IQ-AI Regulatory News (IQAI)

1 Aug 2008 07:00



FLYING BRANDS LIMITED

Interim Results for the 26 weeks to 27 June 2008

1 August 2008, Jersey. Flying Brands Limited (LSE: FBDU), the multi channel retailer, today announces preliminary results for the 26 weeks ended 27 June 2008.

Summary 

Sales from ongoing operations fell 5% to £18.9m (2007: £19.9m)

Internet sales increased by 20% to £4.0m (2007: £3.3m)

Managed shut down of Greetings Direct operations; impaired the goodwill value of Greetings Direct by £11.6m

Profit before tax from ongoing operations fell to £1.2m (2007: £2.7m)

Loss after tax of £(11.7m) (2007: profit £3.1m)

Net cash from ongoing operations £0.9m (2007: £2.9m)

No interim dividend per share (2007: 3.3p)

Arrested long-term decline in active customer base

Earnings per share from ongoing operations decreased to 3.3p (2007: 8.9p). 

Basic EPS including Greetings Direct losses and impairment charge was a loss of (47.5p) (2007: profit 10.3p)

Appointed Tricia Killen, Chief Executive

Commenting on today's announcement, Tricia Killen, Chief Executive, said:

"Although the first six months of 2008 have been tough, I firmly believe we are now at a turning point for the business. We know which direction we should be taking, we have a strong plan and we will be executing it over the next six months to stabilise the picture in 2008 and ensure that we can drive for organic growth in 2009 and beyond."

For further information, please contact:

Flying Brands Limited 0844 884 6465

Tricia Killen, Chief Executive

Graham Norton, Finance Director

Smithfield Consultants 020 7360 4900John KielyGeorge Hudson

Notes to Editors

Jersey based Flying Brands Limited (LSE: FBDU) is a multi brand home shopping

group. Founded in 1981, it was admitted to the Official List of the London Stock

Exchange in 1993. The Group operates the following divisions:

* Gifts (Flying Flowers, the UK's largest flowers by post brand, despatching nearly one million bouquets a year; Greetings Direct, the UK's only continuity greeting cards business)

* Garden (Gardening Direct, one of the UK's largest mail order bedding plants and gardening products operations; Garden Bird Supplies, a leading provider of food and accessories for birds and other wildlife; Sarah Raven's Kitchen & Garden, high quality plants and general hardware that are hard to find elsewhere)

* Entertainment (Listen2, the leading mail order audio books, DVD and video publisher and distributor; Benham, the first day cover stamps and coins collectables specialist)

More information can be found at: www.flyingbrands.com

  CHAIRMAN'S STATEMENT

Business summary

The first half of 2008 has been a difficult trading period for the Group in comparison with the prior year period. Flying Brands delivered a profit before tax from ongoing operations of £1.2m, compared with £2.7m in the first half of 2007. Sales from ongoing operations were £18.9m, 5% down on the first half of 2007. Flying Flowers sales were down £0.6m on the 2007 level. The fall in the Group profit is predominantly due to a drop in profit of £1.0m from Gardening Direct due to a reduction in our active customer database and higher postage costs in Jersey and £0.6m from the impact of lower sales of flowers at Mother's Day and higher operating costs.

We have been extremely disappointed with the trading results of Greetings Direct in both the UK and Australia and with the results of the recent trial in the United States. After a detailed review of this business we have decided to implement a managed close down of our UK and Australia operations and we have also decided not to roll out the business in the United States. Accordingly we have impaired the goodwill value of Greetings Direct by £11.6m. The loss before taxation for the first half of 2008 for Greetings Direct before the impairment charge is £1.3m (2007: profit £0.4m). The Group's loss before tax after these write-offs related to Greetings Direct is £11.7m.

Earnings per share ("EPS") adjusted to reflect ongoing operations decreased to 3.3p from 8.9p in 2007. The basic EPS which includes the losses from Greetings Direct and the impairment was (47.5p) compared with 10.3p in 2007. As a result of the low level of profits, the investments in the business and our decision to manage a close down of Greetings Direct we will not be paying an interim dividend. Cash generated from ongoing operations was £0.9m against £2.9m in 2007. In the first half of 2008, we invested £1.2m of cash in Greetings Direct of which £0.6m related to the USA trial. 

Operating units

Flying Flowers delivered sales of £4.8m (2007: £5.4m) with a loss before interest and amortisation of £0.5m (2007: profit £0.3m). Throughout most of the first half of the year Flying Flowers' sales have been slightly down on the prior period as a result of the decline in our active customer database. The other principal reason for the sales decline was at Mother's Day when sales were below last year by about 14% mainly as a result of Mother's Day being so early in the year. The other adverse profit impact in this half has been the investment in the new Demandware internet platform and higher operating and despatch costs.

