TED.L Regulatory News (TED)

Ted Baker Plc ("Ted Baker", the "Company")

Full Year Results for 52 weeks ended 25 January 2020

A detailed strategy and transformation plan for the Company

Ted Baker, the global British Lifestyle brand, today announces its full year results for the year ended 25 January 2020, as well as providing: an update on actions taken to strengthen the business; a transformational strategy "Ted's Growth Formula", to return the Company to profitable growth; a summary of its response to Covid-19 and an update on current trading.

Ted Baker has separately today announced its intention to raise approximately £95 million in gross proceeds (approximately £90 million in net proceeds) by way of a fully underwritten Placing and Open Offer and Firm Placing of the newly-issued ordinary shares of the Company. Up to a further approximately £10 million in gross proceeds (up to approximately £9.6 million in net proceeds) may also be raised by way of an Offer for Subscription which is not underwritten (the "Offer for Subscription", together with the Placing and Open Offer and Firm Placing, the "Capital Raising"). This capital raising will strengthen the balance sheet, allowing the Company to navigate through the COVID-19 disruption and invest in its future through the transformation plan.

Financial Results Overview

· Total revenue was down 1.4% to £630.5m, (down 2.4% in constant currency) impacted by significant discounting as seen across the apparel industry, particularly in the UK, in response to weak consumer spending and channel shift to online.

o Retail revenues fell 4.6% (fell 5.4% in constant currency) to £439.9m driven by:

§ Store revenues down 5.3% (down 6.3% in constant currency) to £321.2m

§ eCommerce revenues were down 2.5% (down 3.1% in constant currency) to £118.7m

o Wholesale revenues increased by 9.6% (up 8.1% in constant currency) to £171.5m, benefitting from incremental footwear revenue. On a comparable basis (excluding footwear), wholesale revenues decreased 3.7% (decrease of 5.0% in constant currency) due to challenging trading conditions for trustees and territorial franchise partners.

o Licence revenues decreased 14.1% to £19.0m. Underlying licence income increased 1.8%, adjusting for the acquisition of the footwear licence, with a steady growth in both our product and territory licences during the period.

· Underlying gross margin of 55.6% (2019: 59.8%), impacted by increased promotional activity, lower wholesale margin on footwear and an active approach to inventory sell through, partially offset by higher margin on retail footwear sales.

· The 2019 Underlying Gross Margin has not been adjusted since the financial statements of 21 March 2019 and excludes the impact of inventory adjustments. The Group has restated the balance of inventory at 26 January 2019 from £225.8 million to £205.6 million, a £20.2 million restatement. The restatement was due to inappropriate cost values being attributed to inventory, inventory reflected on the balance sheet which did not physically exist and intercompany profit in stock that was not adjusted for in previous calculations.

· In addition, the Group has reviewed its approach to estimating the carrying value of stock and adopted a more prudent methodology which resulted in a £32.4 million reduction in stock value being accounted for as a change in estimate booked as a non-underlying expense in the income statement for the period ended 25 January 2020.

· Underlying profit before tax and IFRS 16 was £9.8m (2019: £63.0m), driven by the combination of gross margin pressure, increased distribution and administrative costs.

· Reported loss before tax was £79.9m (2019: profit of £30.7m), a significant fall versus the prior year due to the Group booking £84.6m of non-underlying expenses, mainly comprising total charges of £45.8m related to inventory, £16.2m related to impairment of store assets, £7.6m related to losses on the disposal of the Asian business and £6.5m for legal and professional costs. In addition, the application of IFRS16 for the first time introduced charges of £5.0m.

The Board recognises that last year's performance was disappointing for all of Ted Baker's stakeholders, reflecting a challenging external environment as well as significant internal disruption, driven by a number of senior leadership departures.

In response, Ted Baker today announces a comprehensive strategy (Ted's Growth Formula) to transform the Company in the coming years and see Ted Baker become a more profitable, cash generative business delivering higher returns on capital employed.

Ted's Growth Formula

This strategy, underpinned by the proceeds from the capital raising, will leverage the inherent strengths of the Company. These strengths are: Ted Baker's strong and resilient brand; its diversified footprint (such as through retail, wholesale and licence channels, product category and geographic presence); combined with substantial historical investments that have been made in the last five years (over £65m invested across IT, CRM, logistics and infrastructure); and a strong culture carried by a passionate and engaged team.

