Brown Group Regulatory News (BWNG)

6 October 2022

HALF YEAR RESULTS FOR THE 26 WEEKS ENDED 27 AUGUST 2022

Performance reflects normalisation of Financial Services post Covid-19 and the macroeconomic environment, with continuing strategic progress and strong balance sheet

Highlights

·  Revenue reflects tougher trading conditions

o  As the period progressed, weakening consumer confidence led to a more challenging online retail market, with the market down c.7% for H1 233 based on our category mix

o  Group revenue down 4.6%:

§ Product revenue down 5.2%, from 0.6% in Q1 to 9.4% in Q2 and with this trend continuing into Q3

§ Strategic brands product revenue 2.2% lower, with Heritage brands 11.8% lower

§ Financial Services revenue down 3.5%, reflecting a smaller debtor book at the start of the year

·  Product margin improvement with Financial Services margin normalising post Covid-19

o  A focus on product gross margin rate, up 1.4ppts, provided mitigation to lower order volumes and continued returns rate normalisation

o  Financial Services gross margin rate down c.13ppts, against an exceptional elevated rate in the prior period driven by Government Covid-19 support to consumers

·  Profit reduction reflects exceptional Financial Services profitability in H1 22

o  Adjusted EBITDA reduction of 46.9% driven by prior year Financial Services performance, with the FY22 impact weighted towards H1, when a Covid-19 IFRS 9 credit loss provision was released and write-offs were atypically low, as highlighted in the FY22 year end results

o  Lower product revenue due to softer market conditions in H1 largely offset by margin focus

o  Operational and central cost base tightly controlled despite inflationary pressures

o  Targeted marketing investment in line with strategy

·  Strong balance sheet

o  Strong balance sheet, with unsecured net cash of £47.2m. Additional £45.5m accessible cash voluntarily undrawn on the securitisation funding facility and access to fully undrawn RCF of £100m, with total accessible liquidity in excess of £200m

·  Actions taken to mitigate softer volumes and inflationary pressures

o  Continued strategy execution with a focus on promotional discipline and implementing measured price increases supported by data tools. Average item values up 14%

o  Operational cost flexibility and contract management has generated savings to offset normalisation of returns volumes and inflationary pressures

·  Digital transformation continues despite challenging backdrop

o  New mobile-first website for Simply Be launched in September enhancing customer experience, including easier site navigation and checkout journey; plan to launch new Jacamo site in first half of 2023

o  Commenced work on building new Financial Services platform

·  Current trading & outlook

o  Uncertainty around macroeconomic conditions persists, and as such, visibility of trading trends is limited. We have seen second quarter product revenue decline of 9.4% continue into September and at this stage, are planning on the basis of challenging market conditions continuing for longer, with H2 23 product revenue expected to decline at a similar rate to Q2

o  Additional product margin improvements are expected through the Group's pricing response to cost inflation, the movement of the product mix back to clothing, and ongoing initiatives including data usage to optimise pricing strategies

o  We will continue to carefully manage cost and margins whilst planning for ongoing elevated inflation. We will benefit from the variable cost model and normalising against a baseline that from H2 includes the step up in strategic marketing

o  We are well hedged against our US Dollar purchases at more than 100% for H2 23 and c. 50% for FY24, and interest rates hedged to December 2024

o  We have yet to see a significant change in the performance of the debtor book as a result of the macroeconomic environment; we expect the steady normalisation back towards pre-pandemic Financial Services arrears rates to continue

o  As a consequence of these factors, we now expect FY23 Adjusted EBITDA to be in the region of £60m

o  At the end of FY23, we continue to expect the Group to maintain a strong unsecured net cash position, and, whereas we previously expected net debt to be in line with FY22's closing position, we now expect year-end net debt to have reduced over FY22

Steve Johnson, Chief Executive, said:

"In a difficult period of weakening consumer confidence, we've balanced our objectives between disciplined trading - with a focus on upholding margin - and delivering on our long-term strategy to transform the business.

Our teams have worked relentlessly to launch Simply Be's new website, and early indicators give us confidence in the wider benefits for all our customers when we roll this out more widely across our other strategic brands.

