CPR.L Regulatory News (CPR)

Carpetright plc

Preliminary Results Announcement for the 52 weeks ended 26 April 2014

Carpetright plc, Europe's leading specialist carpet and floor coverings retailer, today announces its preliminary results for the 52 week trading period ended 26 April 2014.

Group Financial Summary

Highlights

UK

• Like-for-like revenues declined by 0.2%. Excluding the expected contraction in sales from the wholesale business, the core retail business like-for-like grew by 0.5%.

• Gross profit percentage increased by 100 basis points to 62.5% (2013: 61.5%).

• 89 stores refurbished in the period taking the total to 275 stores, representing 58% of the trading estate.

• Store base reduced by a net six during the year to 472 stores.

Rest of Europe

• Revenue in local currency, declined by 8.6% with like-for-like sales down by 8.6%.

• Difficult trading conditions in the Netherlands, where the floor coverings market remains weak.

• Number of stores remains unchanged at 142, having opened one and closed one store during the period.

Exceptional charges of £11.8m related to a combination of net losses on disposal of properties, onerous lease provisions and non-cash impairment of property assets.

Board succession plans confirmed - Wilf Walsh to join as CEO on 21 July 2014, at which point Lord Harris will become non-executive Chairman.

Commenting on the results Lord Harris, Executive Chairman, said:

"While indicators point to an overall improvement in UK economic performance over the past twelve months, it has been a challenging time for the Group with our markets remaining highly competitive and deal-driven.

"The performance of the business in the Rest of Europe is principally a reflection of the continued difficult trading in the Netherlands. Whilst this business reported a loss for the year, it remained cash generative.

"Against this backdrop, we continue to take steps to develop the business. While we anticipate trading conditions will remain challenging, we expect these actions will underpin an improvement in Group performance in the new financial year."

Notes

1. All sales figures are quoted after deducting VAT.

2. 'Underlying' excludes exceptional items, related tax and an exceptional tax credit.

3. Like-for-like sales calculated as this year's net sales compared to last year's net sales for all stores that are at least 12 months old at the beginning of our financial year. Stores closed during the year are excluded from both years. No account is taken of changes to store size or introduction of third party concessions. Sales from insurance and house building contracts are supplied through the stores and included in their figures.

4. Exceptional items comprises, net losses on disposal of properties of £1.6m; onerous lease provisions of £6.6m; non-cash impairment of freehold property assets of £1.9m; impairment of other assets of £0.5m; and restructuring costs of £1.2m.

5. Comparative period for the year is the 52 week period ended 27 April 2013.

Results presentation

Carpetright plc will hold a presentation to analysts and investors at Deutsche Bank, Winchester House, 1 Great Winchester Street, London EC2N 2DB at 8:45am today.

A listen only conference call facility is available on +44(0) 1452 560297, conference ID: 62949169

A copy of this interim statement can be found on our website www.carpetright.plc.uk 

For further enquiries please contact:

Carpetright plc

Lord Harris, Executive Chairman

Neil Page, Group Finance Director

Tel: 01708 802000

Citigate Dewe Rogerson

Kevin Smith / Lindsay Noton

Tel: 020 7638 9571

Forthcoming news flow:

Carpetright will release its Interim Management Statement for the first quarter on29 July 2014.

Certain statements in this report are forward looking. Although the Group believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements contain risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements. We undertake no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

Preliminary Results

A summary of the reported financial results for the year ended 26 April 2014 is set out below:

Note - Where this review makes reference to "Underlying" these relate to profit / earnings before exceptional items.

Overview

Total sales decreased by 2.2% to £447.7m, reflecting the tough consumer environment in all the geographic markets in which we operate. During the year, the Group opened 14 stores and closed 20 which gave a net decrease of six stores, with a total store base of 614. Total store space declined by 1.5% to 5.6 million square feet.

Operations in the UK continued to be challenged by a fragile consumer environment where the disposable incomes of our customers remained under pressure. The key driver in the performance of the Rest of Europe continues to be the deterioration of consumer confidence in the Netherlands, where the floor coverings market remains weak.

