UCG.L Regulatory News (UCG)

20 December 2019

UNITED CARPETS GROUP PLC

(the "Group" or "Company" or "United Carpets")

Interim Results for the 6 month period ended 30 September 2019

United Carpets Group plc (LSE: UCG), the third largest chain of specialist retail carpet and floor covering stores in the UK, today announces its interim results for the 6 month period ended 30 September 2019.

Key points

·; Revenue for the period increased by 36.4% to £14.75m (2018: £10.81m)

·; Like for like sales* were +1.8%

·; Profit before tax and IFRS 16 adjustments** was £154,000 (2018: £121,000)

·; Earnings per share before IFRS 16 adjustments were 0.14p (2018: 0.09p)

·; Profit before tax after IFRS 16 adjustments was £nil (2018: loss before tax of £4,000)

·; Earnings per share after IFRS 16 adjustments were -0.01p (2018: -0.03p)

·; Interim dividend maintained at 0.135p per share (2018: 0.135p) payable 17 January 2020

·; Net funds*** were £1.09m (2018: £2.01m)

·; LFL sales for the 11 weeks since the period end were -3.5%

* Like for like sales are defined in the financial review

 ** IFRS 16 adjustments are explained in note 1

*** Net funds comprise cash and cash equivalents less borrowings (hire purchase liabilities)

Paul Eyre, Chief Executive, said:

"A small improvement in profit before tax and IFRS 16 adjustments is a satisfactory performance in a challenging market environment with consumer confidence constrained by political uncertainty. Nevertheless, the Group generated a significant increase in revenues, primarily driven by a small increase in the average number of stores trading compared to the prior period and the Group's fledgling instalment payment model, a new business channel for the Group with the potential to become an important future profit centre. Importantly, the fundamentals of the Group remain sound. We have a strong network of mostly franchised stores, offering an excellent range of good quality, great value products making us well placed to benefit from any uptick in the market environment."

Enquiries:

Chairman's Statement

Overview

The retail environment continues to be challenging and, combined with an uninspiring housing market, made it a difficult period in which to operate. Given this backdrop, we believe the results achieved for the 6 months to 30 September 2019 are satisfactory being in line with management targets for the financial year and showing a small improvement in profit before tax and IFRS 16 adjustments compared to the same period in the prior year.

During the period under review, the Company continued to focus on implementing good retail practices, expanding the product ranges on offer across the store network and providing strong customer services levels. Flooring ranges have been refreshed, providing new options and keeping abreast of up and coming trends with a number of new lines being successfully introduced.

The significant rise in online shopping has impacted upon all areas of the store-led retail market and the same is true of the flooring and beds sector. However, as with other larger ticket retail items, there is a greater desire amongst consumers to visit and purchase in-store providing some degree of protection to our market place.

Looking ahead, if 2020 sees an improvement in the political and economic outlook for the UK leading to a rally in consumer sentiment, then United Carpets is well placed to benefit.

Financial review

As previously reported (and explained more fully in note 1), from 1 April 2019 the Group has adopted IFRS 16 'Leases' using the full retrospective approach. The adjustments included in this Interim Report are in line with the estimates provided in the Annual Report for the year ended 31 March 2019, reducing profit before tax in the 6 month period ended 30 September 2019 by £154,000 (6 month period ended 30 September 2018: £125,000, year ended 31 March 2019: £319,000).

Revenue, which as in previous years includes marketing and rental costs incurred by the Group and recharged to franchisees, was £14.75m (2018: £10.81m). The increase in revenues came primarily from the ongoing development of the recently introduced instalment payment channel, 2 new stores opened in the 6 months to 30 September 2019 offset by a closure, a full period's trading from stores opened in the prior year and a modest increase in like for like sales in the period.

Like for like sales across the whole of the network (based on stores that have traded throughout both the period under review and the corresponding period in the prior year and thus excluding stores that opened or stores that closed during either period) increased by 1.8%, a reasonable performance albeit against relatively weak comparatives from the previous summer period.

Gross margin was 63.4% compared to 62.3% in the same period in 2018. Warehousing gross margins improved as a result of actions taken during the prior year to improve overall profitability. This, together with the inherently higher margin of the instalment payment channel, more than offset the "mix" impact from an increased proportion of total revenue being derived from corporate stores and new business channels with a corresponding reduction in the proportion of total revenue from franchise related income.