We anticipate continued softness in trading over the second half as macroeconomic pressures continue to weigh on consumers, despite government support. We will, therefore, maintain our focus on tightly managing both our costs and margins. At the same time, given our ongoing confidence in our strategy and the strength of our balance sheet, we will continue to invest in our digital transformation to deliver sustainable profitable growth."

1Refer to FY22 prior year adjustment on page 11.

2A full reconciliation of statutory to adjusted measures is included in the Financial Review.

3BRC total online non-food market weighted to N Brown category mix using management analysis.

Webcast for analysts and investors:

A webcast presentation of these results will take place at 9am on 6 October 2022 followed by a Q&A conference call for analysts and investors. Please contact Nbrown@mhpc.com for details. 

For further information:

About N Brown Group:

N Brown is a top 10 UK clothing & footwear digital retailer, with a home proposition. Our retail brands include JD Williams, Simply Be and Jacamo, 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 1,800 people across the UK. 

PERFORMANCE REVIEW

Macroeconomic pressures during the period have resulted in a tough retail market, with more caution from consumers around discretionary spending, record low consumer confidence and an ongoing reduction in disposable incomes. Whilst the economic backdrop has become more subdued, we have seen resilience in average item values, which were up 14% on H1 22, and stable items per order. At a customer demand level, this has more than offset a lower level of website sessions and softer conversion of these through to orders, albeit demand has then reduced at product revenue level by the normalisation of returns rates.

Despite this challenging backdrop, we have progressed execution of the strategy we announced in May 2022 which targets the delivery of growth through a simpler and more focused business. As announced, our strategic brands, Simply Be, JD Williams and Jacamo, remain our primary focus for growth, with our remaining brands consolidated within a "heritage brands" portfolio focused on protecting value. We have no further brand closures planned. Our strategy is predicated on five pillars and a short update on progress made against each is set out below. Our five pillars are underpinned by two key enablers: our people and talent, and a sustainable operating model appropriate for a digital retailer.

We remain wholly focused on returning N Brown to sustainable growth and are increasing our efforts to progress this. In a particularly challenging market, we are concentrating on all the elements we can control as a business, ensuring we deliver value for our customers in the most effective way possible.

Key Performance Indications (KPIs)1

We report a range of digital customer metrics which provide operational measures of how our strategy is progressing.

1 KPIs are defined on page 21.

2 Prior year sessions restated reflecting implementation of improved data tool which includes more accurate tracking of app sessions.

3 Total orders includes online and offline orders.

4

Several of our KPIs reflect the impact of the tougher consumer environment on the business. Total website sessions declined by 3.3%, reflecting a combination of a more cautious consumer and significant cost inflation in paid social and paid search, reducing the number of sessions obtained from the same spend. The conversion rate is down 0.2ppts against last year due to customers across the market adopting a more cautious approach whilst browsing sites.

The reduction in orders has been offset by an increase in average item value (AIV), benefitting from our proposition of quality own brand product combined with selected aspirational third-party brands. We have also mitigated a more subdued backdrop with a focus on promotional discipline, implementing measured price increases supported by data tools to help offset inflationary impacts, focusing on the elevated demand for occasionwear vs. leisurewear and customers buying into more premium ranges.

The total number of active customers is broadly in line with the prior year, reflecting the managed decline in our Heritage portfolio of brands, offset by growth in Strategic brands. The reduction against year-end reflects a lower re-trade rate due to greater caution in customer behaviour. We have seen a 3.9ppt increase in the proportion of new accounts opened which are credit accounts.

Financial Services arrears increased by 1.6ppts with Government support during the first part of the Covid-19 pandemic resulting in high repayment rates and low arrears, with the rate remaining below pre-pandemic level.

Our Net Promotor Score (NPS) declined modestly from our FY22 year-end position as we manage short-term delivery issues, whilst we focus on medium term opportunities to improve the customer experience.

Progress against our 5 strategic pillars

1. Build a Differentiated Brand Portfolio

Strategic objective: Build two multi brand and category platforms, one for women (JD Williams) and one for men (Jacamo), as well as one inclusive fashion brand (Simply Be)

Our brand focus has been on iterating our creative platforms to better represent the brand positioning.

