STU.L Regulatory News (STU)

25 November 2021

Studio Retail Group plc ("SRG" or "the Group")

Interim Results for the 26 weeks ended 24 September 2021

"Solid H1 performance, but challenging trading conditions in Q3"

SRG, the digital value retailer, today announces its Interim Results for the 26-week period ended 24 September 2021 and gives an update on its performance in its peak trading period.

Financial Summary

* this is an Alternative Performance Measure for which a reconciliation to the equivalent GAAP measure can be found below.

^ restated to show the results of Education as a discontinued operation - see note 2. 

Group summary

· Group revenue in H1 of £239.6m, up 3.2% on prior year and up 32% over two years following the exceptional growth seen during FY21

· Adjusted profit before tax* up 36% to £23.7m (2020 restated^: £17.4m)

· Sale of Findel Education for headline consideration of £30m completed in April 2021

· New £50m revolving credit facility agreed in June 2021, with a further increase of £25m to the securitisation facility to £275m recently approved (subject to contract) alongside a new maturity date of December 2024

· Core net debt* of £20.8m (September 2020: £45.2m), with the strong H2 trading from last year and the proceeds from the sale of Education being offset by the growth in receivables and the extra investment in stock

Studio highlights

· Product revenue in H1 up 0.3% on prior year and up 38% over two years

o Active credit base at the end of September down marginally to 1.46m, with spend per customer up 10.5% to £189

o Over 1.2m active Studio App users with 25% of purchases now coming through this channel

· Financial Services revenue in H1 up by £7.0m or 11.3% on prior year

o Representative APR for new customers reduced to 39.9%

o New technologies including Open Banking enabling a refined strategy with a more stringent approach towards credit customer acceptance and charging default fees, aimed at enhancing the lifetime overall value to Studio whilst also ensuring fair outcomes for customers

o Eligible Receivables* up by 12% on prior year, with a reduced yield driven by lower fee income

o Bad debt charge £5.3m lower than prior year, due to improved recovery rates and lower default fees being charged to customers

Current trading and outlook

Studio is not immune to the well-publicised market headwinds and has had to manage challenges in product shipping which has driven up costs in this area. This will lead to selling price inflation going forward, although we have competitive monitoring tools to ensure we retain our value position. In addition, we have faced some product availability issues as deliveries were delayed, but we took a proactive decision to secure stock early aided by our Shanghai based sourcing office, meaning that as we went into peak season, we had higher levels of stock than last year and have good tracking in place on all remaining deliveries due in the next couple of weeks.

Again, as with the wider market, we have seen lower availability of staff to fulfil temporary roles in our operations. However, by putting in place peak season pay enhancements, we are now at a point that we can cater with the demand forecast through December, so customer orders are despatched in readiness for Christmas. As we go into FY23 we are anticipating wage increases due to inflation and increases to national living wage.

Studio typically delivers around 40% of its full-year product sales during Q3, the period that includes Black Friday and Christmas. Our core seasonal ranges have sold well throughout peak and although sales of certain ranges, notably ladies clothing, have been slower than expected, they have recovered well in the last two weeks. Our impression is that customers are shopping more selectively this year given inflationary pressures and the recovery from the pandemic. The supply chain challenges have added cost and gross margin pressure that has only partially been mitigated through pricing. We have also recruited fewer new customers due to marketing media inflation, lower availability hindering conversion, plus changes previously described in our financial services strategy that have had more of a short-term impact than anticipated.

We will give a further update on this key trading period at the end of January but our current expectation for the full-year outturn of Adjusted PBT is now in a range of £35-40m (previously £42-45m). Despite these short-term headwinds, many of which are impacting the wider market, our strategy for growth remains intact and we maintain our £1bn revenue goal in the medium term.

Paul Kendrick, Group CEO, commented:

"I am pleased with how the business has built on the success seen during FY21 in delivering a solid trading performance in the first half of the year. There are undoubtedly more near-term headwinds for all retailers, but we are confident that the proactive decisions we have taken will leave us well placed to navigate these. We continue to focus on our strategy set out in June, and our objective remains to drive growth with Studio's outstanding digital value proposition for its customers at the forefront. We remain confident in our medium-term targets."

A video overview of the results from Paul Kendrick, Group CEO and Stuart Caldwell, Group CFO, is available to watch here on the company's website, www.studioretail.group/investor-centre. They will be hosting a conference call for analysts and investors at 9.30am this morning, Thursday, 25th November. To register for the call, please contact Tulchan Communications LLP at studio@tulchangroup.com or by telephone on 020 7353 4200.

This announcement contains inside information. The person responsible for arranging the release of it on behalf of SRG is Stuart Caldwell, Group CFO.

Enquiries

Studio Retail Group plc 0161 303 3465

Paul Kendrick, Group CEO

Stuart Caldwell, Group CFO

Tulchan Communications 020 7353 4200

Sunni Chauhan Will Palfreyman

Notes to Editors

LEI number: 2138006V9ZT2KO6PZY81

Studio Retail is a market-leading digital value retailer offering its UK customers a broad range of products and a flexible repayment proposition. Around 2.3m customers are able to enjoy clothing and footwear alongside home and electrical products, plus more seasonal ranges, many of which can be personalised for free. The medium-term ambition is to achieve over £1bn of revenue, through the following three levers for growth: Value, Choice, Payment.

