Shoe Zone Regulatory News (SHOE)

08 January 2020

Shoe Zone plc

Preliminary Results

Shoe Zone PLC ("Shoe Zone"), the UK's largest value footwear retailer, operating in Town Centres, Retail Parks and Online, is pleased to announce its Preliminary Results for the 53-week period to 5 October 2019.

Financial Highlights

·; Revenue up 0.9% to £162.0m (2018: £160.6m)

·; Product gross margin maintained at 62.7% (2018: 62.7%)

·; Statutory underlying profit before tax of £9.6m (2018: £11.3m)

·; Earnings per share 11.4p (2018: 19.0p)

·; Cash balance of £11.4m (2018: £15.7m) following £1.5m higher capex spend and £4m special dividend paid in the year

·; Proposed final dividend of 8.0p per share (2018: 8.0p per share)

·; Total ordinary dividend for the year maintained at 11.5p (2018: 11.5p per share) reflecting confidence in future growth prospects

Operational Highlights

·; 21 Big Box store openings in 2019 led to total of 45 Big Box stores by end of December, contributing revenue of £15.6m (2018: £7.1m)

·; Successful trial of four new Hybrid town centre stores; plans to convert a further 20 in 2020

·; 23.6% reduction on rents across 60 town centre lease renewals

·; Average lease length of 2.1 years

·; Digital revenue growth of 9.2% to £10.6m (2018: £9.7m) with growth weighted to H2

·; Over 1 million engaged users on shoezone.com database

·; Relaunched premium own label brand Lilley & Skinner contributed £535k sales

Anthony Smith, Chief Executive of Shoe Zone plc, said:

"Despite it being a difficult year for Shoe Zone, the business has achieved revenue growth, and delivered underlying profit before tax marginally ahead of our revised expectations following our revaluation of freehold property.

Alongside the continued momentum in Big Box expansion and Digital growth, Town Centre renewal is the third key focus for our refreshed strategy. Following a successful trial of four Hybrid stores, in 2020 we plan to convert a further 20 of our traditional stores to this more premium Town Centre Hybrid model.

Town centre stores remain an important component of our proposition and we don't agree with doomsayers referring to the inevitable "death of the high street". However, it's stark that over the past 10 years the rates paid as a proportion of our rent has increased from 26.4% in 2009 to 54.3% in 2019. Despite rationalising our store estate, the value of rates paid has increased by £700k despite having 38% fewer stores and 30% lower sales.

For the retail sector to continue to play its important role in the UK economy, and town centres to serve their communities, it is vital that Government recognises the impact of the increasing financial burden placed on businesses on the High Street by successive governments and their policies.

Notwithstanding the broader sector challenges, I am delighted to be back running this market-leading business, knowing its potential to produce great results. The core business model remains robust and combined with the refreshed strategy of Big Box expansion, higher Digital growth and Town Centre renewal, the board is confident that this enhanced strategic focus will improve customer experience, increase market share and drive shareholder returns."

For further information:

About Shoe Zone

Shoe Zone is a Town Centre, Retail Park and Digital footwear retailer, offering low price and high-quality footwear for the whole family.

Shoe Zone operates from a portfolio of around 500 stores and has approximately 3,500 employees across the UK and the Republic of Ireland.

The store portfolio consists of over 450 high street stores containing the core Shoe Zone product range and 40 larger out of town retail units which also feature brands such as Clarks, Skechers and Hush Puppies.

The website shoezone.com, combined with the store network ensures a full multi-channel offering for great customer service.

Shoe Zone sells 18 million pairs of shoes per annum with an average retail price per pair of shoes of around £10.

Chief Executive's report

I am delighted to be back running this market-leading business knowing it has amazing potential to produce great results. The core business model remains robust and combined with the refreshed strategy of Big Box expansion, higher Digital growth and Town Centre renewal, the Board are confident that this enhanced strategic focus will improve customer experience, increase market share and drive shareholder returns.

In 2019, the business delivered revenue growth of 0.9% to £162.0m (2018: £160.6m) driven by the Big Box expansion and Digital division. Shoe Zone continues to generate cash effectively from a robust and debt free balance sheet.