For Simply Be, we launched a new creative approach, grounded in fit, which is a key reason we are chosen by customers. This was accompanied by a new media approach which saw us move away from traditional TV advertising entirely and focus our efforts on channels which better align with where our customer spends time, for example, digital video, social, out of home and influencers. We have built on this for our autumn/winter (AW) campaign. 

For JD Williams, we designed our 'collections' creative approach to help the customer understand our full range across categories. It was launched with a new media approach in spring/summer (SS) '22, working alongside our brand ambassadors, Davina McCall and Amanda Holden, to bring it to life in an eye-catching, inspirational way. This approach has evolved further for the autumn/winter '22 season with our campaign having launched at the start of September. 

For Jacamo, we launched our 'every man' creative approach for SS'22, designed to show we have the brands, styles and sizes for all men, broadening Jacamo's audience and helping to shift perceptions of the brand as 'plus size', to consistently give clear reasons to choose us. This was accompanied by a new media approach where we have aligned our ongoing communications and storytelling with the 'every man' creative. 

Our social media channels continue to grow as we foster stronger relationships with our customers through these routes. We now have 2.3m followers across Facebook, Instagram, and Twitter, up 7% versus last year. 

2. Elevate the Fashion and Fintech Proposition

Strategic objective: Elevate the fashion assortment, integrate the credit offer into the journey and create a credit brand

We continue to see improvement in how we elevate our own-brand fashion proposition. We have invested in and rebalanced the core offer whilst building in growth categories such as occasionwear. We have continued to grow our in house designed product from 67% of the range in AW'22 to 93% in SS'23 and we intend to reach 100% by AW23. We have introduced 3D Design on certain product areas and are training our design team in the technology over the remainder of the financial year. 

Men's own label formalwear performance within the half was an area of particular success, up 74% vs. last year and with a significantly higher proportion sold at full price. Within this, we have sold over 50,000 of our own label 'James' suit.

We have launched a number of own brand labels and third-party brands since the start of the year, which have landed well. We launched Anise, our new sustainable own brand, with a campaign featuring our brand ambassadors, Davina McCall and Amanda Holden, wearing pieces from the range, creating a halo effect, with sales more than doubling on the items they wore. The brand has resonated with our new creative approaches, with a significantly stronger than average return on paid social media spend. 

Third-party brands which have launched across our strategic portfolio have been chosen selectively to complement our own product offering. Ladies third party brands sales have increased by 26% versus last year, with a significant increase in the proportion sold at full price. In July, Twisted Wunder was our biggest ever new brand launch on Simply Be and complemented the great performance of Nobody's Child which sold over 45,000 dresses during the first half of the year. Men's branded offering continues to see growth, with good performance from our premium brands including Polo Ralph Lauren and Boss. 

Our existing Financial Services proposition has been evolved to enhance the offer in the near term whilst, in parallel, work has begun on a new technology platform. We have improved the integration of our existing Financial Services proposition into the customer journey including developing better credit messaging displays, the introduction of store cards and optimising the user experience, which are all yielding results. There is more to come from our credit offering; we launched 0% interest for new customers and are due to launch this to existing customers in the autumn of 2022. 

3. Transform the Customer Experience

Strategic objective: Transform the customer experience, pre and post purchase, and drive conversion at checkout through a personalised experience

We have evolved our digital sales journey in Simply Be through the launch of our new website, which is now live for 100% of our customers. The platform aims to deliver a seamless customer experience so shoppers are able to easily navigate the site, have a frictionless checkout experience and receive the same rich mobile application experience across any device. Jacamo will be the next brand to benefit, and is expected to go live in the first half of 2023.

Native checkout, which allows customers to pay directly through our app, went live for 20% of Android visitors and is now in Beta for iOS users. 

Product Implementation Management to provide our customers with better information and insight on our products, including offering more detail about sizing and fabric, has now begun, and various technology solutions are currently being considered. This will create a consistent customer experience and lower returns rate by distributing accurate and complete content across all channels. The building of our new Financial Services technology platform has also commenced through a standalone team, working with an iterative approach.

