JLH.L Regulatory News (JLH)

JOHN LEWIS OF HUNGERFORD PLC

FINAL RESULTS

John Lewis of Hungerford plc ("John Lewis of Hungerford" or the "Company") the specialist kitchen manufacturer and retailer announces its final results for the year ended 30 June 2019.

Chairman's Statement

The last twelve months have seen the Company operating within an unprecedented retail landscape. Although the economy is not technically in recession, the current uncertainty within the economy, mainly resulting from Brexit and structural issues facing retail in the high street, has made it more difficult for retail than the recessions in 1990 and 2008. We have seen significant store closures: 2,868 stores have closed in the first half of 2019, and numerous financial restructurings during this period - with some of the High Street's best-known brands being affected. We have seen this within our own sector of kitchen retail with several companies reporting challenging conditions.

Economic conditions are continuing to be difficult and the calling of the General Election, resulting from Parliament's failure to reach any conclusion on Brexit, has further deteriorated the retailing environment.

Against this background, and in this uncertain economic environment our focus has been, and will continue to be, on improving our performance and preserving cash. We have therefore been applying stringent controls on costs and as a result have driven c£275k of costs out of the business in the current financial year. This should provide savings of £450k in a full financial year - some 5.8% of the Companies total cost base. This is with the objective of preserving cash even with a significantly reduced sales base - detailed further in the CEO Report.

We have previously reported on the work we had undertaken to improve the operations within all aspects of the business and also the repositioning of the brand through our marketing activities and marketing collateral which has been a key factor in managing the performance of the business in this difficult trading environment.

We have also discussed the strategic objectives of the business to build the business not only through organic growth following our actions but to add to the store portfolio to give the business an improved critical mass. However, the last couple of years have seen significant uncertainty within the economy and this has hindered the growth of the business. As such we have had to put our growth objectives on hold while we manage costs and cash, by not spending on the capital cost of adding new stores.

We remain focused on delivering our strategic plan, which will see the Company grow the estate and our portfolio of services at a point that we consider appropriate. The Company has improved efficiencies and particularly we have been building a team and a workforce that are ready to take advantage as soon as the economy starts showing signs of recovery.

The primary factors in our loss for the year are both a change in mix towards our lower margin offerings i.e. bedrooms and, inflationary price increases throughout our supply chain, which we have been unable to pass fully onto our customers. This is discussed further in the CEO Report. Our team have worked hard to ensure that efficiencies are realised across the business, to retain high levels of productivity. We are pleased with the efforts from the staff around the business and thank them for their commitment to the future success of the Company.

The longer term forecast for the industry remains positive and we hope that once the Brexit issue is resolved, that consumer confidence will return and the economy will recover in due course. I have full confidence in my colleagues around the business who are ready for the challenges and opportunities, which lay ahead.

Gary O'Brien

Non-Executive Chairman

Chief Executive's Business Review

Overview

As detailed in the Chairman's Statement, the last year has been a challenging one in many areas of the retail sector. We achieved a turnover of £8.3m for the FY2019, compared to the unaudited comparison for 12 months to 30 June 18 of £8.9m. The FY2018 was affected by our year-end change from 31 August to 30 June so on a like for like basis, removing the benefit of two year-end peaks in FY2018, the prior year comparative turnover was £8.5m. Our turnover achieved in FY2019 was therefore just below the prior year adjusted turnover.

Following a profitable second half year of £127k, the Company reports a reduced operating loss for the full year of £191k, reduced from the £318k loss reported in our Interims for the 6 months ended 31 December 2018.

The results reflect mixed fortunes within the business, with the majority of the estate outperforming the rest with record-breaking results however with several showrooms underperforming, although only one store failing to make a net contribution. Ensuring that all of our showrooms make a positive net contribution is vital to our success. Footfall has been variable throughout the year and across the sites - with our London showrooms continuing to lead the others in this regard. We have been reviewing our lease commitments to ensure we remain flexible in our approach to retaining better performing stores and reviewing underperforming stores, primarily due to changes in local economic factors, coupled with the movement of hubs to out of town locations in some of our territories. New showrooms have been evaluated, however, given the unpredictable nature of the current retail trading environment, any growth of the estate has been delayed at this time. We continue to consider new territories and opportunities as they arise.