Forward looking statements

This document may contain forward looking statements. In particular, but without limitation, nothing contained in this document should be relied upon or construed as a promise or a forecast, including any projection or management estimate, any statements which contain the words "anticipate", "believe", "intend", "estimate", "expect", "forecast" and words of a similar meaning, reflect the management of the Company's current beliefs and expectations and are subject to risks and uncertainties that may cause actual results to differ materially. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such statements. Any forward-looking statements speak only as at the date of this document, and except as required by applicable law, Studio Retail Group plc undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information or otherwise.

INTERIM MANAGEMENT REPORT

Summary

Following the transformational performance seen in FY21, the trading performance during the first half of FY22 was one of consolidation, as anticipated. Product revenue increased by 0.3%, with Financial Services revenue up by 11.3%. Adjusted profit before tax increased by 36% to £23.7m (H1-2020: £17.4m), primarily due to the stronger Financial Services performance and lower bad debt charges.

Having completed the sale of Findel Education in April 2021 and with new financing facilities secured in June 2021, we set out our growth strategy for the Studio Retail business at our Capital Markets Day at the end of June 2021 with the ambition to reach total revenue of £1bn in the medium term.

Whilst the near-term market conditions have contained numerous well-publicised headwinds, we remain confident in Studio's proposition to "make more affordable and make more possible" for our value-conscious customers.

Our strategy

Our digital value retail business primarily trades under the Studio brand. It has undergone a multi-year transformation to move from its catalogue heritage into being a pureplay online business of scale. The transformation continues to now make the business truly digital, utilising data and technology in all aspects of the business to improve customer experience and engagement.

Our strategy for growth aims to build further scale into the business by growing its total revenue to £1bn over the medium term, focussed in three primary workstreams:

- Value: Attract more of our core customers who love Studio value

- Choice: Build the spend per customer through enhanced product range

- Payment: Expand our range of flexible payment options to appeal to a broader customer base

In the near term, we expect to see faster progress with the second workstream and, to a lesser extent, the first workstream. This is broadly the pattern that we have seen during the first half of FY22.

Value: attract more customers

Offering a broad range of great value products is the key driver for customers to choose to shop at Studio. These products are promoted to customers through an increased use of digital and TV advertising, supplemented to a lesser extent by catalogues and other paper media.

Studio ended the previous financial year with a total active customer base (customers who have traded in the previous 12 months) of 2.47m. Within that figure were 1.53m customers with an active credit account, a feature which generates a significantly higher level of customer loyalty, repeat purchasing and lifetime value. The typical level of retention from these credit customers is normally around 70%. The other 0.94m customers as at the end of March 2021 were customers who pay using a credit or debit card at the point of sale. These cash customers exhibit a far lower retention rate of around 20%.

The total customer base increased by 36% during FY21. However, the number of cash customers within that base doubled in that period, as the pandemic reduced high-street shopping opportunities. This was not a trend that we expected to continue as the UK returned to more normal conditions.

Marketing costs increased by 6.1% during H1 to £17.3m, with tariffs for most types of media increasing at a far higher rate on the equivalent period at the start of the pandemic. The response levels and effectiveness of this spend was therefore lower, producing 28% fewer applicants for credit accounts. Our regulated credit account application process has been enhanced through the introduction of newer technologies such as Open Banking, to ensure that customers can demonstrably afford to repay for the products they purchase from Studio. In the near term, that has the effect of reducing the proportion of these applicants who are accepted for credit. However, in the longer term, that approach is expected to produce a better outcome for customers and a greater lifetime return for Studio due to better loyalty and lower arrears.

The lower marketing effectiveness and the changes to our lending strategy have had a marked impact on new customer acquisition, which has in turn reduced the active credit base to stand at 1.46m at the end of September 2021, with the total base at 2.35m. Temporary factors such as stock availability will depress this further during the remainder of the year, before moving forwards again in FY23 as process improvements to reduce attrition in the application journey and to convert more of the rejected credit customers into cash buyers of the product are introduced.

Choice: build the spend per customer

Once we have brought a customer to the website, the next element of our strategy is to present more products and brands that customers want at competitive prices, so that we capture a greater share of their wallet and increase their ordering frequency. This is likely to be the most effective route to our overall growth in revenue, as we know that our customers' average spend with Studio is around half that seen with peer retailers.

We have seen the annual average spend per customer increase by 11% over the last year, now standing at £189 (September 2020: £171, March 2021: £180), driven by mix effects within our ranges towards branded electrical goods and garden furniture. As the pandemic eases, we would expect to see spending on clothing ranges increase further, which is a significant opportunity for growth due to the relatively high frequency of purchasing and our underweight performance in kidswear.

Our Studio App has become an important retention tool over the last year. It now accounts for around a quarter of all product purchases, with more than 1.2m customers having the App on their devices. Nearly 900k of these have push notifications enabled, providing a low-cost route to bringing customers back to our shop.

The flexible credit account is also a key part of bringing customers back to the shop. Around 7-8% of customers who come onto the App or website to make their monthly repayment will also make a new product purchase.

Part of Studio's successful performance in FY21 was the result of being able to increase the proportion of sales dispatched directly to the customer by a supplier, particularly from popular brands such as Samsung, Regatta and Virgin Wines. We have continued to see this feature in H1 with new ranges from Disney, Hasbro and Lenovo being added, with directly dispatched sales representing 34.3% of product sales in H1.

The business is in the middle of its investment to modernise its retail back-office technology, including a new order management system and a more granular product database to improve the quality of the information presented to customers and so increase basket building and order conversion. We expect to see the benefits from this investment starting to emerge in FY23.