4. Win with our Target Customer

Strategic objective: Grow our customer base through our existing core customer, high value lapsed customers and a new, younger generation

We have focused on building foundations for this pillar, firstly around activity to revitalise our lapsed customer base but also to drive frequency and engagement from our existing customers.

Secondly, we are evolving our approach to customer retention through agile principles. We are developing propensity models on leading indicators of retention and the customer journey to better understand customer behaviours and how we can influence them more effectively to increase customer value.

We are also investing in our data in this area so that we can better understand our base and how to improve customer targeting and personalisation. 

5. Establish Data as an Asset to Win

Strategic objective: Establish data as an asset to drive top line and margin improvements

Significant progress has been made in developing our data strategy, which underpins this pillar. We have focused on how we establish data, through the operational model, team structure, recruitment, and culture, to set ourselves up for success. 

In the meantime, we continue to invest in work around pricing, marketing optimisation and customer value as valuable products for the business. Pricetagger, an in-house tool which helps us optimally promote product using pricing elasticity curves, has been rolled out to all clothing and footwear promotions, with tangible benefits to gross margin. We have also developed a mailing selections model, allowing more efficiency with offline marketing spend. 

Key Enablers

A significant amount of enabling work is underway in relation to developing an agile operating model through organisational structures which are aligned to our brands and systems which enable customer outcomes. We are learning through an iterative process how to embed this as part of our culture and implement it across areas of the business where value can be realised fastest. 

We continue to put our people at the heart of our business, which is why we launched our Equity, Diversity and Inclusion Strategy, 'Embrace', a fundamental enabler to our success as an organisation, during the period. We are committed to both building a diverse workforce and creating an inclusive environment which values equality for all. Alongside this, we are welcoming the first cohort of our graduate scheme in October, as we continue to attract, acquire and develop capabilities for the future.

Environment, Social and Governance

We have continued to embed our Environmental, Social and Governance strategy into the business. Our sustainability plan, SUSTAIN, fully aligns our ethical policies with our commercial activities and our commitment to Our People and Our Planet.

Simply Be has launched its first clothing rental collection with the UK's leading accessible fashion rental platform HireStreet. This is another important milestone in the SUSTAIN strategy with the rental edit helping to extend the lifespan of products and encouraging customers to embrace product circularity.

A key pillar of SUSTAIN is our commitment to responsibly source own-brand product, and we have reached 31% of own brand designed Clothing and Home textile ranges with sustainable attributes (from 0% in 2019) as we target growing this to 100% by FY30 in line with our Textiles 2030 commitment.

Our Greenhouse Gas Emissions per item shipped are 50% lower compared to the base line set in FY15, in line with our BRC Climate Action Roadmap commitments. We are seeing benefits from upgrading to LED lighting at our main distribution centre at Shaw, and an overall reduction in the use of gas and water across our sites.

There has been a particular focus on our social impact during this period with new charity partnerships with Retail Trust and FareShare Greater Manchester announced in September, and the implementation of a more integrated Diversity, Equity and Inclusion policy "EMBRACE". The first 12 months of EMBRACE are targeted on building engagement, awareness and connection supported by five communities which we are establishing to represent the core strands of diversity that exist within our business. The charity choices reflect the two overarching objectives of our corporate charity strategy, which are to support a charity which is closely connected to our business through alignment with our strategic vision and industry and to continue to support a charity with a strong presence in Greater Manchester. We will work closely with both charities to develop a tangible fundraising target and a programme of activities to benefit all our colleagues.

Macroeconomic Environment

The current operating and economic environment remains extremely challenging. Significant increases in energy prices, general price increases and interest rate increases are putting pressure on household budgets and adversely impacting consumer confidence. The cost of living crisis is impacting all elements of people's lives including their decisions in relation to spending on non-essential items.

The Board maintains a continuous process for identifying, evaluating and managing risk as part of its overall responsibility for maintaining internal controls and the Risk Management Framework. This process is intended to provide reasonable assurance regarding compliance with laws and regulations as well as commercial and operational risks.