The strategy will build on those strengths and is based on three key building blocks: stabilising the foundations, driving growth, and enhancing operational excellence.

Building Block 1: Stabilise the Company's foundations

The Company's initial focus has been on stabilising the business. These actions, which are largely complete, include:

· Refreshing and strengthening the Company's leadership. The appointment of the new Chair, John Barton; permanent CEO, Rachel Osborne; permanent CFO, David Wolffe; Chief Customer Officer, Jennifer Roebuck; Chief People Officer, Peter Collyer; and Global Creative Director, Anthony Cuthbertson, bring new experience and depth to the Board and the executive team. Ted Baker now has strengthened Board governance and a smaller, focused executive team with clear lines of responsibility.

· Responding effectively to COVID-19. We have taken swift action to protect the business, our customers and our colleagues.

· Recapitalising the business. A restructuring of our debt arrangements, the sale and leaseback of the Company's head office to reduce indebtedness, and the proposed capital raising announced today will ensure the Company can navigate through the current Covid-19 disruption and invest in the transformation plan and future of Ted Baker.

· Management has undertaken a full operational efficiency review, supported by Alix Partners. This will reduce head office costs, both in the UK and North America, and has allowed us to simplify the organisation and reset the business with better ways of working and cost savings. After year end, the Company announced that this reorganisation will achieve £5 million of cost savings for the current financial year, with £2.7 million exceptional cash costs to achieve these savings and will result in £7 million of annualised savings.

· Rethinking Ted Baker's vision and commercial strategy. The strategy can be characterised by the following two building blocks and when delivered, the Company will be more cash generative and produce a higher return on capital employed than in the past.

Building Block 2: Driving Growth

Ted Baker has identified five primary drivers of top line growth to focus on as part of its transformation strategy:

· Attract more customers: Gain higher share of wallet and lifetime value through deeper and broader relationships with new and existing customers, by leveraging of insights, analytics and online engagement, to increase customer acquisition, frequency and conversion online.

· Be 'no ordinary brand': Re-energise the brand and creative direction for all consumer touch points, to increase engagement, awareness and purchase consideration.

· Expand our product and its relevance: Make clothing more relevant to all day / week occasions; drive accessories, footwear and large licence partner categories

· Be forward thinking: Retain relevance of business model; keeping ahead of industry trends through internal R&D function and capability

· Profitably be where the customer is: Reach customers in prioritised territories through the appropriate distribution and service model, in a profitable way.

Building Block 3: Operational Excellence

Going forward, Ted Baker will operate under the core philosophy of 'Simpler, Smarter, Together'. By getting the basics rights and operating more efficiently and collaboratively the Company sees significant scope to improve profitability and cash generation. The Company is focused on creating a digital and data enabled operating model, a high-performance business culture, and a commercial and agile approach. The Company has established a transformation programme team, with proven operational expertise to help support the delivery of these initiatives and achieve the potential benefits.

· Operate with a 'digital first' mentality: Upgrade and enhance IT systems

o Focus on critical systems enablers such as an upgraded e-commerce platform and new payment service provider gateway to enable a much broader set of payment options for customers; enhanced internal systems to improve efficiency; enhanced store and omnichannel service for enhanced insights.

· Create a high performing business culture

o Established three pillars to enhance the team's performance: direction, dynamics and delivery. In future years, the focus will be on developing and embedding capabilities and ways of working as well as a continuous improvement mentality.

· A more commercial and agile business, a more effective organisation

o Scope for significant improvement in gross margin through a series of structural bought-in margin improvements. The Company plans to change how it buys goods (streamlining its critical path and reducing sampling), who it buys from (consolidation of its supplier base) and where it buys from (relocation of sourcing markets). Product margin can be further enhanced through the purchase of products throughout the season in response to customer preferences, reworked margin on outlet products and more sophisticated promotional activity.

o Continued focus on working capital efficiency. Historically, the Company has operated with too much inventory, which has negatively impacted cash flow. Despite improvements in working capital efficiency over the last 12 months (with an improvement in underlying net working capital to sales ratio from 27.5 per cent. to 15.8 per cent.) the Company is highly confident it can achieve a further material improvement through shortening its product lifecycle from three years to two.

o Reduce operating expenditure. The Company's recent cost review concluded the business is carrying high costs in several areas, including logistics and distribution, the head office and stores. As a result, it intends to renegotiate carrier arrangements, reduce requirements for air freight and implement productivity improvements in its Derby and Atlanta Distribution Centres which will further reduce the cost base within the business in addition to the annualised £7 million of cost savings relating to head office costs.

o Improve retail store profitability. The Company has conducted a thorough review of retail stores across all territories, with a critical focus on rental costs and payroll. It has identified significant cost saving potential on store payroll driven by new ways of working; the transformation team is in ongoing discussions with landlords across all territories and Directors remain confident in the Company's ability to reduce rental costs.