Underlying Profit before Tax was £9.6m (2018: £11.3m) marginally ahead of our revised expectations. Government imposed increases in our operational costs presented challenges in maintaining levels of profitability year on year (see High Street section).

During the year we also took the decision to review the freehold property values held by Shoe Zone to reflect the current retail property environment. This resulted in a non-cash adjustment of £2.9m which reduces Underlying Profit before Tax from £9.6m to Statutory Profit before Tax of £6.7m.

Earnings per Share is therefore 11.43p (2018: 19.03p).

Strategy

The refreshed Shoe Zone strategy has three main objectives:

§ Big Box expansion

§ Digital growth

§ Town Centre renewal

Big Box Expansion

The Big Box portfolio has expanded by 21 stores to a total of 39 stores operational at year end (45 stores operational by 31 December 2019). Big Box stores have already become a key part of the business with revenue of £15.6m (2018: £7.1m) and profit contribution of £1.5m in the period (2018: £0.4m), a significant increase which represented 9.6% of total revenue and 6.7% of store cash contribution during 2019.

During the year we continued to develop the Big Box model. We have successfully revived the 'Lilley & Skinner' brand and introduced Spring/Summer ranges of premium sandals and Autumn/Winter ranges of high quality boots. These are sourced direct from our existing manufacturer base and consistently deliver margins in excess of 70%.

We have also continued to build our brand relationships, all of which are very supportive of our Big Box and Hybrid formats and future growth potential. This ongoing partnership will ensure that we deliver the best products at competitive margins to ensure continued profitable growth for Big Box and Hybrid stores.

The high availability and low demand for out of town retail premises has allowed us to achieve very competitive lease deals. We continue to only sign five year contracts and typically negotiate long rent-free periods, effectively funding over 50% of the refit capital required.

Digital Growth

Digital continues to be a key area of focus for the business. During 2019 we consolidated our internal resource to create an autonomous Digital department. This investment, allied with a drive to expand our email database and increase the volume of offers sent out has resulted in a step change in Digital performance.

Digital delivered revenue growth of 13.0% in the second half, compared to 5.2% in the first half, giving overall growth of 9.2% for the full year. Total Digital revenue was £10.6m (2018: £9.7m) with contribution of £3.0m (2018: £2.6m); an increase in full year contribution of 15.4%.

Our focus on Digital has led to significant positive momentum in key website statistics, particularly in the second half:

By the close of the year we achieved an email database size of over 1 million engaged members. This growth, allied with the increased volume of email traffic, has resulted in a slightly lower conversion rate of 3.48% (2018: 4.1%).

Returns continue to be extremely low at around 11%, with 80% of those returned direct to store.

Town Centre Renewal

We are not part of the death of the high street despite successive governments putting barriers in our way.

We have been trialling four Hybrid stores, in which 50% of the Big Box range (total style count of 550) is sold within a traditional Shoe Zone store with enhanced fixtures and fittings. The stores have performed extremely well and we now plan to roll out at least 20 of these in 2020. In addition to sales and profit growth, the returns on capital are greater than for a traditional High Street refit. We now believe this will form the backbone of our Town Centre renewal strategy over the next five years and form the core of our future Town Centre profitability.

This new proposition, coupled with our ability to maintain the profitability of the existing estate by closing poor performing stores, reducing rents at the time of the lease renewal, and lowering other costs through improved technology and increased productivity means that the Shoe Zone Town Centre offering will continue to contribute to the profitability of the business and deliver increased returns for shareholders.

Portfolio Developments

We ended the year operating from 500 stores, having opened 24 and closed 16 during the period. 21 of the openings were the continued roll out of Big Box, one was a Hybrid and the remaining two were the standard High Street format.

The core estate continues to be invested in and refreshed. Total capital spend of £6.6m included the 24 new openings, 30 full refits and the ongoing rebranding of the retail estate. We expect to complete the rebranding programme by the end of 2020.

The focus on managing property costs has resulted in rents at lease renewal falling by 23.6% (2018: 23.1%) delivering £631k of annual savings and continuing the trend seen in recent years. We expect that this trend will continue as supply in the retail property market continues to outstrip demand and properties fall vacant following CVAs and Administrations.

The business continues to benefit from a flexible property portfolio, with an average lease length of 2.1 years, which gives us significant opportunity to respond to changes in shopping patterns in any retail location at short notice.