Increased risk in the external environment of many of our principal risks (refer to page 30) is leading to a worsening risk position in many categories, despite improvements to the control environment. Control enhancements are identified routinely and on a continuous basis as we test controls, review operational issues and perform assurance activities.

FY23 Outlook

We have seen significant volatility in trading trends in the second quarter and into the third quarter of FY23, including both pre and post the 19th September bank holiday. This, combined with other macroeconomic conditions, makes visibility on revenue trends difficult. Based on the assumption that macroeconomic uncertainty and inflationary pressures continue through the second half of the year, we have revised our assumptions for H21 product revenue and now expect it to decline in line with the year-on-year decline seen in Q2 and September.

Consistent with H1, we expect to drive product margin improvements through the Group's pricing response to cost inflation, the movement of the product mix back into clothing, and continued initiatives, including data usage, to optimise pricing strategies. We are well hedged against our US Dollar purchases in H2, which we expect will offset most of the headwind from the recent weakening in Sterling. We will also continue to carefully manage the cost base to mitigate ongoing inflationary pressures.

The Financial Services gross margin has normalised in H1. We will continue to closely monitor customer behaviour and provide support to customers. We are expecting a steady move back towards pre-pandemic arrears rates. We have yet to see a significant change in the performance of the debtor book as a result of the macroeconomic environment.

As a consequence of the above factors, we now expect FY23 Adjusted EBITDA in the region of £60m before growing again as the Group's strategy is executed.

At the end of FY23, we expect the Group to maintain a strong unsecured net cash position and for net debt to be below FY22's closing position, whilst continuing to have full access to the £100m RCF, allowing us to further progress our transformation strategy.

We remain confident in the resilience of our business model and in our strategic direction. As demonstrated by the launch of the new Simply Be website, the business continues to be well positioned to invest in and deliver strategic change through the remainder of FY23 and beyond.

Over the medium term and if current macroeconomic conditions improve, the Board is confident that our strategy will support the delivery of 7% product revenue growth with a 13% EBITDA margin.

1. FY23 is a 53 week financial year. The reference to revenue growth expectations is on a comparable basis excluding the 53rd week in FY23. Other Outlook expectations include the 53rd week in FY23.

FINANCIAL REVIEW

Financial KPIs

Our non-financial KPIs are contained in the Chief Executive Officer's statement. We also use a number of financial KPIs to manage the business. These are shown below and will continue to be reported going forwards.

1 Refer to prior year adjustment on page 11.

2A full glossary of Alternative Performance Measures and their definitions is included on page 22.

Prior year adjustment

In FY22, full year results included a prior year adjustment relating to a change in accounting policy for software as a service ("SAAS") costs and re-presentation of deceased customer debt write-offs. The H1 22 comparatives have been adjusted to reflect these changes and the rephasing of returns. These are illustrated in the table below.

Reconciliation of Statutory financial results to adjusted results

The reporting includes alternative performance measures ("APMs"), which are not defined or specified under the requirements of IFRS. These APMs are consistent with how we measure performance internally and are also used in assessing performance under our incentive plans. Therefore, the Directors believe that these APMs provide stakeholders with additional, useful information on the Group's performance.

The adjusted figures are presented before the impact of exceptional items. Exceptional items are items of income and expenditure which are one-off in nature and are material to the current financial year or represent true ups to items presented as exceptional in prior periods. These are detailed in note 5.

A full glossary of APMs and their definitions is included on page 22.

1 Refer to prior year adjustment on page 11.

Reconciliation of Cash and cash equivalents and bank overdrafts to Unsecured Net Cash and Adjusted Net Debt

Reconciliation of Net movement in Cash and cash equivalents and bank overdrafts to Net Cash generation

Overview

We entered FY23 cognisant of the escalating and fast-moving inflationary environment. As we have moved through the first half of FY23, we have seen a reduction in consumer confidence and the environment in which N Brown operates has become more challenging.