Much of the work to achieve operational excellence is considered self-help and the Board is therefore confident in delivering these initiatives without improvement in the retail environment across the Company's markets.

FY21 Guidance and Medium Term Targets

Based on current expectations for the economic outlook, and Ted Baker's performance through and beyond COVID-19 (further detail around the scenarios planned for are included in the separate capital raising announcement, also released today), the Company expects to deliver the following progress in FY21:

· Structural bought-in margin improvement: Consolidation of supplier base from 150+ to 100

· Continued focus on working capital efficiency: Reduce stock cycle from three to two years

· Reduced expenditure: Further central headcount reduction; Limit capex to £15m annually

· Improved retail store profitability: Global payroll costs reduction

· Increased controls: Implementation of new improved control environment; Simplified organisational structure

The Board has also provided financial targets to FY2023 which are:

· Medium-term revenue growth of ~5%

· EBITDA margin of 7% to 10% in FY 2023

· Free cash flow generation, after capex, of at least £30m by FY 2023

· Net debt to EBITDA ratio of 1.0x or less by FY 2023

Current Trading and Response to COVID-19

Current trading has been significantly impacted by COVID-19, but online revenues have been strong, reflecting the resilience of our brand, customer loyalty and recently implemented trading and marketing initiatives.

· Company revenue down 36% for the 14 week period from 26 January 2020 to 2 May 2020 (the "Period"), compared to the same period last year. 

· Total retail sales (including online) down 34%

o Retail online channel grew strongly up 50% in the period, up 78% in the 6 weeks from 22 March 2020.

· Wholesale sales for the period down 40%; Licence income for the period down 34% reflecting lockdown measures around the world

Ted Baker's plans for the future build on a number of critical actions that have already been taken by the Board and Leadership Team, particularly in response to COVID-19, in order to protect our customers, our colleagues and the business as a whole.

In addition to an intensive focus on our online business, an extensive cash preservation programme has been put in place, delivering permanent cash flow savings of £138.4m and deferring £10.9m of cash payments:

· The Company has deferred all non-essential capital expenditure, stopping discretionary operating expenses, severely restricting travel, executive pay has been voluntarily reduced by 15%, and landlord and supplier negotiations are ongoing.

· The Company has benefited from the Government's support through the Government's Coronavirus Job Retention Scheme (85% of the workforce is currently on furlough), and Business Rates holiday.

The Company has also started to gradually reopen stores, primarily in Europe and planning for further re-openings is underway as governments begin to relax lockdown rules.

Rachel Osborne, Chief Executive Officer, commented:

"Today we are excited to launch 'Ted's Formula for Growth', a comprehensive strategy for the Ted Baker brand which is supported by a significant recapitalisation of the business, that strengthens our position and enables us to both execute that transformation, and navigate through the disruption caused by COVID-19. 

The Ted Baker brand is much loved, it has a unique personality and character built up over many decades, and that provides us with a remarkably strong foundation from which to continue our international growth. Over the past 6 months our new executive team have pulled together and undertaken a thorough review of the business, identified key opportunities and acted decisively in a number of areas. I would like to thank each and every one of our team at Ted Baker for their extraordinary commitment over the past few months and I look forward to working with them to deliver this transformation and the exciting opportunities ahead.

I am confident that our transformation plan will enable us, Ted Baker, to capitalise on our opportunities and deliver value for all of our shareholders."

CONTACT DETAILS

Ted Baker

Investor.relations@tedbaker.com

Rachel Osborne, Chief Executive Officer

David Wolffe, Chief Financial Officer

Phil Clark, Commercial and Strategy Director

Tulchan Communications (Financial PR)

Tel: +44 (0) 20 7353 4200

Michelle Clarke / Jonathan Sibun / Will Palfreyman

E: tedbaker@tulchangroup.com

Investor & Analyst presentation and Q&A:

Management will host an analyst and investor presentation followed by Q&A. This will commence at 9.00 am on 1st June 2020.