Other objectives

In addition to our core strategy we are focused on accelerating key areas of business operations. Our statistics are market-leading however we believe we can go much further by:

·; Reinventing our procedures for a paperless environment to increase productivity, reduce costs and be environmentally friendly;

·; Reducing Head Office costs to below 10% of sales;

·; Simplifying the marketing strategy with renewed focus on price; and

·; Streamlining style count to improve availability/ stockturn/ markdowns.

The High Street

Retail is the single largest sector of employment in High Street locations providing circa. 30% of all employment.

It is vital that Government recognises the impact of the increasing financial burden placed on businesses on the High Street by successive governments and their policies.

For example, the impact of Property Taxes on Shoe Zone can be seen by examining the impact of Business Rates.

Over the past 10 years the rates paid as a proportion of our rent has increased from 26.4% in 2009 to 54.3% in 2019. In 2009, with 805 stores and sales of £268.2m we paid £10.4m in Business rates, 3.9% of sales.

In 2019, the value of rates paid has increased by £700k despite having 38% fewer stores and 30% lower sales. It now represents 6.0% of our sales.

If rates had been maintained at the same proportion of rents paid throughout the period, Shoe Zone would have delivered an additional £55m Profit before Tax; around a 55% increase on the actual value of profit earned during that time. In total, the tax burden on Shoe Zone has risen over the past 10 years from 9% of sales to 16% of sales. The impact of each area of legislation can be seen in the following table:

We will continue to use self-remedies to counter these unjust increases in taxation.

Doing the right things

We are incredibly proud of all of our team's effort in achieving these results and want to thank them for their ongoing commitment and hard work.

During 2019, Shoe Zone donated over £100,000 to charitable causes. We also continue to support BBC Children in Need and the enthusiasm and commitment of our colleagues has resulted in us collectively raising over £750,000 in the last five years.

We recognise the impact of our activities on the environment. We relentlessly review our use of plastics and aim to reconsider usage before recycling. As an example, we have eliminated single use plastics in all own label product and use sea transportation to reduce emissions.

In our refits we use LED lighting in order to reduce energy consumption and wastage of fluorescent lighting tubes. LED lighting has now also been fitted throughout Head Office.

As a last resort our delivery lorries return any recyclable materials back to the Distribution centre for reuse or recycling.

We are also transitioning our car fleet to hybrid cars.

Board Changes

The Shoe Zone plc Board was restructured in August. Anthony Smith moved from Chairman to Chief Executive and Charles Smith was appointed Interim Chairman. Jonathan Fearn continues his role as Chief Financial Officer and Catherine Bowen was promoted from Legal Counsel to join the plc Board as Company Secretary.

The Non-executive Directors; Deputy Chairman Jeremy Sharman, Charlie Caminada and Malcom Collins all now serve on the Remuneration and Audit Committees.

Dividend

The Board recognises that a stable and growing dividend is important to shareholders. Therefore, the Board is proposing to maintain the final dividend of 8.0p (2018: 8.0p) per share, giving a total ordinary dividend for the year of 11.5p (2018: 11.5p) per share, despite the fall in underlying earnings in the year. We believe that this demonstrates our confidence in the future growth of the business while rewarding shareholders for their ongoing support. This results in a pay-out ratio above our historical guidelines of 60% of earnings.

The dividend will be paid to shareholders on the register on 28 February 2020, payable on 18 March 2020 if approved at the Annual General Meeting, which will be held on 5 March 2020. The shares will go ex-dividend on 27 February 2020.

Current trading and Outlook

We have continued to drive the refreshed strategy into the new financial year and the implementation is moving at pace and with momentum.

We have opened six new Big Box stores achieving our target of 45 stores by December, and are aiming to have a total of 65 Big Box stores open by December 2020. Our new Hybrid format is being accelerated with a target of 20 by October 2020 and we will complete our rebranding programme by the end of 2020.

We expect the business to continue to generate strong cash conversion and anticipate that capital expenditure will continue at current levels as we improve the standard of the store portfolio.

Shoe Zone has made a solid start to the year and is trading in line with market expectations. The Board is positive about the outlook for the year with the refreshed strategy well underway.