We decided not to aggressively drive volumes and although we have seen a softer product revenue performance than last year and also a weakening in Sterling, our disciplined approach to product margin rate and foreign exchange hedging has largely mitigated the impact of these. The cost base has been carefully managed through the period to mitigate inflationary headwinds, with the increase in costs for planned marketing investment in line with our strategy. Alongside this, the investment in and launch of the new Simply Be website marks a significant milestone in the digital transformation journey.

We have annualised against an unusual set of Financial Services comparatives, which has driven EBITDA lower against prior year.

The balance sheet remains strong and a return to growth in the debtor book and securitisation borrowings, driven by product revenue growth, remains a key opportunity for the business.

Revenue

Group revenue declined 4.6% to £331.5m, as a result of a 5.2% decline in total Product revenue and a 3.5% decline in Financial Services revenue.

Weighted for our category mix, the online market reduced by c.7% against last year for H1 235, and includes the impact of some year-on-year channel shift by consumers from online to stores due to annualising against periods of store closures during pandemic-related lockdown measures.

In the first half, we experienced a decline in product revenue, however, we are disciplined in our approach to trading and retaining margin, and took the decision to not aggressively drive volumes, with average item values increasing by 14%. Alongside this we have made progress with our digital strategy including delivery of the new website for Simply Be and we remain confident in the ability of strategic brands to deliver growth beyond FY23. As previously highlighted, the Figleaves closure no longer causes a drag on revenue from FY23 onwards and this is reflected in the lower decline seen in Heritage brands versus FY22.

As anticipated, Clothing and Footwear mix increased further, moving from 66% of product revenue in H1 22 to 70% in H1 23. A strong performance has been delivered by categories rebounding against pandemic comparatives including swimwear, occasionwear, and formalwear, whereas declines have been seen in casual categories. As expected with the pivot back into Clothing and Footwear, and customers buying into higher returning categories such as dresses, we have seen further normalisation in customer returns rates, which have increased by 5ppts against the prior year and are now c. 1ppts below pre-pandemic levels.

Financial Services revenue has declined broadly in line with the customer receivables book, with the 3.5% revenue decline being slightly better than the decline seen in FY22.

1 Refer to prior year adjustment on page 11

2 Brand split re-represented into Strategic and Heritage brands in line with the Group's strategy.

3 JD Williams, Simply Be, Jacamo.

4 Heritage brands are Ambrose Wilson, Home Essentials, Fashion World, Marisota, Oxendales and Premier Man.

5BRC total online non-food market, management analysis

Adjusted Gross profit1

1 A reconciliation of statutory measures to adjusted measures is included on page 12. A full glossary of Alternative Performance Measures and their definitions is included on page 22.

2 Refer to prior year adjustment on page 12.

The Group's adjusted gross profit margin was 47.2%, compared to 51.0% in H1 22. Financial Services gross margin was 50.1% in H1 23, 13.3ppts lower than in H1 22, and consistent with our expectation that Financial Services gross margin will normalise to a low to mid 50s percent range for full year FY23. This was a result of unprecedented conditions within the consumer credit market over FY21 and FY22, with government support during the first part of the Covid-19 pandemic resulting in high repayment rates, low arrears and write-off rates, and consequently, a net reduction in the IFRS 9 bad debt provision and low write offs in H1 22, the period against which H1 23 annualises.

Product gross margin increased 1.4ppts to 45.5%, benefitting from management actions taken to mitigate the impact of inflationary pressures, including on freight rates. These included a combination of reduced promotional levels through disciplined trading, measured price increases supported by data, the mix effect into clothing and the decision to increase shipping charges to customers, which benefitted margin rate by c. 4ppts. We saw c. 1ppt of margin rate benefit from higher VAT bad debt relief due to a normalising level of financial services write-offs. Partially offsetting this was a negative impact of c. 1.5ppts from higher freight rates and with the impact from weak Sterling mitigated through hedging. A further adverse impact of c. 2ppt includes additional stock provisioning reflecting a higher stock balance with greater mix towards clothing.

Adjusted operating costs1

1 A reconciliation of statutory measures to adjusted measures is included on page 12. A full glossary of Alternative Performance Measures and their definitions is included on page 22.