Please follow the link below to access the presentation through a webcast, or alternatively use the dial in if you would like to ask a question:

https://webcasting.brrmedia.co.uk/broadcast/5ebebab631da814c9fc71b74

This release may contain certain forward-looking statements, forecasts, estimates, projections and opinions ("Forward Statements"), which are based on current assumptions and estimates by the management of Ted Baker. These Forward Statements can be identified by the use of forward-looking terminology, including, without limitation, the terms "believes", "estimates", "anticipates", "expects", "intends", "plans", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology. By their nature, Forward Statements involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company. Past performance cannot be relied upon as a guide to future performance and should not be taken as a representation that those trends or activities underlying past performance will continue in the future. No representation is made or will be made that any Forward Statements will be achieved or will prove to be correct. Actual future results, operations and circumstances could vary materially from the Forward Statements. Similarly, no representation is given that the assumptions disclosed in this release upon which Forward Statements may be based are reasonable. The recipient acknowledges that circumstances may change and the contents of this release may become outdated as a result. The Company and its respective Associates and advisers undertakes no obligation to update these Forward Statements, which speak only as at the date of this release, and will not publicly release any revisions that may be made to these Forward Statements, which may result from events or circumstances arising after the date of this release.

This release is not an offer to sell or a solicitation of an offer to buy any securities in the United States. The securities referred to herein may not be offered or sold in the United States absent registration or an exemption from registration under the U.S. Securities Act of 1933, as amended (the "Securities Act") and in accordance with any applicable securities law of any state or other jurisdiction of the United States. The Company does not intend to register any portion of the offering in the United States or to conduct a public offering of any securities in the United States.

The release does not constitute or form part of, and should not be construed as, an offer to sell or issue, or an invitation to purchase or subscribe for, or the solicitation of an offer to purchase, subscribe to or acquire, securities of the Company, or an inducement to enter into investment activity in any country, including the United States, the Commonwealth of Australia, its territories and possessions, Canada, Japan, the Republic of South Africa and Switzerland or in any other jurisdiction in which such offer, solicitation, inducement or sale would be unlawful prior to registration, exemption from registration or qualification under the securities laws of such jurisdiction. No part of this release, nor the fact of its existence or distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever.

Business Review

Territory and Distribution

The Ted Baker brand operates globally through three main distribution routes: retail, which includes concessions and eCommerce; wholesale; and licensing, which includes territorial and product licences. As part of our strategy we shall review by territory our optimal customer proposition and routes to market. This will enable Ted Baker to optimise and to grow our territory presence through a joined up and collaborative channel approach, while ensuring the controlled distribution of our product.

Retail

Our retail comprises stores, concessions and eCommerce, providing an omni-channel experience. We operate stores and concessions across the UK, Europe, North America and the Rest of the World, and localised eCommerce sites in the UK, continental Europe, the US, Canada and Australia. We also have eCommerce businesses with some of our concession partners. Our unique stores showcase the Ted Baker brand and are key to the growth and success of our eCommerce business. The relatively low number of our own stores and higher number of concession locations allows us to maintain a flexible store business model.

Retail sales decreased by 4.6% (decrease of 5.4% in constant currency)1 to £439.9m (2019: £461.0m). We continue to experience unprecedented trading conditions within the retail industry which has heavily impacted our performance. The structural transition from physical stores to digital retail, alongside a cyclical downturn, has resulted in intense pressures on physical retail, changing customer behaviour and declining demand. This has led to a dramatic increase in promotional activity and the most intense level of competitive discounting across the retail sector.

The overall decline in retail sales of 4.6% (decline of 5.4% in constant currency)1 compares to an increase in average retail square footage of 2.6% to 442,790 sq ft (2019: 431,646 sq ft). Retail sales per square foot (excluding eCommerce) decreased 7.7% (decrease of 8.6% in constant currency)1 to £725 (2019: £786) demonstrating the challenging external trading conditions together with changing customer behaviour as customers continue to shift from physical to digital retailing.

The retail gross margin decreased to 59.9% (2019: 63.1%) as a result of increased promotional activity and deeper discounting in response to the extremely difficult trading conditions experienced during the period.