Payment: expand the range of our flexible payment options

Studio has invested in its systems and datasets over the last three years to enhance its flexible, affordable credit options that allow customers to pay for their goods over an extended period. These enhancements have included the capability to tailor the interest rate to the customer's circumstances during the application process, rather than imposing a single rate that is subsequently adjusted after the customer has shopped for 6-12 months. This has allowed Studio to reposition its representative APR offered to new customers at 39.9% during the first half of the year, but it should also give the business the capability to offer lower-APR payment solutions to a different customer audience in the future. This is our third route to growth, which will be developed in FY23 and beyond.

As a responsible lender who is regulated for its conduct by the FCA, Studio is mindful of the need to only lend to customers who can reasonably afford the associated repayments. In addition to using the traditional datasets from credit bureaus in its underwriting scorecards, as noted above Studio is increasingly using Open Banking tools to gain rapid documented assurance on the affordability of lending to each customer at the point of application. Whilst such tools do not prevent real-life circumstances from affecting a customer's future repayment capabilities, Studio starts from the working presumption that all of its customers could be vulnerable from having lower financial resilience if their circumstances change, and this shapes how we design our financial services products and processes. Our tools then enable us to make acceptance decisions and set credit limits that incorporate appropriate buffers for the customer's personal circumstances.

This presumption of potential financial vulnerability then feeds into our approach to forbearance and default fees, which we have also adapted over the last year to reduce the incidence of fees being charged to customers when monthly repayments are missed. Whilst in the short term, that reduces a part of Studio's financial services revenue, it also reduces bad debt charges, produces a better lifetime return for Studio through greater loyalty for product spending and, most importantly, produces a better outcome for the customer. This is consistent with the FCA's guidance on responsible lending.

Balances available for funding from the securitisation facility, which is a measure of "in order" customer accounts now stand at £301.4m, 12% higher than at September 2020. That growth led to Financial Services revenue increasing in the first half of the year by 11.3% to £69.6m (2020: £62.5m), although the overall yield is reducing due to the lower number of default fees being charged and, in time, the lower representative APR for new customers reducing interest income.

Customer collections performance continues to be robust and, whilst we have seen some year-on-year deterioration in arrears performance against the abnormally good performance seen in H1 of FY21, this has been in line with our expectations. The level of recovery achieved from the sale of defaulted debt has improved, and the size of the loss at the point of default is lower due to the new fee strategy noted above. Both of these factors reduce the size of the bad debt provision, leading to a lower in-period bad debt charge.

The accounting standard for bad debt provisioning requires a forward-looking assessment of potential loss. That economic outlook is less pessimistic than a year ago, particularly in the case of unemployment. However, management's analysis of the arrears profile of the portfolio indicates that some customers have continued to benefit from the temporary regulatory support put in place by the government to protect jobs and incomes. There is also increased concern about the likely effect of rising inflation on household incomes and repayments. We therefore believe that some of these customers are in a better, lower-provision state than will ultimately be appropriate. Judgement has therefore been applied in determining the period-end provision, which has increased it by approximately £13m from the central level derived from the normal forecasting model.

The bad debt charge for H1 was £11.4m, down by £5.3m on the prior year.

Peak season planning

As has been well publicised, global shipping container availability and costs have been materially disrupted in recent months. The business took a proactive decision early in the summer to secure its supply chain for the crucial trading period leading up to Christmas, aided by Studio's in-house sourcing office based in Shanghai. This included use of our contracted container shipping plus additional charter ships at an incremental cost, which gives more guaranteed stock availability, albeit arriving slightly later than originally planned. This means Studio was in a strong stock position at the end of September ahead of the peak Christmas season.

H1 Financial results

Product revenue in H1 increased by 0.3% to £170.0m. However, trading from the middle of August was more challenging for online retailers such as Studio, due in part to the full reopening of the high street, and further easing of lockdown restrictions. Nonetheless, the business exited the summer season with a clean seasonal stock position, albeit achieved through a longer period of sale than originally envisaged. Most of the new stock acquired through the higher-cost sourcing routes noted above is intended for sale during H2 and early FY23, although some of it was sold in H1. This, alongside the longer sale period, contributed to the product margin rate achieved in H1 of 34.9% being 120bp lower than in prior year. The gross profit from product therefore reduced slightly by 3.0% to £59.3m.

The gross profit from financial services increased by £12.4m to £58.2m, bringing the total gross profit for the business in H1 to £117.5m. Overhead costs including depreciation and Central costs increased by 4.6%, bringing the Adjusted Operating Profit* for the Group in H1 to £28.6m, up 30% on 2020. After taking account of finance costs of £4.9m, the Adjusted PBT for the Group was £23.7m (2020: £17.4m).

Our sustainability plan - Sustainable, Responsible and Good

We outlined our approach to sustainability, "Sustainable, Responsible and Good" in June, focussed around five pillars:

- Putting colleagues first

- Helping people thrive

- Protecting our planet

- Sourcing responsibly

- Upholding high standards

Key elements of progress during the first half of the year include increasing the number of mental health first-aiders within Studio, implementing the changes to our financial services strategy to improve customer outcomes, stepping up our activities to proactively monitor our suppliers and their factories resulting in us ceasing to trade with a small number of overseas factories, and working across the business with our chosen charity partner, Home-Start.

On emissions, we are currently having our Scope 1 and 2 calculations audited which should enable us to set out our carbon neutrality targets by the end of the financial year.

Current trading and outlook

Studio is not immune to the well-publicised market headwinds and has had to manage challenges in product shipping which has driven up costs in this area. This will lead to selling price inflation going forward, although we have competitive monitoring tools to ensure we retain our value position. In addition, we have faced some product availability issues as deliveries were delayed, but we took a proactive decision to secure stock early aided by our Shanghai based sourcing office, meaning that as we went into peak season we had higher levels of stock than last year and have good tracking in place on all remaining deliveries due in the next couple of weeks.