2 Restated for change in accounting policy (refer to Prior Year Adjustment note 32 in the 2022 Annual Report and Accounts).

Overall, adjusted operating costs as a percentage of Group revenue increased from 35.9% in H1 22 to 38.7% in H1 23. As highlighted at the start of the financial year, we anticipated that inflationary increases and maintaining strategic brand investment would increase the cost ratio in FY23. Management actions have helped to mitigate increases to the cost base, with the total increase of £3.4m being driven by the marketing investment and after the absorption of approximately £6m of inflationary increases. We are focused on maintaining an efficient and sustainable cost base and are planning for a reduction in adjusted operating costs as a percentage of Group revenue in H2 relative to H1.

Warehouse and fulfilment costs were slightly lower than in the prior year period, benefitting from flexing of the cost base by c. £4m with c.10% lower volumes due to higher average item values. This was partially offset by higher returns which drove a c. £2m increase over prior year and the absorption of around £2m across fuel surcharges and inflationary impacts on carrier and resource costs.

Marketing and production costs increased by 9.0% to £36.5m reflecting the previously highlighted strategic decision to invest more into brand marketing, comparing against a lower level of spend in Q1 FY22 when above the line activity did not increase post easing of lockdowns, as well as approximately £2m of inflationary impact, particularly due to higher market costs for paid social and paid search.

Admin and payroll costs increased by 1.0%, driven predominantly by inflationary increases of c. £2m including utilities, payroll and National Insurance.

Exceptional items

Exceptional items were £nil in the period (H1 22: £nil). Further details can be found in note 5.

Profit and earnings per share

Driven by the elevated Financial Services gross margin rate in prior year, lower product revenue performance and marketing investment, Adjusted EBITDA reduced by £24.3m to £27.9m and Adjusted EBITDA margin reduced by 6.7ppts to 8.4%.

Depreciation and amortisation reduced to £17.1m from £21.3m in the prior year as a result of the acceleration of amortisation in FY22 following a review of useful economic lives which took place at the end of FY21, and the change in accounting policy adopted in FY22 relating to software as a service.

Statutory operating profit decreased by £20.4m over the prior year to £10.8m reflecting the reduction in Adjusted EBITDA partially offset by lower depreciation and amortisation.

Net finance costs were £6.5m, broadly in line with £6.8m in the prior year. The opportunity to voluntarily underdraw on the securitisation facility continues to be utilised. The Group has limited its exposure to interest rate movements through interest rate hedging which it continues to have in place, as described in Note 6.

Adjusted profit before tax was £4.3m, down £20.1m year on year (H1 22: £24.4m) as a result of the reduction in EBITDA, partially offset by the lower depreciation and amortisation.

Statutory profit before tax was £7.2m, down £21.9m year on year (H1 22: £28.4m).

The taxation charge was £1.6m (H1 22: £4.8m) with the reduction driven by the lower profit before tax.

Statutory earnings per share decreased to 1.22p (H1 22: 5.10p). Adjusted earnings per share decreased to 0.72p (H1 22: 4.41p).

Financial Services customer receivables and impairment

Gross customer trade receivables at the end of H1 23 reduced by 4.4% to £572m over H1 22. This reflected a combination of lower product revenue, higher write-offs, and higher than normal levels of customer repayments in the half.

The IFRS9 bad debt provision to gross receivable balance ratio is 13.9% compared to 14.7% in H1 22. The H1 22 level was inclusive of £5.2m to cover future Covid-19 default risks.

The reduction in provision rate on payment arrangements reflects a higher propensity to recover. This is a consequence of customers proactively seeking forbearance via the business' various support measures.

The FY22 year-end inflationary post model adjustment of £5.8m is now embedded in the base provision as book performance has declined and modelled economic inflationary expectations are now in line with the market.

Overall provision rates remain higher than the pre Covid-19 level reported in FY20 (10.9%).

In the half year, the net impairment charge was £59.3m, £14.3m higher than prior year driven by exceptionally low levels of arrears in the prior year, which are now normalising as expected, and the prior year benefitting from the release of c. £10m of Covid-19 additional credit loss provision which was not required.