The Garden Division delivered sales of £11.2m (2007: £11.6m) with profit before interest and amortisation of £1.6m (2007: £2.6m). Given the significant decline in the active customer base we experienced in 2007, Gardening Direct's sales performance was encouraging. With another year of double digit price increases from Jersey Post we saw our margins adversely impacted by £0.3m. Garden Bird Supplies continues to perform strongly although there has been a significant increase in the costs of the foods it is selling driven by the increases in the global grain prices. As a result of the quality of the products and the customer database, we have been able to successfully pass on the product cost increases to our customers.

The Entertainment Division produced sales of £3.0m, the same as in 2007 even though we experienced a reduction in our active Listen2 customer database as we continued to find it difficult to recruit new names profitably. Profit before interest and amortisation was £0.2m (2007: £0.1m).

Financing

Since management expectations of 2008 profits are now lower than previously expected, we have agreed in principle with our bank new debt and interest service covenants over our £6.2m of outstanding bank debt. The new covenants are expected to provide adequate headroom on our banking facilities for the foreseeable future.

Strategy

Our strategy remains focused on extracting maximum value and cash from our ongoing Brands and using that cash to grow the business through investment in our core Brands and partnerships. We have reached a mutual agreement with Sarah Raven that we will terminate the licensing of Sarah Raven's Kitchen and Garden at the end of October 2008 because we could not derive enough value out of this partnership.

I am pleased to report that Tricia Killen, who joined the Group as Chief Executive on 9 June has settled well into her new role. Tricia previously worked for Reader's Digest for over twenty years and held a number of senior positions, including: President of Western Europe; Vice President, Marketing and New Business Development for Europe; and, Managing Director of France.

The Group continues to transition from being purely a catalogue operator to becoming a multi channel home shopping retailer. Whilst trading conditions have been difficult, we have continued to invest in both our e-commerce business activities and staff. It is very pleasing, therefore, to see our internet sales grow by 20% in the first half of 2008 to £4.0m up from £3.3m in the same period in 2007, which now represents 21% of our sales from ongoing operations (2007:17%). We continue to find the recruitment of new customers challenging although we had success in the period from reactivating many dormant customers. As a result we have grown our active customer database by 1% over the position as at 28 December 2007, compared with a 9% reduction in the last six months of 2007.

Our homogeneous database of predominantly over 50's customers presents us with considerable opportunities both in terms of offering a wider range of goods and services but also in expanding the size of the active trading database through more proactive direct marketing and increased internet activity.

Outlook 

The current market environment remains challenging and the Board remains cautious on the outlook for the remainder of 2008. However, despite the challenges the Group faces, we still have robust fundamentals: strong cash generation from our ongoing businesses, good profit margins within our market sector, an under-exploited database and tax benefits of being a Jersey based operation.

Tim Trotter

Chairman

1 August 2008

  Chief Executive's Report

A tough first half year but a clear direction for the future

* The directors manage each division at a contribution level and believe this is a more meaningful measurement than gross profit.

Overview

Trading for the Group in the first six months of 2008 has been tough, with the ongoing businesses down 5% in revenue versus 2007 and down 21% in contribution.

As previously reported, Greetings Direct has suffered from significant returns and bad debts in both the UK and Australia during the period. In addition, a poor introductory mailing result in the USA meant that the economies of scale expected to be achieved in the UK and Australia from the addition of a US roll-out are not now deliverable. As a result, the Board has decided to implement a managed shut down of the operation and impair the entire goodwill of the business by £11.6m.

Although closing down Greetings Direct was a tough decision to take, it was certainly the right one. Most of the bad news from the Group over the last six months has stemmed from the unpredictability of this 'pay later' series business model. Returns and bad debts for a relatively newly acquired business like this are difficult to project accurately and any decline versus projections in these metrics can be very expensive. The rest of the Flying Brands' business operates on a cash with order basis and therefore does not have this kind of problem. Now that we have made the decision to implement a managed close down of Greetings Direct, we are focused on optimising the rest of the business.

Profit before tax from ongoing operations was £1.2m for the first half of 2008 versus £2.7m for the same period last year with most of the downturn coming from Flying Flowers and Gardening Direct. Flying Flowers had a poor Mother's Day campaign, almost certainly because the early Easter meant that Mother's Day fell very soon after Valentine's Day whereas these two periods are usually very distinct trading peaks for flowers. Gardening Direct has been suffering from coming into 2008 with an active customer base down 25% versus the beginning of 2007, although, on a more optimistic note, strong customer recruitment in the spring has helped to arrest this decline and the Gardening Direct customer base has actually grown 3% since January.