Overall, Group underlying operating profit decreased by 39.5% to £6.9m. Underlying net finance charges were £0.6m higher at £2.3m. These factors combined to generate an underlying profit before tax of £4.6m, a 52.6% decrease on the prior year.

Exceptional charges totalled £11.8m (2013: £14.8m), primarily from onerous lease provisions and non-cash impairment charges.

As a result, the loss before tax was £7.2m (2013: £5.1m loss). Basic loss per share was 5.3p, reflecting the post tax loss (2013: 9.8p loss).

The combination of cash flow from continued underlying profitability, effective management of working capital and control of capital expenditure enabled year-end net debt to be held broadly flat at £11.1m (2013: £10.2m).

Operating Review

The Group's underlying profits declined in the year, with the Rest of Europe reporting a loss, reflecting the continuation of extremely difficult trading conditions in the Netherlands. The performance of the UK business was characterised by significant sales volatility throughout the year, resulting in a small decrease in reported profit.

Modernising the estate

We are part way through a programme of refurbishing the UK store estate, introducing an updated store design, with a new, more contemporary feel, in which it is easier for customers to shop. This has involved improving natural light, updating signage, developing new layouts, replacing floor coverings and upgrading in-store lighting.

During the year we modernised a further 89 stores, making a total of 275 stores now completed, being 58% of the estate. Within this programme, we trialled a 'sample only' smaller store format, with extended ranges of roll stock samples, a special 'smooth flooring area' and the introduction of premium branded carpets. The post-refurbishment sales uplifts are highest in these smaller stores and this will be reflected in the remainder of the programme, with opportunities for 'sample only' stores being prioritised.

As previously announced, following the success of the UK modernisation plan, we have a similar refurbishment programme in the Rest of Europe to adapt to changing customer preferences. We now have a total of 33 completed to date.

Adjusting the store portfolio

At the end of April 2014 we had 472 stores trading in the UK and during the year we opened 13 stores and closed 19. This net reduction is primarily the result of implementing the plan from our catchment analysis work which identified a small number of overlaps, where having more than one store in a town was not beneficial to profit or cash flow. In the past 12 months we have negotiated exits from seven locations where we had onerous leases, removing us from all future liabilities.

We continue to take a robust view at lease renewal, which provides an opportunity to secure lower rental cost for future years. In the year we achieved an average rent reduction at lease renewal of over 19%. Within the next five years 21% of the estate has lease renewals scheduled, with the average length of lease as at April 2014 falling to 7.7 years (2013: 8.3 years).

In the Rest of Europe we had 142 stores trading as at the end of April 2014, with one opening and one closure in the year. In line with the UK activity, discussions are being held with landlords in respect of lease renewals, which is delivering rental reductions. The potential to secure reductions is generally dictated by the average length of lease remaining, with this being 3.2 years in the Netherlands and 1.6 in Belgium. In the Republic of Ireland this is 11.2 years, reflecting the agreement of long-term deals during the expansion into this market in the period from 2001 to 2008.

Across the Group, we have taken opportunities to reduce our store size and we now have 105 stores operating as 'sample only' with a small takeaway range format, which has the benefit of lower operating costs without negatively affecting customer choice. This format is allowing us to reduce fixed occupancy costs by either sub-letting or handing back space to the landlord, hence benefiting profitability.

Optimising digital as part of a multi-channel offering

Our UK customer research indicates that the nature of our product means that the vast majority of customers prefer to visit a store to make their purchase, to give them the opportunity to see and touch their choice of floor covering. However, the internet has become a vital research tool for many customers and the rapid growth of smart phone and tablet use has made an effective and integrated multi-channel proposition a necessity.

We have continued to develop our website to improve the customer experience and drive sales. One specific improvement has been the re-launch of the bed section in September 2013, with significantly enhanced navigation filters. We have been encouraged by the increased visitor numbers and subsequent sales growth this has produced.