As the market tightens, we have focused our attention on adding value to our customer proposition. We are in discussions with an external provider to add a potential finance offering to our portfolio, which will provide the opportunity to broaden our appeal and assist our customers in purchasing from John Lewis of Hungerford in this challenging economy. Our marketing strategy continues to be ever crucial to the reach of the brand and the promotion of our expertise in delivering excellence across our service offering including our customer journey and final installation. With our new website launching last December and our ongoing SEO commitment, we have seen improvements in both the quantity and quality of our web enquiries, increasing by 200% which has been critical given an average of 10% reduction in footfall across our locations. Our focus remains firmly on conversion and this has been an ongoing area of investment, both in marketing tools to aid the customer interaction, with the launch of our new brochure, together with our CRM investment, which is now able to personalise the e-marketing for customers engaging with the business. Supported by our social media, the website has drawn interest from across the sector, from both professionals and the end consumer.

Developing our partnerships within the professional sector has contributed to our performance throughout the year. Key relationships, which have affected our social media presence, include our focus on collaborations with high profile influencers including 2LG Studio, which has led to interest from highly talented interior designers, developers and architects. Through sharing these projects and our portfolio of stunning kitchen and bedroom installations, we have successfully secured numerous projects and a high level of recommendations. Working with like-minded professionals across the industry has given us the opportunity to build sustained relationships with highly influential trade partners, looking for a high quality provider to support their businesses on a regular basis. All of them are ambassadors for the Company and they continue to work in partnership with our design team.

Balancing our customer needs for a bespoke product and our business needs for simplicity in production planning, remain essential to our productivity. The administrative work involved in processing our orders remains complex and an area of focus for our continuous improvement team.

Ongoing investment in our people to prioritise the customer experience with the business remains our key focus, protecting our most distinguishing factor - our highly talented design team. We have invested in their project management skills and capabilities, to ensure that this USP can be retained, leading to high levels of recommendations. Recruiting and retaining high performing individuals in this sector continues to be challenging, although we have noted an improvement in our ability to attract high performing individuals.

Our most significant investment this year, has been in our manufacturing facility, through the installation of new spray booths. This has significantly improved our ability to produce high quality product, with a superb finish, improving our efficiency during the peak months of the year. Our skilled Artisans within our production team continue to work diligently to ensure our error rate across the business continues to improve. It is now in line with industry levels at 1.5%, reduced significantly since the 3% recorded in 2016.

The volume of units sold has seen a small reduction in Kitchens, at 290 (3 year average is 300), and the number of Bedrooms has seen a significant increase at 119 (3 year average 80) with the category now accounting for 7% of overall sales. The level of repeat business from existing JLH customers where we are able to fulfil a 'whole home solution' is now 50% of the category. However, the margins on Bedroom cabinetry are much lower than on Kitchens and we are evaluating our proposition to determine the most viable way forward for our Bedroom collection, and the business.

The actions taken over the second half year, which included a necessary price increase, demonstrated an improved margin to 47.3% from the 46.2% detailed in the Interims. Although we are pleased to see movement in a positive direction, the impact of our growing Bedrooms category over the last three years has adversely impacted the margin.

Additional margin dilution from price increases across all bought-in items, including white goods and worktops, presents a challenge that the business is addressing, and how the business might mitigate this margin impact by focusing on increasing kitchen volumes through the supply chain, whilst reducing our cost base.

Input prices have also increased, which have been offset against a corresponding price increase for our customers.

The product margin movement is directly attributable to the increased Bedrooms component within our mix this last year. Margins on kitchens have remained consistent with the prior period. The additional costs attributed to the manufacture of bedrooms are approximately 20% higher.

Our installation offering has been maintained at 96% of all orders being installed by our Artisan Installation Service. Our professional fitting teams have offered an exemplary service to our customers, for which we thank them.

With the shortage of good trade professionals, it has been vital to our fitter retention, to ensure we are competitive and that we are paying market rate for trade professionals. This has necessitated a price increase from the new financial year, which we have passed directly on to customers.

Cash Flow

At 30 June 2019 the Company had a closing bank balance of £287k including £220k on long term deposit. The Company has an overdraft facility of £250k. Liquidity headroom at 30 June 2019 was therefore £537k.