Again, as with the wider market, we have seen lower availability of staff to fulfil temporary roles in our operations. However, by putting in place peak season pay enhancements, we are now at a point that we can cater with the demand forecast through December so customer orders are despatched in readiness for Christmas. As we go into FY23 we are anticipating wage increases due to inflation and increases to national living wage.

Studio typically delivers around 40% of its full-year product sales during Q3, the period that includes Black Friday and Christmas. Our core seasonal ranges have sold well throughout peak and although sales of certain ranges, notably ladies clothing, have been slower than expected, they have recovered well in the last two weeks. Our impression is that customers are shopping more selectively this year given inflationary pressures and the recovery from the pandemic. The supply chain challenges have added cost and gross margin pressure that has only partially been mitigated through pricing. We have also recruited fewer new customers due to marketing media inflation, lower availability hindering conversion, plus changes previously described to our financial services strategy that have had more of a short-term impact than anticipated.

We will give a further update on this key trading period at the end of January but our current expectation for the full-year outturn of Adjusted PBT is now in a range of £35-40m (previously £42-45m). Despite these short-term headwinds, many of which are impacting the wider market, our strategy for growth remains intact and we maintain our £1bn revenue goal in the medium term. 

FINANCIAL REVIEW

Summary income statement

The Group produced an adjusted profit before tax* of £23.7m in the period, up 36% on the prior year, as set out below.

* this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below.

^ restated to show the results of Education as a discontinued operation - see note 2.

Profit before tax was £26.5m (2020 restated^: £15.9m).

Borrowings and finance costs

The Group finances its operations through a combination of a securitisation facility that partially funds Studio's credit receivables and a revolving credit facility. The securitisation facility was increased by £25m to £250m in April 2021. We have recently agreed terms for a further increase to £275m in principle subject to the documentation being signed in the coming days, with its maturity date also proposed to be extended to 31 December 2024. The revolving credit facility was refinanced in June 2021 with a smaller group of three lenders providing a commitment of £50m until 30 September 2024.

Core net debt* which excludes securitisation funding and lease liabilities, stood at £20.8m at the end of September 2021, down by £24.3m from September 2020.

Credit receivables capable of being funded by the securitisation facility grew by £32.6m or 12% to £301.4m. £23.1m of this growth was funded by the securitisation facility and £9.5m was funded from working capital.

Finance costs of £4.9m (2020 restated^: £4.6m) were incurred in the first half of the year. The Group manages its exposure to rising interest rates through the use of interest rate caps. It currently has such protection in place until February 2023 over £250m of borrowings at a capped SONIA rate of 0.68%.

Foreign exchange contracts

The Group's policy on hedging its foreign exchange risks remains to cover its planned exposures over the next 12 months on a rolling basis by the use of forward contracts. At the end of September 2021, the Group was committed to contracts for $97.5m, contracted at US dollar exchange rates between £1/$1.41 and £1/$1.31, with maturity dates covering the period to September 2022. The fair value of these contracts at the period end was a net position of £nil (September 2020: asset of £1.7m). Fair value movements in the first half have resulted in a credit of £2.8m (September 2020: charge of £1.5m), which has been recorded in the condensed consolidated income statement.

Taxation

The Group recorded a tax charge of £5.8m in the first half from continuing operations (2020 restated^: £3.3m), based on an estimated effective tax rate for the full year of 21.8% (2020 restated^: 20.4%), marginally higher than the prevailing rate of 19%. The increase in rate vs. FY21 is due to the remeasurement of deferred tax assets and liabilities at the now substantively enacted rate of 25%.

Balance sheet

Net assets at 24 September 2021 stood at £99.3m, up from £84.9m at the year end due to the net income of £19.8m from continuing operations less £5.4m from the discontinued Education business including the loss on disposal.

Defined benefit pension contributions totalling £2.5m have been made into the pension scheme in the first half, together with a lump-sum contribution of £9m following the completion of the sale of Findel Education. The net valuation of the pension scheme as calculated per the rules of IAS19 showed a surplus of £30.3m at the end of September 2021 (March 2021: £20.8m, September 2020: £21.7m). The Company is continuing to actively pursue options to remove this potentially volatile item from the balance sheet, including the potential use of insurance.

Share capital and dividends

The Company's shareholders passed resolutions at the AGM in September 2021 approving the repurchase and cancellation of the non-voting deferred shares for the nominal sum of £1. That process was completed in November 2021.

As noted in the FY21 Annual Report, our ambition over the next few years is to invest in our digital capabilities to increase the level of potentially distributable reserves within the primary operating subsidiary, Studio Retail Limited, to enable it to remit dividends up to the Company. The Company does not have plans to reinstate dividend payments at this stage.

Alternative Performance Measures

The Directors use several Alternative Performance Measures ("APMs") that are considered to provide useful information about the performance and underlying trends facing the Group. As these APMs are not defined by IFRS, they may not be comparable with APMs shown in other companies' accounts. They are not intended to be a replacement for, or be superior to, IFRS measures.

The principal APMs used in these Interim Results are set out below.

Adjusted profit before tax

This measure is used by management to assess the underlying trading performance of the Group from period to period.

In both the current and prior period, fair value movements on derivative financial instruments have been excluded in arriving at adjusted PBT. The Group's foreign exchange hedging policy means that there will be unrealised fair value gains or losses at the period end relating to contracts intended for future periods. Those fair value movements are therefore excluded from the underlying performance of the Group until realised.