In the second half of the financial year, on a weekly basis we were achieving an average of over 98,000 unique visitors to our website, a 15% increase on the same period last year, and this has produced a corresponding increase in appointment leads and sample requests. Some of the increase is attributable to an enhanced search engine optimisation programme and increased investment in pay-per-click. We have also continued to focus on improving our conversion to sales ratio, through a call centre and improved follow-up at store level. Sales from this combination of the call centre and an online capability have grown significantly during the period and by April 2014 were the equivalent of one of our top five stores.

We have transferred much of this learning to our Dutch business, with the launch of an updated website in January 2014. The new site has the functionality of sample ordering, booking of appointments, 'call to buy' via a freephone number and online payment of outstanding customer balances. We are encouraged by the early results of this activity.

Developing our bed proposition

In our UK business, beds provide an important complementary revenue stream to our core floor coverings offer and we believe this category has significant further growth potential. At the end of April 2014, the offer 'Sleepright by Carpetright' was trading from 260 stores (2013: 271 stores), with the decrease reflecting the net closure of 11 stores and the decision to remove this category from certain locations where it compromised the flooring offer. The category delivered an increase in sales of 10.9% in the year as a whole, with the sales momentum accelerating to 16.8% in the second half. Beds now represent 7.6% of total UK sales revenue (2013: 6.7%) and 11.1% of the sales mix in those stores where they are available. We are pleased with this performance and are stepping up our investment in marketing to establish greater customer awareness of the strength of our beds offer.

Building on the lessons learnt in the UK, we replicated the bed proposition in seven stores in the Netherlands, albeit adjusted to reflect the needs of the local consumer. The performance of these trial stores has been disappointing and further roll out has been put on hold, allowing the management to concentrate on the core flooring category.

Outlook

Although there are signs that the UK economy is improving with reduced unemployment, growing levels of consumer confidence and an increase in the number of housing transactions, we continue to assume we will trade in a subdued retail environment until the recovery is clearly established.

In the Rest of Europe, there appear to be tentative signs that the rate of decline in the Netherlands market is slowing and the competitive environment is easing in Belgium. Against this backdrop, we have implemented a revised promotional programme to drive sales and margin, alongside a restructuring of central support functions to improve efficiency and reduce costs. It is anticipated that the combination of these activities will improve profitability.

The Republic of Ireland remains a drag on Group performance, with the major contributory factor being excessive rents relative to sales. Whilst we continue to address this, the trading plan is focused on growing sales and margin in a tough economic climate.

Against this backdrop, we continue to take steps to develop the business. While we anticipate trading conditions will remain challenging, we expect these actions will underpin an improvement in Group performance in the new financial year. 

Financial review

UK

Total UK revenue decreased 1.5% in the year to £375.8m. We opened 13 stores and closed 19 stores in the year, which translated into net space decline of 87,000 sq ft, a decrease of 2.1%. After taking into account the movement in the number of stores, like-for-like sales for the year decreased by 0.2%, with the first half decrease of 0.8% partially offset by a stronger second half, being an increase of 0.3%. Excluding the expected contraction in sales from the wholesale business, the core business grew 0.5%.

Gross profit increased by £0.3m to £235.1m, representing 62.5% of sales, an increase of 100 basis points. The margin was achieved through better sourcing and promotional planning. The impact of the increase in bed sales at a lower margin was offset by a corresponding decrease from our wholesale business.

The total UK cost base increased by 0.2% compared with the prior year to £224.4m (2013: £223.9m). Store payroll costs continue to be monitored closely relative to the volume of sales, but increased by 0.9% to £58.8m (2013: £58.3m). Store occupancy costs fell 0.6% to £125.7m (2013: £126.4m) due to a net reduction in the number of stores and successful rent negotiations, although this was partially offset by business rates inflation. The underlying rent in like-for-like stores held level with the prior year, with the majority of rent reviews being settled at zero. Marketing and central support costs increased 1.8% to £39.9m (2013: £39.2m), primarily the result of an increased investment in television and digital advertising.

Underlying operating profit decreased by 1.8% to £10.7m (2013: £10.9m).