Loss before tax for the group after the impairment of £11.6m and the losses in Greetings Direct, was £11.7m for the first half of 2008 compared with a profit of £3.1m in the first half of 2008.

The remaining ongoing businesses, Garden Bird Supplies, Benham and Listen2, were relatively flat in sales and contribution versus 2007. 

Active Customer Base

A continuing issue for the Flying Brands Group is the declining trend in the Active Customer Base (ACB) of the Brands. The two largest ACBs, Flying Flowers and Gardening Direct, are 6% and 11% respectively down on the same period last year and only Garden Bird Supplies, which has a smaller ACB than Flying Flowers and Gardening Direct, has bucked the trend with an 11% increase versus last year. Some of this decline in ACB size is offset by a slight increase in annual customer spend across most of the Brands versus this time last year but it is clear that we need a different strategy if we are to start growing the ACB again. To this end, we are currently undertaking a major review of our two leading Brands, Flying Flowers and Gardening Direct, aiming to reposition them to appeal to new target groups of customers, especially via the internet, whilst continuing to appeal to our core customer base.

The percentage of active customers retained year on year for most of the Brands is stable or slightly up versus 2007 but low versus many other direct marketing/home shopping businesses and I believe that making big improvements here is the key to unlocking the value of the Flying Brands business.

Currently, as a legacy of how the Group was built up through acquisition, each Brand operates in a silo and sends catalogues to its own ACB. We do not currently make sufficient use of a consolidated database of all Brands' customers and the opportunities it presents for new segmentation, targeting and cross Brand promotion. Our 'marketing' is very passive and customers are often not 'retained' because they are not strongly persuaded to buy from our full range of products rather than from another company. We are going to reverse this situation by transitioning the Group from being a silo-based, passive catalogue business towards being a fully-integrated direct marketing business which makes full use of the corporate database, proven direct marketing techniques, including targeted copy and promotions and all direct channels available to us, with a very high priority being given to internet and e-commerce. 

Internet

With the internet, we have made steady progress versus last year across all continuing businesses and internet sales now account for 21% of all sales versus 17% last year. Flying Flowers and Garden Bird Supplies are leading the field with 31% and 28% respectively, of sales via the internet. Gardening Direct has jumped from 11% last year to 17% this year and we expect this to improve further by the end of 2008 as a result of a newly-designed website incorporating an expanded range of products and a stronger e-commerce programme. All Brands are benefiting from our investment in the new Demandware web platform, which has already given us much better functionality than we previously had online and will continue to contribute to our online growth as we adopt even more of the features that it can provide. Our short term plans for the internet include implementing a strategy for search engine optimisation as well as developing specific programmes for driving traffic and improving conversion. We will also focus on increasing the percentage of e-mail addresses we have on our active and dormant customer bases, so that we can transition more of the business to online, which is cheaper and faster than via other direct marketing channels.

Gifts

Flying Flowers

One of the main issues for Flying Flowers is the lack of growth in the ACB. Our business is currently popular amongst an ageing customer base, which tends to buy a limited range of bouquets and is happy with the postal service we offer. To appeal to the broader flower-buying public and compete with others in the marketplace, we need to offer more choice - of products, of price points and of delivery methods - as well as a value proposition that is easily communicated and understood. We have already taken some steps in this direction by developing our new 'ultimate collection' of courier delivered, luxury bouquets.

In addition, we have undertaken a repositioning exercise for Flying Flowers, to make it more appealing to new customer segments. This has involved customer and non-customer market research and will result in a more attractive product range, a new logo, more stylish packaging and redesigned catalogues . This exercise will be completed in August but already there has been a very marked improvement in the look of the catalogues since May. 

The Flying Flowers Brand will also benefit from our new integrated, rather than silo, approach and will be able to target and recruit customers from the other Brands' customer bases.

Greetings Direct

As already announced, we have made the decision to close down the Greetings Direct business completely. In the USA, where we are only at test stage, this will be an immediate shutdown of operations. In the UK and Australia, we will do no further recruitment mailings but as we have a significant number of active customers in both of these markets, we will manage the winding down of operations over the next 6 to 12 months, running them to optimise contribution with minimum effort and investment.