Since the Education business met the criteria to be held for sale at 26 March 2021, its results have been presented separately in the condensed consolidated income statement in both the 26-week period ended 24 September 2021 and the 26-week period ended 25 September 2020. Since the business was involved in two disposal processes during FY21 and was sold in April 2021, management have concluded that the results of Education are no longer relevant when assessing the underlying performance of the Group and have therefore focused on the results from continuing operations.

A reconciliation from adjusted profit before tax to profit before tax is shown below:

Studio product gross margin %

This is used as a measure of the gross profit made by Studio on the sale of products only, which shows progress against one of Studio's strategic pillars. It is derived as follows:

Studio underlying impairment loss as a % of revenue

This is an assessment of the underlying impairment loss incurred in respect of Studio's trade receivables, which enables management to assess the quality and performance of its trade receivables from period to period.

Studio marketing costs to sales ratio

This measure allows management to assess the efficiency of our marketing spend as we pursue our stated strategy of increasing the profile of the Studio brand. It is calculated by dividing marketing costs by product revenue.

Overall net debt

This measure takes account of total borrowings less cash held by the Group and represents our total indebtedness. Management use this measure for assessing overall gearing.

It is calculated as follows:

* balances have been restated as set out in note 2 to the financial statements.

Core net debt

This measure excludes lease liabilities and securitisation borrowings from net debt to show borrowings under the revolving credit facility net of cash held by the Group. This is our preferred measure of the indebtedness of the Group and is relevant for covenant purposes.

It is calculated as follows:

** Disclosed within bank loans.

* balances have been restated as set out in note 2 to the financial statements.

Debt funding consumer receivables

The majority of Studio's trade receivables are eligible to be funded in part from the securitisation facility, with the remainder being funded from working capital. This measure indicates the face value of trade receivables (before any impairment provision) capable of being funded from the securitisation facility. It is useful to management as it demonstrates the proportion of net debt that is supported by paying customer receivables.

It is calculated as follows:

Adjusted earnings per share

This measure shows the earnings per share given when individually significant items and fair value movements on derivative financial instruments are excluded from the profit after tax figure. Details of how the adjusted earnings per share are calculated can be found in note 7 of the condensed consolidated financial statements.

Studio Retail Group plc

Group Financial Information

Condensed Consolidated Income Statement

26-week period ended 24 September 2021

*Earnings before interest, taxation, depreciation, amortisation and fair value movements on derivative financial instruments. 

Condensed Consolidated Income Statement

26-week period ended 25 September 2020 (restated - refer to note 2)

*Earnings before interest, taxation, depreciation, amortisation and fair value movements on derivative financial instruments. 

Condensed Consolidated Statement of Comprehensive Income

26-week period ended 24 September 2021

The total comprehensive income for the period is attributable to the equity shareholders of the parent company Studio Retail Group plc.

Condensed Consolidated Balance Sheet

At 24 September 2021

Condensed Consolidated Cash Flow Statement

26-week period ended 24 September 2021

 Condensed Consolidated Statement of Changes in Equity

26-week period ended 24 September 2021

The total equity is attributable to the equity shareholders of the parent company Studio Retail Group plc.

Notes to the Condensed Consolidated Financial Statements

1. General Information

The condensed consolidated financial statements have been approved by the board on 24 November 2021.

Statement of compliance

These condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the United Kingdom ("UK") and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority. As required by the latter, the condensed consolidated financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the 52 weeks ended 26 March 2021, except for the segmental analysis which is explained in note 3. They do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's consolidated financial statements as at and for the 52 weeks ended 26 March 2021.

The financial information for the period ended 26 March 2021 is not the Company's statutory accounts for that financial year. Those accounts, which were prepared under IFRS as adopted by the UK ("adopted IFRS"), have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor draws attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under sections 498(2) or (3) of the Companies Act 2006. The financial information included in this interim financial report for the six months ended 24 September 2021 is unaudited. The comparative information for the six months ended 25 September 2020 is also unaudited.

Going concern basis

The directors have adopted the going concern basis in preparing these condensed consolidated financial statements after assessing the principal risks and having considered the impact of severe but plausible downside scenarios for COVID-19. These remain the same as those set out the Group's annual report and accounts for the period ended 26 March 2021. The Group is financed by a securitisation facility and a Revolving Credit Facility ("RCF") as disclosed in note 18 to the consolidated financial statements for the period ended 26 March 2021. The directors considered the impact of the current Covid-19 environment on the business for the next 12 months for the purposes of their going concern assessment. Whilst there is inherent uncertainty in forecasts caused by COVID-19, the directors have considered severe but plausible downside scenarios on sales, profits and cash flows.

The directors have assumed that the Group's operations remain open and that we will continue to be able to serve our customers in the event of any further national lockdowns, as we have done since March 2020. The downside sensitivities considered include a reduction in new customer growth and existing customer spend, the level of future forecast revenue and gross margin growth as well the impact of economic factors (particularly unemployment rates) on the ability of the Group's customer base to continue to shop with us and to service their credit accounts. The directors also considered the impact of these sensitivities occurring in combination. In the event that one of or a number of these downside scenario arise at the same time the directors consider they are able to take reasonable mitigating actions, which include but are not limited to, a reduction in discretionary capital expenditure and a reduction in discretionary marketing spend. Implementing these mitigating actions would enable the Group to continue to operate within its existing facilities during the forecast period.