UK - Performance review

The key financial results for the UK were:

The Rest of Europe portfolio is now as follows:

Rest of Europe

The flooring market in the Netherlands and Belgium remained weak, impacted by government austerity measures restricting customers' disposable income and low consumer confidence. This resulted in an extremely challenging year for our business. Performance in the Republic of Ireland also stepped backwards over the year, with a small reduction in sales volumes.

After exchange rate movements, the three businesses combined to produce a total sales decline of 5.4% in reported currency. In local currency terms, total sales fell 8.6%, with like-for-like sales decreasing by 8.6%.

Gross profit percentage decreased 50 basis points to 56.7% (2013: 57.2%), and this, combined with lower sales volumes, resulted in a decline of gross profit to £40.8m (2013: £43.5m). In local currency terms, this represented a 9.5% decline.

Reported operating costs increased by 3.7% to £44.6m. In local currency terms costs remain level, reflecting tight management control in offsetting inflationary pressures.

The net result was an underlying operating loss of £3.8m (2013: profit of £0.5m).

Rest of Europe - Performance review

The key financial results for the Rest of Europe were:

The Rest of Europe portfolio is now as follows:

Group Financial Review

Net finance costs and taxation

Underlying net finance charges were £2.3m (2013: £1.7m). This increase was a combination of the impact of an amendment to IAS 19 relating to pension costs and interest on deferred tax liabilities.

The underlying tax rate reduced to 30.6% (2013: 31.3%) reflecting the 1.0% reduction in the UK corporation tax to 23.0% and losses in Europe. A further 3.0% reduction in future UK corporation tax rates reduces deferred tax liabilities by £2.7m. This, along with the impact of exceptional items, results in an exceptional tax credit of £5.0m and an effective tax rate credit of 52.0% (2013: charge of 29.3%).

Exceptional items

The Group recorded a net charge of £11.8m (2013: charge of £14.8m) in the year.

The out-of-town retail property market remains subdued, impacting our ability to exit unprofitable stores and the valuation of our freehold estate. A net loss of £1.6m was made on property disposals in the year (2013: £1.2m loss). This was principally the result of surrender premiums being paid to exit loss making stores.

At the prior year end we carried onerous lease provisions for 30 stores. During the year we disposed of seven stores, relieving us from all future liabilities. Leases for three stores returned to us under privity of contract following their current occupier's administration. The net movement in other store re-openings and closures led to there being 25 onerous stores at the end of the financial year. The onerous estate has been reviewed in detail and the Group is increasing an onerous lease provision for the estimated future outgoings by £6.6m to £13.4m.

We have reviewed the carrying value of the store assets in our balance sheet, consistent with the approach in previous years. The model used to value these assets includes a number of assumptions relating to market growth and inflationary expectations. These tests have led to a net impairment charge of £0.5m (2013: £0.3m charge).

Changes in the property market in both the UK and the Netherlands, with more properties being returned to landlords, has led us to review the carrying value of the Group's freehold properties. Based upon an independent valuation of the Group's freehold assets, the review has resulted in a non-cash impairment charge of £1.9m.

In this difficult retail environment, the Group has focused on organisational changes aimed at enhancing our efficiency and leveraging our strengths to provide a solid framework for growth. This has involved the consolidation of our offices in Europe at a cost of £1.2m. Given the irregular nature and amounts associated with business restructuring, these have been treated as exceptional items.

Earnings per share

Basic loss per share was 5.3 pence (2013: loss of 9.8 pence). Underlying earnings per share decreased to 4.7 pence (2013: 9.6 pence).

Dividend

The Board has decided not to pay a dividend (2013: nil).

Balance sheet

The Group had net assets of £61.1m (2013: £65.3m) at the end of the year, a decrease of £4.2m since 27 April 2013, reflecting the post tax loss for the year.

During the period, one freehold property disposal was completed. The Group owns a significant property portfolio, most of which is used for retail purposes. The carrying values are supported by a combination of value in use and independent valuations.