Gardening Division

Gardening Direct

As we have been doing with Flying Flowers, we aim to reposition the Gardening Direct Brand to appeal to customers beyond our current core. Gardening is probably the most popular hobby in the UK and we need to take advantage of this and reverse the declining trend in our Gardening Direct ACB by tapping into new groups of customers. We are just launching customer and non-customer research for the Gardening Direct Brand and we will use the findings to help us to expand our product range and improve our catalogues, internet site and other promotional material, in preparation for the very important spring 2009 season.

The newly-released autumn catalogue for Gardening Direct and the newly launched website already take significant strides in this 'repositioning' direction and should help Gardening Direct to recruit more new customers from outside the Group and, as we launch more inter brand activity, from the ACBs of the other Brands.

Garden Bird Supplies

This is a very solid business with a loyal core of customers. We offer a premium brand which is bought by customers who know and understand garden birds, who are prepared to pay that bit extra for quality and who each spend significantly more per annum with us than their counterparts in any other Brand.

One major issue going forward will be the cost of the ingredients, which are rising sharply in line with global grain price trends. We raised our selling prices in June to take this into account and our customers seemed prepared to pay the extra but we are working on creative ways to address this issue in the medium to long term, aiming to offer customers a range of prices and quality to suit everybody's needs and pockets. Again, we expect Garden Bird Supplies to benefit from our new, integrated marketing approach and to be able to recruit new customers from amongst our other Brands, particularly Gardening Direct.

Entertainment

Listen2 and Benham

Both Listen2 and Benham are stable businesses, which will continue to make a solid level of contribution and should benefit from the ongoing business transition 

Overheads

Overheads for the ongoing operations have grown by 6% to £2.5m as a result of general inflationary pressures in the UK and Jersey and the cost of now renting our UK headquarters building.

Outlook

Business prospects for Flying Brands over the next six months are going to be impacted by two aspects - one negative and one positive. The negative element is obviously the state of the UK economy and the pressure it is putting on the spending power of consumers. The positive element is, as I said earlier, that we are in the first stages of transitioning the Group from being a silo-based, passive, catalogue business towards being a fully-integrated direct marketing business. 

In the short term, this 'transition' will involve:

Continuing with the re-branding of Flying Flowers and Gardening Direct to make our products, catalogues and Brand names more appealing to consumers.

Optimising our current direct marketing activity by using more targeted name selections and appropriate marketing messages for different customer groups.

Consolidating the ACBs of all the Brands and allowing all Brands to access the best 'corporate' customers rather than just their own ACB. Adding in extra but well-targeted activity to generate more revenue from current customers. 

Identifying all opportunities for cost-saving as we start to look at the Group as a whole, rather than continuing to do everything by individual Brand. The major areas of focus will be catalogue printing and related mailing costs, packaging costs and flower supplier costs. We believe that we can make savings here.

So, although the first six months of 2008 have been tough, I firmly believe we are now at a turning point for the business. We know which direction we should be taking, we have a strong plan and we will be executing it over the next six months to stabilise the picture in 2008 and ensure that we can drive for organic growth in 2009 and beyond.

Tricia Killen

Chief Executive

1 August 2008

  Consolidated Interim Income Statement 

for the 26 weeks ended 27 June 2008

Footnote:

The income statement relates to continuing operations at 27 June 2008.

  Consolidated Interim Balance Sheet 

for the 26 weeks ended 27 June 2008

  Consolidated Statement of Changes in Shareholders' Equity

for the 26 weeks ended 27 June 2008

  Consolidated Interim Cash Flow Statements 

for the 26 weeks ended 27 June 2008 

  Notes to the Consolidated Interim Financial Statements 

1 accounting policies

1.1 Reporting entity 

These Financial Statements are the unaudited Consolidated Interim Financial Statements (hereafter "the Interim Financial Statements") of Flying Brands Limited a company registered in Jersey, and its subsidiaries (hereafter "the Group") for the 26 weeks ended 27 June 2008 (hereafter "the interim period"). 

These Interim Financial Statements have been prepared under IFRS applying the accounting policies published in the Group's IFRS Financial Statements for the 52 weeks ended 28 December 2007, published on 14 March 2008. 

1.2 Statement of compliance 

These Interim Financial Statements have been prepared on the basis of the recognition and measurement requirements of IFRS in issue that are either endorsed by the EU and effective (or available for early adoption) at 31 December 2008. These Interim Financial Statements have been prepared in accordance with IAS 34, Interim Financial Reporting. 

These Interim Financial Statements should be read in conjunction with the Consolidated Financial Statements for the year ended 28 December 2007 (hereafter "the Annual Financial Statements"), as they provide an update of previously reported information. They were approved for issue by the Board of Directors on 14 March 2008. 

The comparative figures for the financial year ended 28 December 2007 are not the Company's statutory accounts for the financial year. 