The directors believe that the Group is well placed to manage its financing and other business risks satisfactorily, noting that further agreement would be required to make fresh drawings on the securitisation facility after 31 December 2022 and its RCF matures on 30 September 2024, and have a reasonable expectation that the Group will have adequate resources to continue in operation for at least 12 months from the signing date of these condensed consolidated financial statements. They therefore consider it appropriate to adopt the going concern basis of accounting in preparing the condensed consolidated financial statements.

Risks and uncertainties

The principal risks and uncertainties which could impact the Group's short and long-term performance are:

· Pressures on the levels of disposable income available to lower socio-economic groups, who form a core part of Studio's customer base;

· The risk of financial crime being attempted or committed against Studio, its customers or employees;

· Potential disruption to our business support systems and the storage and protection of our customers' data;

· A material interruption to the product supply chain could reduce the level of retail trading;

· Execution and liquidity risks from a substantial three-year plan of transformation and growth at Studio;

· Attracting and retaining the right talent in the business, particularly in the highly competitive areas of digital marketing, IT development and cyber security, to support the development of our high growth digital strategy;

· Failure to comply with legal and regulatory developments could result in significant financial penalties, including fines or sanctions and could also lead to reputational damage and/or restrictions on Studio's ability to trade; and

· Any inability to operate from one of our key warehouse facilities centres.

For further details please refer to pages 48 to 49 of the Group's annual report and accounts for the 52-week period ended 26 March 2021, a copy of which is available on the Group's website www.studioretail.group.

These risks remain valid with regards to their potential to impact the Group during the second half of the current financial year.

Brexit

The principal challenge that continues to be faced by the business as a result of the United Kingdom leaving the European Union is in respect of the Northern Ireland Protocol. The Protocol was agreed by the UK Government in October 2019 and was aimed at avoiding the introduction of a hard border on the island of Ireland. The Protocol requires that the UK authorities apply EU customs rules to goods entering Northern Ireland, with the effect that the sales made to customers in Northern Ireland are now effectively treated as exports. This is a substantial operational change for a business that historically has only made sales to UK customers. Whilst the enforcement of the Protocol by HMRC has been delayed, we continue to work with our distribution partners to make the necessary system and data changes to allow us to be able to comply with the requirements of the Protocol and continue to serve customers in Northern Ireland.

Impact of Covid-19

Studio business was able to trade continuously throughout the year and saw strong levels of trading and new customer recruitment. Studio put in place the necessary steps to ensure that colleagues were able to either work remotely or in a Covid-secure workplace environment as appropriate. Additional resources were put in place for hygiene and screens, with extra deep-cleaning of warehouse premises from time to time.

At the outset of the pandemic, whilst the implications of how trading could continue for a non-essential retailer were being assessed, the businesses made use of short-term cash flow supports offered by HMRC. All of this support was repaid later in the year.

Additional forbearance measures were put in place for Studio's credit customers on request, including offering up to two 90-day payment holidays where necessary for the customer's circumstances.

The Studio business continues to retain a cautious approach to the number of colleagues being on site, in part because its offices and warehouses are located in Greater Manchester and Lancashire, where infection rates have often been higher than the national averages.

Seasonality

The nature of the businesses within the Studio Retail Group mean that profits have shown, and will continue to show, a significant seasonal bias with the majority of product revenue being earned in the second half due to peak trading season of Black Friday and Christmas.

Customer balances typically move in line with the seasonal patterns of product purchases. It is normal for balances to peak at Christmas before gradually reducing from then until the following summer. Customers receive a monthly statement and can then choose whether to repay their balance in full each month, in which case they do not incur any interest charges, or whether to pay an amount they choose between a minimum level and the outstanding balance.

2. Accounting Policies

As required by the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority, this condensed set of financial statements has been prepared applying the same accounting policies and computation methods that were applied in the preparation of the Company's published consolidated financial statements for the period ended 26 March 2021.

Findel Education's classification as discontinued operation

The Group completed the disposal of Findel Education Limited on 16 April 2021. Consequently, the comparative figures given in the condensed consolidated income statement for the 26 week period ended 25 September 2020 have been restated to show the results from this discontinued operation separately, in accordance with the requirements of IFRS 5 Non-current assets held for sale and discontinued operations. The comparative condensed consolidated balance sheet has not been restated in accordance with IFRS 5.

Changes in classification of costs

During the current period management has changed the presentation of Studio's payroll costs previously classified within distribution costs so that these are now presented within administration costs. The comparative figures have been restated to reduce distribution costs by £3,178,000 and increase administration costs by £3,178,000. These adjustments have no effect on the profit for the year. There is no presentational impact in the interim financial statements.

Reclassification of software

During the prior period, management performed a review of the Group's accounting policies and identified that software that had previously been disclosed within property, plant and equipment and should been disclosed within intangible assets. Consequently, software with a net book value £18,668,000 of at 27 March 2020 was reclassified from property plant and equipment to intangible assets. A subsequent reclassification of £21,953,000 was made to the 25 September 2020 balance sheet. This is a balance sheet reclassification only and has no impact on the income statement or net assets.

The restated Condensed Consolidated Income Statement and Condensed Consolidated Balance Sheet shown below summarise the restatements made.

Restated Condensed Consolidated Income Statement

26-week period ended 25 September 2020

*Earnings before interest, taxation, depreciation, amortisation and fair value movements on derivative financial instruments. 

Restated Condensed Consolidated Balance Sheet

at 25 September 2020

In addition to the above, the deferred tax balance at 25 September 2020 has been adjusted by £325,000 relating to the reinstatement of depreciation and amortisation that was not charged for the 26-week period to 27 March 2020. Further details are included within the consolidated financial statements for the period ended 26 March 2021. 