Net debt and cash flow

The Group's net debt at 26 April 2014 was £11.1m, an increase of £0.9m on the prior year end position of £10.2m. This increase was driven by the underlying operating profit performance being offset by a £4.9m cash outflow related to provisions, £0.9m contributions to closed defined benefit pension schemes and a £8.1m increase in working capital.

The increase in working capital in the year was attributable to the decline in merchandise creditors, a consequence of lower sales and stock levels and the net amortisation of property lease incentives.

The resulting net inflow of cash generated by operations of £11.3m was offset by net capital expenditure, interest and tax net outflows totalling £12.3m.

The Group's average cost of funding was 4.5% (2013: 4.7%), with an average net debt of £16.4m (2013: £21.4m).

Cash flow statement

Net capital expenditure was £10.2m (2013: £6.6m). This can be broken down into the following principal categories:

After the repayment of borrowings, net debt increased by £0.9m to £11.1m at the year end (2013: £10.2m).

Current liquidity

At the year end the Group held cash balances of £6.3m (2013: £7.9m), principally a combination of Sterling and Euros.

Gross bank borrowings at the balance sheet date were £14.9m (2013: £16.1m) of which £0.6m is term based, with the balance of £14.3m being drawn down from overdraft and revolving credit facilities. The Group had further undrawn facilities of £47.1m at the balance sheet date. The term of the majority of these facilities is to July 2015 and they are subject to a number of covenants, against which the Group monitors compliance.

The Board considers that the Group has sufficient headroom to enable it to comply with the covenants on its existing facilities. The Directors have commenced discussions with the Group's lenders with regard to renewing the principal facility and intend to complete a refinancing during the financial year ending in 2015.

Pensions

At 26 April 2014, the IAS 19 net retirement benefit deficit was £3.3m (2013: £5.1m). The discount rate was 4.2% (2013: 4.2%), reflecting prevailing corporate bond rates. The higher market value of plan assets and additional Company contributions led to a decrease of £1.8m in the calculation of the net pension liability. As previously announced, the Company scheme was closed to future accrual with effect from 1 May 2010.

The Company agreed a recovery plan with the Trustees in 2012 and this will be reviewed following the completion of the next triennial valuation, which will be performed as at 5 April 2014.

Lord Harris Neil Page

Executive Chairman Group Finance Director

23 June 2014

Consolidated income statement

for 52 weeks ended 26 April 2014

All material items in the income statement arise from continuing operations.

Consolidated statement of comprehensive income

for 52 weeks ended 26 April 2014

The notes on pages 18 to 22 form an integral part of this consolidated financial information.

Consolidated statement of changes in equity

For 52 weeks ended 26 April 2014

Consolidated balance sheet

As at 26 April 2014

Consolidated statement of cash flows

for 52 weeks ended 26 April 2014

For the purposes of the cash flow statement, cash and cash equivalents are reported net of overdrafts repayable on demand. Overdrafts are excluded from the definition of cash and cash equivalents disclosed in the balance sheet.

Notes to the accounts

1. Basis of preparation

Carpetright plc ('the Company') and its subsidiaries (together, 'the Group') are retailers of floor coverings and beds. The Company is listed on the London Stock Exchange and incorporated in England and Wales and domiciled in the United Kingdom. The address of its registered office is Harris House, Purfleet Bypass, Purfleet, Essex, RM19 1TT.

The financial statements of the Group are drawn up to within seven days of the accounting record date being 30 April of each year. The financial year for 2014 represents the 52 weeks ended 26 April 2014. The comparative financial year for 2013 was 52 weeks ended 27 April 2013.

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and International Financial Reporting Interpretations Committee (IFRS IC) interpretations as adopted by the European Union, together with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The Directors, after reviewing the Group's operating budgets, forecasts and financing arrangement, consider that the Group has, at the date of this report, sufficient financing available for the estimated requirements for the foreseeable future. Accordingly, the Directors are satisfied that it is appropriate for these financial statements to be prepared on a going concern basis.

The consolidated financial statements have been prepared on the historical cost basis except for pension assets and liabilities and share based payments which are measured at fair value.