Net Cash Generation

1Refer to FY22 prior year adjustment on page 11.

Net cash increased by £4.1m compared to a reduction of £38.9m in the prior year. Excluding voluntary flexible drawdown of the securitisation facility of £14.6m this year and voluntary repayment of £57.2m in the prior year, net cash outflow from operations was £10.5m (H1 22 net cash generation: £18.3m). The undrawn headroom on the securitisation facility was £45.5m (H1 22: £57.2m).

The net cash outflow has been driven by a greater decrease in securitisation debt than seen in prior year. £(4.0)m (H1 22: £(5.0)m) reflects the reduction in the customer loan book during the period. £(22.4)m (H1 22: £(9.5)m) is driven by a reduction in the level of eligible receivables within the loan book which can be securitised. The lower level of eligible receivables is a result of a return to a more normal level of build up of payment arrangements in the year with an increase of £31m in payment arrangements since year end. This includes where customers have chosen to proactively use these, which the business continues to facilitate as a responsible lender.

Net inventory levels at the end of the half were up 14.4% against prior year, to £103.0m (H1 22: £90.0m). We have invested in our improved product offering and ensured availability of supply for our customers and the balance has a higher proportion of current season stock than prior year. The balance also includes c. £2m higher freight costs than in the prior year. Given the revenue expectations for H2, we have plans in place to carefully manage inventory intake.

Capital expenditure of £11.2m (FY21: £10.5m) was slightly higher than prior year and an increase in the level of spend is planned for H2 to deliver the ongoing digital transformation of the business. 

Adjusted net debt

Unsecured net cash, which is defined as the amount drawn on the Group's unsecured borrowing facilities less cash balances, closed the half with unsecured net cash of £47.2m (FY22: unsecured net cash £43.1m; H1 22: unsecured net cash £41.9m).

Adjusted net debt decreased by £15.9m in the half against FY22 year end, to £243.5m (FY22: £259.4m; H1 22: £268.3m). This is the net amount of £47.2m of cash and £290.7m of debt drawn against the securitisation funding facility which is backed by eligible customer receivables. The £492.0m net customer loan book significantly exceeds this adjusted net debt figure.

Dividend and capital allocation

In the context of the current macroeconomic uncertainty in FY23, the Board will defer the decision on the reintroduction of a divided until FY24. Nevertheless, the Directors continue to recognise that dividends are an important part of shareholders' returns.

Pension scheme

The Group's defined benefit pension scheme has a surplus of £31.4m (H1 22: £27.1m surplus).

Since the interim reporting date there has been significant volatility in financial markets, however the net balance sheet position of the Fund is not expected to have materially changed. The Fund's investment strategy aims to hedge the impact of changes in interest rates and inflation expectation, to limit the impact of market volatility on the funding position. Whilst the recent increase in bond yields will have reduced the value of the Fund's liabilities, this is expected to have been largely offset by a similar reduction in the value of the Fund's investments.

Allianz litigation

During the period to 27 August 2022, there have been no material developments in the litigation which would materially change the Group's estimated potential net outflow (see Note 16 for full details).

KPI DEFINITIONS

1Accepted demand is defined as the value of Orders from customers (including VAT) that we accept, i.e. after our credit assessment processes.

APM GLOSSARY

The statement includes APMs, which are not defined or specified under the requirements of IFRS. These APMs are consistent with how the Group measures performance internally and are also used in assessing performance under the Group's incentive plans. Therefore, the Directors believe that these APMs provide stakeholders with additional, useful information on the Group's performance.

The reconciliation of the statutory measures to adjusted measures is included in the Financial Review report on page 12.

Unaudited Condensed consolidated income statement

for the 26 weeks ended 27 August 2022

Unaudited condensed consolidated statement of comprehensive income

for the 26 weeks ended 27 August 2022

1 Refer to prior year adjustment on page 11.

Condensed consolidated balance sheet

As at 27 August 2022

Condensed consolidated cash flow statement

For the 26 weeks ended 27 August 2022

Reconciliation of operating profit to net cash from operating activities