Estimates

The preparation of condensed consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.

In preparing the condensed consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the period ended 26 March 2021 except as noted below.

Studio's trade receivables

Studio's trade receivables are recognised on the balance sheet at amortised cost (i.e. net of provision for expected credit loss). At 24 September 2021 trade receivables with a gross value of £365.2m (2020: £314.8m) were recorded on the balance sheet, less a provision for impairment of £94.0m (2020: £90.2m).

An appropriate allowance for expected credit loss in respect of trade receivables is derived from estimates and underlying assumptions such as the Probability of Default and the Loss Given Default, taking into consideration forward looking macro-economic assumptions. Changes in the assumptions applied such as the value and frequency of future debt sales in calculating the Loss Given Default, and the estimation of customer repayments and Probability of Default rates, as well as the weighting of the macro-economic scenarios applied to the impairment model could have a significant impact on the carrying value of trade receivables.

These assumptions are continually assessed for relevance and adjusted appropriately. Revisions to estimates are recognised prospectively.

The macro-economic drivers that impact the bad debt charge are as follows:

· Annual changes in unemployment rate;

· Actual unemployment rate; and

· Changes in average weekly earnings.

The latest economic scenarios are driven mainly by the expected recovery of the UK Economy from Covid-19, in particular the recovery in unemployment.

We consider four economic scenarios, and apply a weighting based on probability. These are:

· Upside

Assumes unemployment has already experienced the peak in Q4 2021at 5.2%, and recovery will continue until levelling off in Q2 2022 at 3.9%

· Baseline

Unemployment is expected to rise modestly to 5.1%. GDP is not expected to be back to pre-crisis levels until December. Growth slows through 2022 as high inflation crimps consumer spending.

· Downside

The Economy underperforms as households lock in some of the saving gains made over the last year. The fallout from leaving the EU, which has been largely hidden by COVID - constrains output. Many firms affected find they are unviable as government support unwinds and protection from creditors is ended. Unemployment rises to just above 6%

· Stress

Vaccines prove ineffective against new variants. The Economy contracts early next year as people voluntarily social distance. Supply-side constraints see inflation rise sharply peaking at well above 5% at the start of 2022. This increase in inflation could cut into real incomes and exacerbate the recession. Unemployment peaks at 8.1% in H2 of 2022

The table below summarises the peak employment levels assumed within each scenario; with the weightings we have applied to each.

We note that the impairment model was not designed to take into account changes to customer payment and default performance arising as a result of the Covid-19 pandemic, and that Covid-19 has inherently impacted the economic inputs of the model. Management's analysis of the arrears profile of the portfolio indicates that some customers have benefitted from the temporary regulatory support put in place by the government to protect jobs and incomes. We therefore believe that some of these customers are in a better, lower-provision state at the balance sheet date than will ultimately be appropriate. Judgement has therefore been applied in determining the half-year provision, which has increased it by approximately £13m from the central level derived from the normal forecasting model.

We note that the unprecedented level of uncertainty around the impact of Covid-19 on the UK economy as a whole, and subsequently on our customer base, continues to cause challenges in assessing bad debt on a forward-looking basis.

Discount rate for pension scheme liabilities

At 24 September 2021 the Group's defined benefit pension scheme showed a surplus of £30.3m (25 September 2020: £21.7m, 26 March 2021: £20.8m).

The defined benefit obligation at 24 September 2021 was £152.6m (25 September 2020: £153.6m, 26 March 2021: £146.8m). During the period, an interest expense relating to the defined benefit obligation of £1.4m was recognised in the condensed consolidated income statement, £7.0m of remeasurements were recognised in other comprehensive income, primarily relating to financial assumptions, and benefit payments of £2.6m were made, resulting in a gross increase in the defined benefit obligation of £5.9m.

The fair value of scheme assets at 24 September 2021 was £183.0m (25 September 2020: £175.3m, 26 March 2021: £167.6m). During the period, interest income relating to scheme assets of £1.7m was recognised in the condensed consolidated income statement, £4.8m of remeasurements were recognised in other comprehensive income, benefit payments of £2.6m were made, and £11.5m of employer contributions were received by the scheme, resulting in a gross increase in the fair value of scheme assets of £15.4m.

The carrying amounts of the assets and liabilities detailed above are sensitive to the underlying assumptions used by management in their calculation. It is reasonably possible that the outcomes within the next financial year could differ from the assumptions made, which would impact upon the carrying values assumed.

Management makes use of the PwC Single Agency corporate bond yield curve to derive the discount rate applied to the scheme's projected cash flows, in the calculation of its liabilities under IAS 19. Changes to the discount rate applied could lead to significant changes in the level of liabilities recognised.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any of the future periods affected.

3. Segmental analysis

Operating segment

Following the disposal of Findel Education, the Group now has one principal operating segment, Studio, plus a central cost centre. The income statement below is presented in the same format as that presented to the CODM (Chief Operating Decision Maker) and the prior period has been restated on an equivalent basis to enable a like for like comparison.

Inter-segmental trading and profitability is not included in the information provided to the CODM and consequently is not disclosed below. Reportable segmental profits are adjusted for inter-segment profits and as such are stated using costs to the Group.

*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments. 

24 September 2021

Other information

25 September 2020

Other information

Central adjustments primarily relate to the elimination of intercompany balances on consolidation, intangible assets arising on consolidation, defined benefit pension surplus as well as current tax balances and deferred tax. 