Retail operating costs increased by 0.1% (an increase of 0.5% in constant currency)1 to £232.2m (2019: £231.9m) and as a percentage of retail sales, increased to 52.8% (2019: 50.3%).

Wholesale

Our wholesale business sells to the UK, Europe and North America, as well as supplying products to stores operated by our territorial licence partners and our joint venture partners.

Group wholesale sales increased by 9.6% (increase of 8.1% in constant currency)1 to £171.5m (2019: £156.5m). The period benefited from incremental footwear revenue, following the acquisition of No Ordinary Shoes Limited and No Ordinary Shoes USA LLC, which completed on 1 January 2019. On a comparable basis (excluding footwear), wholesale sales decreased by 3.7% (decrease of 5.0% in constant currency)1. UK & Europe sales decreased by 7.1% (decrease of 7.1% in constant currency) to £92.5m (2019: £99.5m), and North America sales increased by 2.3% (decrease of 1.4% in constant currency)1 to £58.0m (2019: £56.7m). This disappointing performance reflects the very challenging trading conditions which are also impacting both our UK and North America trustees as well as our territorial licence partners across the world.

The wholesale gross margin decreased to 39.8% (2019: 44.1%). This was partly as a result of the introduction of footwear, which carries a lower margin, as well as a more proactive approach to inventory sell through as part of our working capital initiatives resulting in a higher mix of off-price sales compared to the prior year.

Collections

Ted Baker womenswear sales decreased by 3.1% to £370.4m (2019: £382.2m) and represented 60.6% (2019: 61.9%) of total sales. Our womenswear product performance has been particularly disappointing with missteps on both buying and design as a result of changes in the team. This has since been addressed with new creative talent being brought in towards the end of year and their impact is already being felt across our design teams. Performance was further affected by unseasonal weather patterns. Ted Baker menswear sales were up 2.5% to £241.1m (2019: £235.2m) and represented 39.4% of total sales (2019: 38.1%).

Licence Income

We operate both territorial and product licences. Our licence partners are carefully selected as experts in their field and share our passion for unwavering attention to detail and firm commitment to quality. Our product licence partners manufacture and distribute their products independent to Ted Baker but with our careful overview and sign off on the product design and style so as to balance and enhance each other and our business.

Product licences include bedding, beauty, watches, underwear & lingerie, phone cases and luggage. We look to expand our lifestyle licence product ranges to complement our apparel business and customer aspirations.

On 1 January 2019, we acquired the issued share capital of No Ordinary Shoes Limited and No Ordinary Shoes USA LLC from Pentland Group. Pentland previously held the exclusive global licence to manufacture and distribute footwear under the Ted Baker brand and therefore the licence income earned ceased from the acquisition date.

Licence income decreased by 14.1% to £19.0m (2019: £22.1m). However, underlying growth in licence income was 1.8%, adjusting for the acquisition of the footwear licence. We saw a steady growth in both our product and territory licences during the period despite a number being impacted by the external trading conditions. During the period, two new product licensees commenced trading: a new men's underwear and loungewear global licence with Delta Galil and a global watch licence with Timex Group. Both partners reflect our commitment to working with the best product specialists who support our status as a global lifestyle brand.

In August 2019, the Group was pleased to announce a new product licence agreement with Next Plc to accelerate the expansion of Ted Baker's childrenswear collections given the significant growth potential we see in this area. Next will create and sell Ted Baker childrenswear products spanning baby, boys' and girls' clothing, shoes and accessories in collaboration with the creative team at Ted Baker. The new collections launched in Spring 2020 and are being sold through Next's retail channels and wholesale relationships as well as through Ted Baker's websites.

Geographic Performance

United Kingdom and Europe

* Excludes licensed partner stores

Retail sales in UK and Europe decreased by 5.7% (decrease of 5.5% in constant currency) to £296.9m (2019: £315.0m) as a result of the deeply challenging external retail environment. In the UK, these pressures have been exacerbated by the significant impact on consumer sentiment and spending from Brexit and political uncertainty during the period.