Financial review

In the 53 weeks to 5 October 2019, Revenues increased by 0.9% to £162.0m (2018: £160.6m). We ended the year with 500 stores, a net increase of eight stores on 2018 (2018 saw a net reduction of four stores) and continue to operate from a robust and debt-free balance sheet.

Underlying Profit before Tax was £9.6m (2018: £11.3m). This reduction in Profit before Tax was due to increases in store operating costs primarily as a result of the phasing of store openings and increases in staff costs in line with the minimum wage. This was offset by the ongoing focus on cost reductions in rent and rates.

During the year, we undertook a review of the value of the 17 freeholds held on the balance sheet. This review resulted in a one off non-cash adjustment of £2.9m to Statutory Profit. This resulted in a reduction of Profit before Tax from £9.6m to £6.7m. Earnings per Share is therefore 11.43p (2018: 19.03p).

Digital growth has proved strong with revenues of £10.6m (2018: £9.7m), and this has now developed to account for 6.5% of total sales (2018: 6.1%). Profit contribution from Digital increased by 15.4% to £3.0m (2018: £2.6m) in the year.

Product Gross Margin remained strong at 62.7% (2018: 62.7%), reflecting a continued focus on direct sourcing and successful negotiations with suppliers.

Operating expenses decreased to £18.2m (2018: £19.1m). Administration expenses decreased by £1.0m primarily due to the reduced impact of foreign exchange differences and a reduction in profit share bonuses. Distribution costs remained broadly flat year on year with staff cost increases being partially offset by warehouse efficiencies.

The effective rate of corporation tax for the year was 19.4% (2018: 19.8%).

Capital expenditure increased to £6.6m (2018: £5.0m). The increase was driven by the accelerated expansion of the Big Box portfolio, ongoing Head Office reconfiguration and IT equipment costs.

The pension liability has increased by £3.4m, from £6.3m to £9.7m. The triennial actuarial valuations for the schemes are currently in progress and the Company is in discussions with the trustees on the options for the future funding of these schemes. During the year, deficit reduction contributions of £890,000 were made between the two schemes.

Derivative financial assets of £2.7m, compared to £1.4m in the prior year, represents the mark to market valuation of the derivative hedges in place at the end of the financial year. As outlined in the annual report, Shoe Zone only hedges against future dollar purchases of goods for resale, all hedges in place will be effective upon their delivery date.

The Group uses derivative financial instruments, typically forward exchange contracts, to hedge the risk of future foreign currency fluctuations. The hedging policy enables the effective portion of changes in the fair value of designated derivatives to be recognised in Other Comprehensive Income. Historically these movements would have been recognised in the Income Statement. Further information can be seen in accounting policies in note 1 of the financial statements.

The Company generated £14.2m cash from operations, a year on year decrease of £0.7m resulting in a net cash position of £11.4m (2018: £15.7m) at the year end. Despite the slight decrease in cash generated in the current year, this still represents a strong debt free balance sheet. The Group's current bank facilities consist of an on demand overdraft facility of £3.0m. This facility has not been used within the year.

The Board is proposing a final dividend of 8.0p (2018: 8.0p) per share, resulting in a total ordinary dividend for the year of 11.5p (2018: 11.5p) per share. The Board recognises that a stable and growing dividend is important to shareholders. Therefore, the Board is proposing to maintain the final dividend and therefore giving a total ordinary dividend for the year in line with last year, despite the fall in underlying earnings in the year.

The dividends will be paid to shareholders on the register on 28 February 2020, payable on 18 March 2020 if approved at the Annual General Meeting to be held on 5 March 2020. The shares will go ex-dividend on 27 February 2020.

Consolidated income statement for the 53 weeks ended 5 October 2019

Consolidated statement of total comprehensive income for the 53 weeks ended 5 October 2019

Consolidated statement of financial position as at 5 October 2019

The financial statements were approved and authorised for issue by the Board of Directors and were signed on its behalf by:

Jonathan FearnChief Financial OfficerDate: 7 January 2020

Consolidated statement of changes in equity for the 53 weeks ended 5 October 2019

Share capital comprises the nominal value of shares subscribed for.

The merger reserve has arisen as a result of the application of merger accounting to the group reorganisation of 26 March 2014.