4. Individually significant items

An analysis of individually significant items arising during the current and prior periods is as follows:

During the 26-week period ended 24 September 2021, there are £nil (26-week period ended 25 September 2020: £nil) individually significant items from continuing operations.

Discontinued operation

A charge of £4,794,000 has been recorded as a loss on disposal following the sale of Education, which completed on 16 April 2021. Disposal costs of £97,000 were incurred during the current period in relation to the sale of Education to West Moorland 221 Limited. These costs have been disclosed within the result from discontinued operation in accordance with IFRS 5.

In the prior period, disposal costs of £1,283,000 were incurred aborted sale of Education to YPO. These costs have been disclosed within the result from discontinued operation in accordance with IFRS 5.

5. Discontinued Operation

On 16 April 2021, the Group entered into a definitive agreement for the sale of Findel Education Limited to West Moorland 221 Limited, a newly formed company owned by investment funds managed by Endless LLP for a gross consideration of £30.0 million on a debt free, cash free basis paid in cash on completion. In addition to the consideration, the Group has made available a working capital facility of £2.0 million to Findel Education. The facility was repaid in full on 30 September 2021. The net cash proceeds were used to make a voluntary payment to the Group's defined benefit pension fund of £9.0 million with the remainder used to reduce the Group's net debt.

Findel Education's results for the 3 week period to 16 April 2021, 26 week period to 25 September 2020 and the 52 week period to 26 March 2021 have been presented to show the discontinued operation separately from continuing operations and are summarised below:

*including individually significant charges of £4,891,000 (26 week period to 25 September 2020: £1,283,000).

The major classes of assets and liabilities of Findel Education as at 16 April 2021, 25 September 2020 and 26 March 2021 were as follows:

The net cash flows (used in)/generated from Findel Education were as follows:

6. Taxation

Income tax from for the 26-week period ended 24 September 2021 is based on an estimated effective tax rate for the full year of 21.8% (26-week period ended 25 September 2020 - restated: 20.4%), giving rise to a tax charge of £5,780,000 in the period (26-week period ended 25 September 2020 - restated: £3,257,000).

The deferred tax assets and liabilities at 24 September 2021 have been calculated at 25% (2020: 19%), being the corporation tax rate substantively enacted at the balance sheet date (effective 1 April 2023). This will increase the Group's future current tax charge accordingly.

7. Earnings per share

From continuing operations

* Adjusted to remove the impact of fair value movements on derivative financial instruments.

From discontinued operation

* Adjusted to remove the impact of individually significant items.

Total attributable to ordinary shareholders

* Adjusted to remove the impact of individually significant items and fair value movements on derivative financial instruments.

The earnings per share attributable to convertible ordinary shareholders is £nil.

8. Provisions and contingent liabilities

(i) Provisions

All balances provided at 25 September 2020 were disclosed within current liabilities.

Onerous lease provisions

The onerous lease provision at 24 September 2021 relates to (non-rent related) unavoidable costs in respect of the unused areas of the Group's properties at Enfield and Hyde.

Studio financial services redress and refunds

Provisions in excess of £30m were built up in previous years in relation to the anticipated refund of premiums and interest to customers in respect of historic flawed credit and insurance products. The refund programmes are now complete and the remaining provision is expected to be utilised within 12 months.

VAT provision

The VAT provision relates to the Group's ongoing discussions with HMRC with regard to agreeing a new Partial Exemption Special Method (the means by which the recovery of input VAT on costs relating to the Group's financial services activities is restricted). As at 24 September 2021, the Group held a provision of £4.4m (September 2020: £nil, £1.9m previously presented within accruals, March 2021: £3.9m), which represents management's best estimate of the likely increase in the level of restriction on the recovery of input VAT over and above that which has already been restricted in the Group's quarterly VAT returns. We note that management's best estimate is one of a number of different outcomes so the amounts provided may differ to the final cost incurred by the Group in respect of this matter.

During the prior year, the Group undertook a review of the accounting policy and transferred £1.9m in respect of this matter from accruals to provisions. The prior year figure has not been restated as management conclude that the quantum of the transfer is not material to the users of the financial statements and note that that both provisions and accruals are presented within current liabilities.

(ii) Contingent liability

As a regulated entity, the Group's main trading subsidiary, Studio Retail Limited, is subject to legal and regulatory reviews, challenges, and investigations during the ordinary course of business. All such material matters are periodically reassessed, with the assistance of external professional advisors where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to management's best estimate of the amount required at the relevant balance sheet date.

9. Derivative financial instruments

At 24 September 2021 the Group had outstanding derivative financial instruments as follows:

Non-current assets

Current assets

Current liabilities

Forward foreign exchange contracts

Exchange rate exposures are managed utilising forward foreign exchange contracts. At the balance sheet date, details of the notional value of outstanding US dollar forward foreign exchange contracts that the Group has committed to are as follows:

Forward contracts outstanding at 24 September 2021 are contracted at US dollar exchange rates between £1/$1.41 and £1/$1.31 (25 September 2020: £1/$1.32 and £1/$1.18).

Changes in fair value of forward foreign exchange contracts for the 26-week period ended 24 September 2021 amounted to a credit of £2,847,000 (26-week period ended 25 September 2020: charge of £1,490,000) and have been recorded in the condensed consolidated income statement.

Interest rate cap

Under interest rate cap contracts, the Group agrees to cap the SONIA element of its interest cost at an agreed level calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of rising interest rates on its variable rate debt.

The following cap was in place at 24 September 2021: