY17: 15.67p). Adjusted earnings per share from continuing operations were 23.06p (53 weeks to FY17: 22.74p).

Dividends

The Board recognises the importance of the dividend to shareholders, and accordingly is proposing to hold the full year dividend consistent with last year, at 14.23p, as we continue to invest in the business to drive growth.

Balance Sheet and Cash Flow

(52 weeks ended 3 March 2018 vs 53 weeks ended 4 March 2017)

Capital expenditure was £39.2m (FY17: £42.3m). Inventory levels at the period end were up 4.8%, to £110.6m (FY17: £105.5m) due to increases in current season stocks.

Gross trade receivables increased by 8.0% to £647.6m (FY17: £599.5m). The provision declined from £64.7m to £48.8m, driven by debt sales at year end removing £40.4m gross debt and associated impairment of £20.5m together with improvements in the quality of the arrears profile in the debtor book.The group's defined benefit pension scheme has a surplus of £19.3m (FY17: £8.3m surplus). The increase in the surplus is as a result of general market changes in asset returns during the year.

Net cash generated from operations (excluding taxation) was £44.3m compared to £87.1m last year, as a result of an £64.0m increase in the loan book year on year. We had a cash outflow of £27.4m related to exceptional items. After funding capital expenditure, finance costs, taxation and dividends, net debt increased from £290.9m to £346.8m, in line with our expectations. The £598.8m net customer loan book significantly exceeds this net debt figure.

Balance Sheet refinancing

We have recently signed the binding documents in respect of new Balance Sheet financing facilities. The remaining administrative documents will be completed in May 2018 which will enable the new facilities to be drawn.

Previously, our total funding of £405m was made up of a Revolving Credit Facility (RCF) of

£125m and a securitisation facility against our customer loan book of £280m. Given the size of our loan book, at almost £600m (net), and the improvement in its quality since the previous refinancing exercise in 2015, there was opportunity to increase headroom.

Our new financing facilities are made up of a £500m securitisation facility and an extension of our £125m RCF, and are secured until September 2021. Our new RCF facility, whilst unchanged in size, includes a material change in the leverage covenant. This was previously based upon a Group EBITDA to Group Net Debt ratio, however the calculation now excludes the securitisation debt from Group Net Debt entirely.

The pricing of our new Balance Sheet financing facilities are comparable with previous facilities, with the increase in costs due to higher debt levels, as reflected in our interest guidance for FY19.