ECommerce sales decreased by 3.5% to £94.6m (2019: £98.0m) with sales impacted by the unprecedented trading conditions detailed above as well as the performance of the Group's UK trading partners. As a percentage of UK and Europe retail sales, eCommerce sales represented 31.9% (2019: 31.1%). Our eCommerce channel will be a core area of capital investment for us in the year ahead to ensure we drive revenue growth in online sales. We also plan to optimise the new CRM system which we implemented at the end of 2019. The new system provides us with a complete single view of our customers across channels enabling us to further personalise content and experiences for each customer, ultimately generating increased customer lifetime value and helping us to grow our customer base.

Sales per square foot excluding eCommerce decreased 10.7% (decrease of 10.4% in constant currency)1 to £711 (2019: £796) reflecting changing customer behaviour as customers move to online. However, our stores remain key to the success of the eCommerce business through initiatives such as order in store and click and collect as well as showcasing the brand and the collections and contribute a healthy financial return.

During the year, our expansion continued across the UK and Europe. We opened three short term leases in the UK in Stratford, Lakeside and Cardiff, all with encouraging starts. We also continued our expansion in Europe with store openings in Hamburg, Madrid and Antwerp. We have made several strategic decisions to exit underperforming concession stores during the period, the majority of which were in Spain and France. After the period, we closed our outlet store in Serravalle, which represented our only store in Italy. We opened licence partner stores in Croatia, Ukraine and Malta. We are pleased with the performance of the new openings and remain positive about further growth opportunities for our brand across these markets.

Sales from our UK wholesale business, which include our wholesale export business and the supply of product to our retail licence partners, increased by 7.0% to £106.7m (2019: £99.7m), reflecting footwear sales following the acquisition of the footwear business in January 2019. Excluding this, sales from our UK wholesale business decreased by 7.1%, with our trustees and licence partners also having been impacted by the very difficult trading conditions.

North America

* Excludes licensed partner stores

We are confident that the Ted Baker brand is becoming more established and continues to gain recognition in this territory as reflected by the steady growth seen in the eCommerce and wholesale channels despite trading in a tough external retail environment and unseasonable weather experienced across North America in the early part of the period.

Sales from our retail division in North America increased by 3.3% (decrease of 0.3% in constant currency)1 to £129.8m (2019: £125.7m) with sales per square foot (excluding eCommerce sales) decreasing by 5.7% in constant currency1. Performance was impacted by unseasonable weather across North America in the early part of the period and the very difficult trading conditions experienced throughout the period.

In the period, we opened a new store in Detroit and three further concession stores.

Our eCommerce business delivered an encouraging performance with sales increasing by 7.3% (3.4% in constant currency)1 to £22.1m (2019: £20.6m). As a percentage of North America retail sales, eCommerce sales represented 17.0% (2019: 16.4%).

Sales from our North American wholesale business increased by 14.1% (10.0% in constant currency)1 to £64.8m (2019: £56.8m), reflecting the acquisition of the footwear business. Excluding this, sales increased by 2.3% (decrease of 1.4% in constant currency)1 with our performance being impacted by key trustees taking a more cautious stance with their order books.

Rest of the World

* Excludes licensed partner stores

During the period, we completed two strategic deals to accelerate Ted Baker's expansion in the Asian market, completing the reorganisation of our operations in the region.

In October 2019, the Group entered into a joint venture agreement with Shanghai LongShang Trading Company Ltd, where they would acquire 50% of our existing business to further develop the brand in People's Republic of China including Hong Kong S.A.R. and Macau S.A.R. This joint venture will drive the long-term growth of Ted Baker in these markets, combining extensive local knowledge with the proven global buying, merchandising, training and brand-building expertise of Ted Baker.

Secondly, in August 2019, the Group announced the appointment of a new licence partner in Japan, Sojitz Infinity ("Infinity"). Infinity represents a strong partner to drive the long-term expansion of the Ted Baker brand in Japan, bringing significant local expertise, in particular within the department store sector.

Total retail revenue decreased as sales in Hong Kong, China and Japan ceased following these transactions and this explains the reduction in revenue against the prior year.

The joint venture with our Australasian licence partner, Flair Industries Pty Ltd, continued to perform well. As at 25 January 2020, we operated nine stores in Australasia (2019: nine stores). We also continue to operate in South Africa via a wholly owned subsidiary and in the year opened two stores to now trade from four stores.

Notes:

1 Constant currency comparatives are obtained by applying the exchange rates that were applicable for the 52 weeks ended 26 January 2019 to the financial results in overseas subsidiaries for the 52 weeks ended 25 January 2020 to remove the impact of exchange rate fluctuations.