The cash flow hedge reserve comprises of gains/losses arising on the effective portion of hedging instruments and is carried at fair value in a qualifying cash flow hedge.

Retained earnings are all other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.

Consolidated statement of cash flows for the 53 weeks ended 5 October 2019

1 Accounting policies

General information

Shoe Zone plc (the 'Company') is a public company incorporated and domiciled in England and Wales. The registered office is at Haramead Business Centre, Humberstone Road, Leicester, LE1 2LH. The company registered number of the Company is 08961190.

The Company and its subsidiaries' (collectively the Group) principal activity is a footwear retailer in the United Kingdom and the Republic of Ireland.

Basis of preparation

The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied for the 53 weeks ended 5 October 2019.

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and Interpretations (collectively IFRSs) issued by the Internal Accounting Standards Board (IASB) as adopted by the European Union ('adopted IFRSs') and those parts of the Companies Act 2006 that are applicable to companies that prepare financial statements in accordance with IFRS.

The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, as modified for the revaluation of certain financial assets and financial liabilities at fair value.

The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in applying the company's accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note 2.

The consolidated financial statements are presented in Sterling, which is also the Group's functional currency.

Amounts are rounded to the nearest thousand, unless otherwise stated.

Basis of consolidation

The consolidated financial statements incorporating the financial statements of Shoe Zone plc and its subsidiary undertakings are all made up to 5 October 2019. The results for all subsidiary companies are consolidated using the acquisition method of accounting.

Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

De-facto control exists in situations where the company has the practical ability to direct the relevant activities of the investee without holding the majority of the voting rights. In determining whether de-facto control exists the company considers all relevant facts and circumstances, including:

·; The size of the company's voting rights relative to both the size and dispersion of other parties who hold voting rights.

·; Substantive potential voting rights held by the company and by other parties.

·; Other contractual arrangements.

·; Historic patterns in voting attendance.

The consolidated financial statements present the results of the company and its subsidiaries ('the Group') as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

Changes in accounting policies

Adoption of new accounting standards

For the financial period ended 5 October 2019 the group has adopted IFRS 15 'revenue from contracts with customers' and IFRS 9 'financial instruments' for the first time. The nature and effect of these changes are disclosed below. In both cases, there was no material impact on profit after tax or retained earnings on the adoption of IFRS 15 and IFRS 9

IFRS 15:

IFRS 15 supersedes IAS 8 Revenue and related interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

The Group has adopted IFRS 15 using the fully retrospective method of adoption. There was no impact on profit for the period or retained earnings on the adoption of IFRS 15.

IFRS 9:

IFRS 9 replaces IAS 39 'Financial Instruments: recognition and measurement' for annual periods beginning on or after 1 January 2018, which covers the accounting for financial instruments; classification and measurement, impairment and hedge accounting.

The Group applied IFRS 9 retrospectively. The impact of the application of IFRS 9 was not material to the net assets or profit for the period or prior period.

Accounting standards not yet adopted

IFRS 16 "Leases":

IFRS 16 is effective for all accounting periods beginning on or after 1 January 2019. For Shoezone the first reported accounting period under IFRS 16 will be the 2019/20 financial year.

On the adoption of IFRS 16, lease agreements will give rise to both a right of use asset and a lease liability for future lease payables. The right of use asset will be depreciated on a straight-line basis over the life of the lease. Interest will be recognised on the lease liability, resulting in a higher interest expense in the earlier years of the lease term. The total expense recognised in the Income Statement over the life of the lease will be unaffected by the new standard. However, IFRS 16 will result in the timing of lease expense recognition being accelerated for leases which would be currently accounted for as operating leases.

The Group has a large portfolio of leased properties and other equipment, including stores and warehouses. The minimum lease commitment on these at the financial year end is disclosed in Note 21: £49,958,000

The adoption of IFRS 16 has no effect on how the business is run, nor on the overall cash flows for the Group.

Transition

As previously disclosed, the Group has decided to adopt the modified retrospective transition approach, not restating prior year comparatives. The Group will apply the practical expedient to grandfather the definition of a lease on transition and apply the recognition exemption for both short term and low value assets.