These accounts have been reported on by the Company's auditors and delivered to both the UK Financial Services Authority and the Jersey Financial Services Commission. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 237 (2) or (3) of the UK Companies Act 1985. 

1.3 Significant accounting policies 

The accounting policies used are consistent with those used in the Annual Financial Statements, except where noted below. The presentation of the Interim Financial Statements is consistent with the Annual Financial Statements, except where noted below. Where necessary, the comparatives have been reclassified or extended from previously reported Interim Financial Statements to take into account any presentational changes made in the Annual Financial Statements or in these Interim Financial Statements. 

The preparation of Interim Financial Statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities at the date of the Interim Financial Statements. If in future such estimates and assumptions, which are based on management's best judgment at the date of the Interim Financial Statements, deviate from the actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change. 

The Group operates in a sector where significant seasonal or cyclical variations in total sales and profits are experienced during the financial year. 

2 income tax expense 

The current tax charge for the period ended 27 June 2008 is £3,000. This is a result of the taxable charge on Jersey profits being higher than the losses arising from the UK tax group.

As a result of the decision to close down Greetings Direct (note 7) operation in Australia the deferred tax asset of £133,000 previously recognised in relation to Australian tax losses is no longer considered recoverable and has been expensed, giving a total tax charge for the period 27 June 2008 of £136,000 (29 June 2007: £516,000) 

3 segmental analysis 

The Directors of Flying Brands Limited are of the opinion that, whilst the Group markets a number of different brands, all the business of the Group is operated within the mail order retail segment. 

Due to the different risks and rewards available on different lines of business, independent of territory operations, Flying Brands primary reporting segment is by business. 

Certain overhead costs, assets and liabilities are shared between segments. These costs, assets and liabilities have been apportioned based on the usage of these services and assets by the appropriate segment. 

Segmentation by primary divisions 

* Included in the segment result for Greetings Direct is a charge relating to the impairment of goodwill (see note 7) of £11,581,000

4 dividends

The value of the interim dividend proposed and to be paid in September 2008 is £nil (2007:£821,000)

5 (loss)/earnings per ordinary share

Basic

Basic (loss)/earnings per share is calculated by dividing the profit attributable to the equity holders of the Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the Company and held as treasury shares.

Adjusted

Adjusted earnings per share which excludes one-off items is presented in addition to that required by IAS 33 Earnings per share as the directors consider that this gives a more appropriate indication of underlying performance.

Diluted

Diluted (loss)/ earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive ordinary shares: share options and share awards.

The calculation is performed for the share options to determine the number of ordinary shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. 

6 related party transactions

S S Cook, a Non-Executive Director of the Group, who is also the Chairman of the Audit Committee, has been performing consultancy services to the Group during the 26 weeks to 27 June 2008.

There were no other new material changes to the related party transaction disclosed in the Annual Report and Accounts for period ended 28 December 2007.

7  goodwill

At the period ended 28 December 2007 the Directors believed that the business model and Greetings Direct concept could be successfully launched in the USA in 2008 and thus considered no impairment of goodwill was necessary.

On 3 July the Group announced its intention to close down immediately its USA division of Greetings Direct and to start a managed closure of the UK and Australia operations of Greetings Direct over the ensuing 12 months. The decision was made because the response rates to the test in June in the United States were extremely disappointing and this meant that the economies of scale expected to be achieved in the UK and Australia would not be possible. This combined with the continuing deterioration of the bad debts and returns metrics in both the UK and Australia meant that these two geographies would be making a loss in 2008 with little probability of profits in 2009. The winding down of these operations will allow the Group to focus on growing its core brands of Flying Flowers, Gardening Direct and Garden Bird Supplies. 

The Directors' expectations are that the business will make losses until finally closed down and the intangible assets will have negligible value; a full impairment of the carrying value of the Goodwill and Intangible Assets related to Greetings Direct of £11,581,000 has been made.

The decision to close down the Greetings Direct business was not made until after the end of this accounting period thus no provision has been made for future trading losses of these operations or for the closure costs. We expect the total loss for this financial year including closure costs will be £1,700,000 of which £1,251,000 is recognised in the Consolidated Income Statement for the 26 weeks to 27 June 2008.

The results of the Greetings Direct that have been included in the consolidated income statement are as follows:

8  bank covenants

Since management expectations of 2008 profits are now lower than previously expected, the Group has agreed in principle with its bank new debt and interest service covenants over the outstanding bank debt of £6.2m. The new covenants are expected to provide adequate headroom on the Group's banking facilities for the foreseeable future.