The Directors believe this measure provides a consistent and comparable view of the underlying performance of the Group's ongoing business.

Financial Review

Revenue and gross margin

Group revenue decreased by 1.4% (decrease of 2.4% in constant currency)1,5 to £630.5m (2019: £639.6m), driven by a 4.6% decrease (decrease of 5.4% in constant currency)1 in retail sales to £439.9m (2019: £461.0m), a 14.1% decrease in licence income5 to £19.0m (2019: £22.1m), offset by a 9.6% increase (8.1% in constant currency)1 in wholesale sales to £171.5m (2019: £156.5m). On a comparable basis (excluding footwear), wholesale sales decreased by 3.7% (decrease of 5.0% in constant currency)1. As mentioned above and within the Chair's Statement, at page 5 in the Group's annual report and accounts, revenue was impacted by several factors during the year including challenging trading conditions characterised by changing customer behaviour, weak consumer spending, intense pressure on physical retailing and unseasonal weather across our global markets. These pressures have been further exacerbated by macroeconomic uncertainty in many of our global markets, particularly in the UK where political uncertainty caused by Brexit has affected customer demand.

The Group's underlying gross margin was lower at 55.6% (2019: 59.8%), with the retail margin of 59.9% (2019: 63.1%) and wholesale margin of 39.8% (2019: 44.1%) both significantly lower than the prior year. The difficult trading environment resulted in lower margins primarily due to an unprecedented and sustained level of promotional activity across the sector, with distressed discounting from some brands and retailers, and heightened competition. The wholesale gross margin was further impacted by the annualised effect of the acquisition of the footwear business which carries a lower gross margin.

Operating expenses

Distribution costs, which comprise the cost of retail operations and distribution centres increased by 7.5% to £268.5m (2019: £249.8m). Distribution costs excluding non-underlying costs and IFRS 162 increased by 2.9% (1.9% in constant currency)1 to £247.4m (2019: £240.5m) and as a percentage of sales increased to 39.2% (2019: 37.6%). The increase is due to inflationary cost increases, higher warehouse and depreciation costs and a result of the annualisation of costs associated with operating the footwear business which was acquired in January 2019.

Administrative costs increased by 26.5% to £100.9m (2019: £79.8m). Administration expenses excluding non-underlying costs2 increased by 14.8% (13.9% in constant currency)1 to £88.3m (2019: £76.9m). This increase is due to inflationary cost increases, higher headcount costs arising from the continued investment in our people, including the additional headcount to support the footwear business which was acquired in January 2019, as well as a higher depreciation and amortisation charge from prior year investments in systems.

During the period, the Group adopted IFRS 16 'Leases' for the first time. IFRS 16 specifies how to recognise, measure, present and disclose leases and replaces IAS17 'Leases'. The Group adopted IFRS 16 from 27 January 2019 using a simplified modified retrospective transition approach, under which the comparative information presented for the 52 weeks ended 26 January 2019 has not been restated and therefore continues to be shown under IAS17. The net impact on profit before tax for the period was a net expense of £5.0m. Further information is provided in Note 1(a) to the Financial Statements.

Profit before tax and non-underlying items and IFRS 163 and Loss/profit before tax

The loss before tax was £79.9m (2019: profit of £30.7m). Profit before tax and non-underlying items and IFRS 163 was £9.8m (2019: £63.0m).

Non-underlying items2

Non-underlying items before tax in the period amounted to £84.6m (2019: £32.3m) and comprised of the following items expenses/(income):

Further details can be found in Note 1(w) and Note 3 to the Financial Statements.

Finance income and expenses

Net interest payable was £15.5m (2019: £4.2m). The IFRS 16 interest expense for the period was £8.3m. As the Group applied the simplified modified retrospective transition approach to IFRS 16, the 2019 comparatives have not been restated. Excluding the impact of IFRS 16 and non-underlying items, net interest payable was £4.1m (2019: £4.2m).

Taxation

The Group tax credit for the period was £9.4m (2019: charge of £6.2m), an effective tax rate of 11.8% (2019: 20.2%). This effective tax rate is lower than the UK tax rate for the period of 19% due, primarily, to the Group being loss making in territories where it has major market operations and due to the utilisation of previously unrecognised tax losses in territories with higher tax rates.