Shoezone has established a working group to ensure we take all necessary steps to comply with the requirements of IFRS 16, reporting regularly to the Audit Committee. Significant work has been completed, including collection of relevant data, changed to IT systems and processes, and the determination of relevant accounting policies.

At January 2018 the weighted average discount rate, based on incremental borrowing rates, across the Group lease portfolio was approximately 3%. The discount rate for each lease is dependent on lease start date and term.

Impact to financial statements

With regards to IFRS 16, at 5 October 2019 the Group holds non-cancellable operating lease commitments totalling £49,958,000. IAS 17 does not require the recognition of any right-of-use asset or liability for future payments for the leases; instead, certain information is disclosed as operating lease commitments in note 21. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, and hence the Group will recognise a right-of-use asset and a corresponding liability.

The new requirement to recognise a right-of-use asset and a related lease liability is expected to have a significant impact on the amounts recognised in the Group's consolidated financial statements and the directors are currently assessing its potential impact. A preliminary assessment indicates that the Group will recognise a right-of-use asset of £135,000,000 to £145,000,000 and a corresponding lease liability in the range of £60,000,000 to £70,000,000 in respect of leases held. The impact on the Income Statement is not expected to be material.

Revenue

Revenue is measured at the fair value of consideration received or receivable net of discounts, returns and VAT. Revenue is recognised when the company has transferred the significant risks and rewards of ownership to the buyer at the point of sale in the shop. At the point of sale a provision is made for the level of expected returns based on previous experience.

Internet sales are recognised when the goods have been paid for, despatched and received by the customer.

Exceptional Items

Exceptional items are transactions that fall within the ordinary activities of the Company but are presented separately due to their size or incidence.

Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as purchase price, cost includes directly attributable costs.

Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over the expected useful economic lives. It is provided at the following rates:

Freehold and long leasehold - 50 years on a straight line basis

Short leasehold and leasehold improvements - 5-10 years on a straight line basis

Fixtures and fittings - 5-10 years on a straight line basis

Motor vehicles - 3-5 years on a straight line basis

No depreciation is provided against freehold land. Depreciation is provided against freehold shop properties writing off the original cost less estimated residual value over the useful economic life of the property which is estimated to be 50 years.

Assets under construction

Whilst held under assets under construction, no depreciation is charged on the assets. Once the project is completed, the asset will be transferred to the correct fixed asset category.

Leased assets

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Shoe Zone plc Group (a 'finance lease'), the asset is treated as if it had been purchased outright.

The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between interest and capital. The interest element is charged to the consolidated income statement over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an 'operating lease'), the total rentals payable under the lease are charged to the consolidated income statement on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.

Impairment of non-financial assets

The carrying values of non-financial assets are reviewed for impairment when there is an indication that assets might be impaired. When the carrying value of an asset exceeds its recoverable amount, the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's cash generating unit (i.e. the smallest group of assets in which the asset belongs for which there are separable identifiable cash flows).

Impairment charges are included in the consolidated income statement in cost of sales, except to the extent they reverse previous gains recognised in the consolidated statement of comprehensive income.

Inventories

Inventories are initially recognised at cost on a first in first out basis, and subsequently at the lower of cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Financial assets

The Group classified its financial assets into the categories, discussed below, due to the purpose for which the asset was acquired. The Group has not classified any of its financial assets as held to maturity.

The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Cash and cash equivalents include cash in hand and deposits held at call with banks.

Loans and receivables

Loans and receivable assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

The Group's loans and receivables comprise trade and other receivables and cash and cash equivalents included within the consolidated statement of financial position.

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the consolidated income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

Financial liabilities

The Group classified its financial liabilities as other financial liabilities which include the following:

·; Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Derivative financial instruments and hedging activities

Hedge accounting is applied to financial assets and financial liabilities only where all of the following criteria are met:

At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Group's risk management objective and strategy for undertaking the hedge.

·; For cash flow hedges, the hedged item in a forecast transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect profit or loss.

·; The cumulative change in the fair value of the hedging instrument is expected to be between 80-125% of the cumulative change in the fair value or cash flows of the hedged item attributable to the risk hedged (i.e. it is expected to be highly effective).

·; The effectiveness of the hedge can be reliably measured.

·; The hedge remains highly effective on each date tested. Effectiveness is tested quarterly.