The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present its income statement and statement of comprehensive income. The profit for the Company for the period was £0.3m (2013: loss of £7.8m).

The financial information on the following pages is derived from the full Group Financial Statements for the 52 week period to 26 April 2014 and does not constitute full accounts within the meaning of section 435 of the Companies Act 2006. The Groups Annual Report and Financial Statements on which the auditors have given an unqualified report which does not contain a statement under Section 498 (2) or (3) of the Companies Act 2006, will be delivered to the Registrar of Companies and posted to shareholders in due course.

The financial information for the 52 weeks to 27 April 2013 is delivered from the Annual Report for that year which has been delivered to the Registrar of Companies. The independent auditors reported on these accounts, their report was unqualified and did not contain a statement under either section 498 (2) or (3) of the Companies Report 2006.

Foreign Exchange rates

Financial assets and liabilities and foreign operations are translated at the following rates of exchange:

2. Segmental analysis

Segmental information is presented using a 'management approach' on the same basis as that used for internal reporting to the Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for resource allocation and assessing performance of the operating segments, has been identified as the Board of Directors.

The reportable operating segments derive their revenue primarily from the retailing of floor coverings and beds. Central costs of the Group are incurred principally in the UK. As such, these costs are included within the UK segment. Sales between segments are carried out at arm's length.

The segment information provided to the Board of Directors for the reportable segments for the 52 weeks ended 26 April 2014 is as follows:

Carpetright plc is domiciled in the UK. The Group's revenue from external customers in the UK is £375.8m (2013: £381.6m) and the total revenue from external customers from other countries is £71.9m (2013: £76.0m). The total of non-current assets (other than financial instruments and deferred tax assets) located in the UK is £151.8m (2013: £154.6m) and the total of those located in other countries is £73.6m (2013: £81.1m).

Carpetright's trade has historically shown no distinct pattern of seasonality, with trade cycles more closely following economic indicators such as consumer confidence and mortgage approvals.

3. Exceptional items

In accordance with IAS 36, assets are reviewed for impairment whenever changes in circumstances indicate that the carrying value may not be recoverable. The Group commissioned an external valuation of freehold properties. These valuations, along with value in use calculations, have resulted in an impairment provision of £2.6m for freehold properties in the Netherlands and a release of £0.7m in the UK.

The Group has undertaken a review of the onerous lease provisions recognised in prior periods. Management has re-assessed the costs and ability to exit the lease contracts. This has resulted in an additional provision of £6.6m.

4. Tax

The tax charge for the year includes a credit of £2.3m in respect of exceptional items (2013: £0.9m credit).

As a result of changes to the main corporation tax rates, which were substantively enacted in July 2013, the corporation tax rate has decreased from 23% to 21% from 1 April 2014 and then 20% from 1 April 2015 and this has been reflected in the financial statements. The deferred tax balances have been re-measured using the tax rates in effect in the period in which the deferred tax balances are expected to reverse. The impact of the change in tax rates on deferred tax liability has resulted in an exceptional tax credit of £2.7m (2013: £0.8m credit).

The weighted average annual effective tax rate for the period is credit of 52.0% (2013: charge of 29.3%). The decrease arises from a combination of the impact of changes in the UK tax rate and losses incurred overseas generating a one off tax credit.

5. Dividends

The Directors decided that no final dividend will be paid (2013: No final dividend paid).

6. Earnings per share

Basic earnings per share is calculated by dividing earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding those held by Equity Trust (Jersey) Limited which are treated as cancelled.

In order to compute diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. Those share options granted to employees and Executive Directors where the exercise price is less than the average market price of the Company's ordinary shares during the period represent potentially dilutive ordinary shares.

Reconciliation of earnings per share excluding post tax profit on exceptional items

The Directors have presented an additional measure of earnings per share based on underlying earnings. This is in accordance with the practice adopted by most major retailers. Underlying earnings is defined as profit excluding exceptional items and related tax. 

7. Movement in cash and net debt

Reconciliation of movements in the periods ended 26 April 2014