Earnings per share and dividends

The basic loss per share was 158.0p (2019: earnings per share 55.0p). Underlying earnings per share, which exclude non-underlying items and IFRS 164, decreased by 60% to 22.0p (2019: 55.0p).

The final dividend for the year has been temporarily suspended by the Board. An interim dividend of 7.8p per share was paid during the period, compared to a total dividend per share for the prior period amounting to 58.6p.

Cash Flow

 Net cash and cash equivalents increased by £38.3m to £52.9m as at 25 January 2020 as the Group drew down on its borrowing facilities. In light of the lower profitability, the Directors took actions to manage cash by reducing capital expenditure, managing working capital primarily by reducing stock levels and temporarily suspending dividends. Accordingly, net debt increased by £3.3m from £123.8m to £127.1m.

Overstatement of inventory

We announced on 2 December 2019 an independent investigation by Deloitte into inventory overstatement and a further statement was announced on 22 January 2020 confirming the extent of the overstatement. Further details can be found in the Chair's Statement on page 4 and within Note 1(y) to the Financial Statements on pages 131 to 133 in the Group's annual report and accounts.

Borrowing facilities

The Group's net debt balance at 25 January 2020 was £127.1m (2019: net debt £123.8m). In September 2019, the Group refinanced its borrowing facilities. The existing revolving credit facility of £135m and the term loan of £47m were refinanced into a new three-year revolving credit facility of £180m (Facility A), with a lending bank syndicate of four banks. The facility contains quarterly covenant testing for the Group's leverage ratio, fixed cover charge and a net assets test. On 23 March 2020, the Group announced that its lending bank syndicate agreed to increase the headroom under the Group's revolving credit facilities by a further £13.5m until 18 December 2020 (Facility B). On 20 May 2020, the lending bank syndicate agreed to increase the headroom under Facility B by a further £11.5m, taking the total Facility B facility to £25m, with a revised Facility B expiry date of 18 January 2022.

The additional facility announced on 23 March 2020 was made available in conjunction with the exchange of contracts for the sale of Big Lobster Limited, a wholly owned Group subsidiary, which owns the Group's Head Office in London. In connection with the sale, the Group has entered into a short-term lease of the property for a period following completion from 1 June 2020 to 31 March 2023. The consideration from the sale will be £78.75m (subject to completion of a customary completion accounts adjustment mechanism) and will be paid in cash by the buyer on completion, expected to take place in June 2020 following shareholder approval. The net proceeds of the sale of at least £72m, after fees and taxes, will be applied to repay existing indebtedness under Facility A to significantly de-lever the Group.

Treasury risk management

The most significant exposure to foreign exchange fluctuation relates to purchases made in foreign currencies, principally the US Dollar and the Euro.

A proportion of the Group's purchases are hedged in accordance with the Group's risk management policy, which allows for foreign currency to be hedged for up to twenty-four months in advance. The balance of purchases is hedged naturally as the business operates internationally and income is generated in the local currencies. The Group is also exposed to movements in foreign exchange rates on intercompany balances denominated in a foreign currency. These are not hedged. In April 2020, the Group exited its foreign exchange contracts to crystallise a cash gain of £6.9m, and as a result, the Group's foreign exchange risk is unhedged for FY21.

The Group is exposed to movements in UK interest rates as the revolving credit facility accrues interest based on floating LIBOR plus a margin. Prior to the refinancing in September 2019, the Group partially mitigated interest rate risk by entering into interest rate swap agreements, fixing a proportion of the floating rate net debt. However post-refinancing, it has not taken out any new interest rate risk hedges.

Notes:

1 Constant currency variances are calculated by applying the exchange rates for the 52 weeks ended 26 January 2019 to financial results in overseas subsidiaries for the 52 weeks ended 25 January 2020 to remove the impact of exchange rate fluctuations.

2 For information about non-underlying items and IFRS 16 please refer to Note 1to the Financial Statements.

3 Profit before tax and non-underlying items and IFRS 16 is an adjusted performance, adjusted for non-underlying items and IFRS 16.

4 Underlying earnings per share is an alternative performance measure, adjusted for non-underlying items and IFRS 16.

5 Revenue includes licence income, which in 2019 was shown below gross profit. The 2019 comparative has been restated accordingly.