The Group uses derivative financial instruments such as forward foreign exchange contracts to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are initially measured at fair value and subsequently remeasured at fair value. The fair value of forward foreign exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in cost of sales in the income statement.

Amounts accumulated in equity are reclassified to inventories in the period when the purchase occurs, matching the hedged transaction. The cash flows are expected to occur and impact on profit and loss within 12 months from the year end.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss previously recognised in equity is retained in equity and is recognised when the forecast transaction is ultimately recognised in cost of sales in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the statement of financial position differs from its tax base.

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted.

Deferred tax assets are offset when the Group has legally enforceable rights to set off current tax assets against current tax liabilities and the deferred tax liabilities relate to taxes levied by the same tax authority on either:

·; the same taxable group company; or

·; different company entities which intend to either settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets and liabilities are expected to be settled or recovered.

Provisions

Provision for dilapidations is made at the best estimate of the expenditure required to settle the obligation at the reporting date, where material, discounted at the pre-tax rate reflecting current market assessments of the time value of money and risks specific to the liability. A dilapidation provision is only recognised on those properties which are likely to be exited. Where such property is identified the full costs expected are recognised. This provision relates to the liability of wear and tear incurred on the leasehold properties and does not include any removal of shop refits as experience indicates that liabilities do not arise for removal of shop refits.

Foreign exchange

Transactions entered into the Group entities in a currency other than the functional currency are recorded at the average monthly rate prevailing during the period. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date.

Foreign exchange differences are recognised in the profit and loss account.

Retirement benefits - defined contribution and benefit schemes

The Group operates both defined benefit and defined contribution funded pension schemes. The schemes are administered by trustees and are independent of the Group.

Contributions to defined contribution schemes are charged to the consolidated statement of comprehensive income in the year to which they relate.

Defined benefit scheme surpluses and deficits are measured at:

·; the fair value of plan assets at the reporting date; less

·; plan liabilities calculated using the projected unit credit method discounted to its present value using yields available on high quality corporate bonds that have maturity dates approximating to the terms of the liabilities; plus

·; unrecognised past service costs; less

·; the effect of minimum funding requirements agreed with scheme trustees.

Re-measurements of the net defined obligation are recognised directly within equity. These include actuarial gains and losses, return on plan assets (interest exclusive), and any asset ceilings (interest exclusive).

Service costs are recognised in the income statement, and include current and past service costs as well as gains and losses on curtailments.

Net interest expense (income) is recognised in the income statement, and is calculated by applying the discount rate used to measure the defined benefit obligation (asset) at the beginning of the annual period to the balance of the net defined benefit obligation (asset), considering the effects of contributions and benefit payments during the period.

Gains or losses arising from changes to scheme benefits or scheme curtailments are recognised immediately in profit or loss.

Settlements of defined benefit schemes are recognised in the period in which the settlement occurs.

Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the directors. In the case of final and special dividends, this is when approved by the shareholders at the AGM.

2 Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the management team including the Interim Chairman, Chief Executive Officer and Chief Financial Officer.

The Board considers that each store is an operating segment but there is only one reporting segment as the stores qualify for aggregation, as defined under IFRS 8. Management reviews the performance of the Group by reference to total results against budget. The total profit measures are operating profit and profit for the year, both disclosed on the face of the consolidated income statement. No differences exist between the basis of preparation of the performance measures used by management and the figures in the Group financial statements.

There are no customers with turnover in excess of 10% or more of total turnover.

The group has only one operating and reporting segment which reflects the group's management and reporting structure as viewed by the board of directors.

3 Dividends

A final dividend of 8.0p (2018: 8.0p) per share is proposed for shareholders on the register on 28 February 2020 payable on 18 March 2020 following approval at the Annual General Meeting on 5 March 2020.

4 Contingent liabilities

5 Share Capital

Ordinary shares carry the right to one vote per share at general meetings of the company and the rights to share in any distribution of profits or returns of capital and to share in any residual assets available for distribution in the event of a winding up.

6 Earnings per share

Earnings per share is calculated by dividing profit for the year by the weighted average number of shares outstanding during the year.

7 Ultimate controlling party

The company is controlled by the Smith family albeit there is not a single controlling party