Closing Comments

The year to 30 June 2019 has served to remind us that market fluctuations can undermine consumer confidence to a degree where discretionary spend on home renovations can be adversely affected. Although the latest IBIS reports suggest market growth over this new financial trading period, we continue to monitor the political and retail climates. Brexit and the General Election have created uncertainty and consumers have delayed high value spend.

Within this challenging environment, we have taken steps to remove c£275k of costs in this current year, with an annualised benefit of £450k. Within the business, we continue to pursue additional areas to ensure that we minimise costs and maximise agility during this challenging time. This review has unfortunately resulted in a reduction of headcount within the business, together with the imminent closure of our Oxford showroom, with potential further headcount reductions in other showrooms. Our focus has also been on working with our trading partners to secure the most effective procurement and ensure that the business is operating with maximum efficiency.

In addition, a project team within the business is working to further reduce waste as the improvement of productivity across the Company remains a primary objective for this year. We continue to promote a lean structure, as we balance our resources in line with business needs and performance. High quality marketing and customer communications remains core to our ability to attract new business and partners for the brand. We have been working hard on new creative innovations, which will continue to keep the brand fresh and relevant this year, as we look to ensure we are always distinctly different to our competitors.

It has undoubtedly been a year of change, determination and challenge. We thank our dedicated team for their ongoing commitment to the business as we continue to work hard to ensure the business is ready for profitable growth once the market begins to stabilise.

Current Trading and Outlook

For the new financial year, despatched sales and forward orders (which we normally consider to be the best measure of current trading) for the first 24 weeks of trading stood at £3.8m (2018: £4.6m). Future orders against which a first stage deposit has been taken stood at £1.6m (2018: £1.5m). Overall design quotation activity within the business is 10% up on the previous year which points to an underlying latent demand but with decisions being delayed by customers as a result of the political climate. The Company expects conversions to improve once we have clarity around Brexit. Whilst the impact on consumer demand continues, we are reacting, as mentioned above, by reducing costs in the business and increasing flexibility to respond to changing demand. The Board continue to monitor the situation closely and work to improve efficiency and agility in the business to ensure the Company is well set to benefit from any improvement in consumer confidence.

With our new marketing initiatives launching for the winter period, and the potential introduction of finance for our customers later in the year, we are confident that our efforts to ensure that the business can achieve sustained profits will be realised, once there is more clarity around Brexit after the General Election.

Kiran Noonan

Chief Executive Officer

Enquiries:

John Lewis of Hungerford plc 01235 774300

Gary O'Brien - Non-Executive Chairman

Kiran Noonan - Chief Executive Officer

Cenkos Securities plc 0207 397 8900

Azhic Basirov

Katy Birkin

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

Notes

1. Statutory Accounts

The financial information does not constitute statutory accounts as defined in section 435 of the Companies Act 2006, but has been extracted from the statutory accounts for the period ended 30 June 2019 on which an unqualified audit report has been issued and which will be delivered to the Registrar following their adoption at the Annual General Meeting. 

The statutory accounts for the period ended 30 June 2018 have been delivered to the Registrar of Companies with an unqualified audit report. 

2. Basis of preparation

The Company's financial statements are prepared under the historical cost convention and in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

3. Going concern

Given that the Company has incurred losses over the last two periods and has net current liabilities of £874,085 (2018: £556,484) the Directors have given consideration to the Company's going concern status. After reviewing the Company's operating budgets, investment plans and financing arrangements (both current and potential), the Directors consider that the Company 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 to adopt the going concern basis in preparing the annual report and financial statements.

In the prior year, a deferred tax asset of £68,531 was recognised in respect of accumulated tax losses amounting to £1,143,232 The Directors continue to believe that the availability of tax losses will in due course reduce the Company's tax liability in future accounting periods, however at this time, the Directors believe that it is prudent for the deferred tax asset of £68,351 to be derecognised, resulting in a deferred tax charge of £68,531. This has no effect on the underlying performance of the business or our cash position.

9. Dividends

The Directors do not recommend payment of a dividend.

11. Posting of Accounts

Copies of the statutory accounts for the financial period ended 30 June 2019 will be posted shortly to shareholders with the notice of the Annual General Meeting. An electronic copy will be available on the Company's website www.john-lewis.co.uk.