Combined distribution costs and administrative expenses increased by £1.83m from £6.17m in the prior period to £8.0m, but reduced from 57.1% of revenue to 54.3% reflecting:

- substantial operating costs associated with the new instalment payment channel,

- increased costs from non like for like corporate stores opened during the period and in the prior year,

- increased property, plant and equipment depreciation (non-cash charge against profit) as a result of controlled expansion and modest ongoing refurbishment of the existing store estate, and

- an increase in the charge for the potential cost associated with vacating a small number of underperforming stores.

The instalment payment channel suffers an inherently greater risk of default than traditional retailing and an impairment charge of £0.77m (2018: £0.09m) was made during the year against these receivables as this business channel was rapidly expanded. The level of charge incurred is broadly in line with the expected levels of default in our original planning model. A further impairment charge of £0.11m (2018: £nil) was made during the year against receivables, reflecting the impact of the prevailing market environment on the franchise network as the Group continues to support its franchisees.

Before the IFRS 16 adjustments, operating profit was £154,000 (2018: £118,000) and profit before tax was £154,000 (2018: £121,000). As a result, earnings per share before the IFRS 16 adjustments were 0.14p (2018: 0.09p).

After the IFRS 16 adjustments, operating profit was £466,000 (2018: £487,000) and profit before tax was £nil (2018: operating loss before tax of £8,000). As a result, basic earnings per share were -0.01p (2018: -0.03p).

The statement of financial position included net funds of £1.09m as at 30 September 2019 (2018: £2.01m).

Dividend

The Board is pleased to announce an interim dividend of 0.135 pence per share to be paid on 17 January 2020 to all shareholders on the register at the close of business on 3 January 2020. The ex-dividend date will be on 2 January 2020.

Operational review

At 30 September 2019, there were 60 stores of which 48 were franchised and 12 were corporate stores. During the period under review, the Group opened a flagship corporate store in Stockton on Tees operating from a higher profile retail park and another corporate store in Failsworth principally servicing the instalment payment channel in the Manchester region. In addition, a small corporate store in Bristol was closed following a short, unsuccessful trial. Since the period end, a corporate store has been transferred, within the Group, to an experienced franchisee whose existing store lease expires during early 2020 and where the landlord has indicated that they do not wish to renew.

As previously stated, expansion of the store network is focused on finding the right sites rather than just seeking to increase the size of the store network. The Group is always looking for locations where a United Carpets store might excel and, as importantly, matching those sites with potential franchisees. As is the case with the new store in Stockton on Tees, the Group is also open to taking on larger sites in higher profile retail parks with rents above average for the Group but offering higher potential returns.

Challenging and highly competitive market environments increase the importance of ensuring the Group's marketing activities are effective. Whilst the Group continues to deploy advertising campaigns across radio, television and print, the

weighting and timing of these campaigns is under constant review and analysis. Following a review of marketing spend directed at generating online sales, investment has been switched to increasing in-house marketing expertise with the initial result being to significantly reduce costs whilst striving to minimise the impact on revenues.

Franchising and Retail

Floor coverings are the Group's primary driver of sales (predominantly carpet, laminate and vinyl floorings) through both franchised stores and the Group's own corporate stores. In the period under review, the portfolio performed well given the adverse market conditions with like for like sales up 2.4%. New product ranges and lines were successfully introduced to refresh customer options such as water-resistant laminate ranges which have been well received by customers.

Bed sales are an important part of the United Carpets retail proposition with over 85% of stores now offering beds alongside flooring ranges. Like for like sales in the period were 5.0% lower than the same period in the previous year, a disappointing performance reflecting the competitive environment which is not expected to improve markedly in the short term. Bed sales have, in the past, been more volatile but they are a natural combination with flooring and the Group will continue to look to expand the ranges offered and the number of stores from which they are sold.

Interest free credit continues to be a growing and important part of the business although not yet achieving the levels of penetration reported by some of our competitors. It is marketed online and in store and is carefully managed to ensure customer suitability for the product. The offer continues to be popular and tends to lead to substantially higher average transaction values, representing a significant opportunity as we increase our focus in this area.

Instalment payment channel

Following earlier trials, the instalment payment model was rapidly expanded during the period under review and is believed to have the potential to be a significant future profit centre. Targeting a different customer base and offering a separate, limited range of products, this service is available on an interest free pay per week basis in contrast to the traditional monthly interest free credit offer referred to above. While profitable, the costs associated with establishing the service within the Group are still relatively high, however, there is the potential for this to be a valuable new business channel for the Group in the near to medium term.

Warehousing

Our in-house cutting operation supports the whole network providing a quick, efficient cutting and delivery service enabling our franchisees to offer attractive retail price points with good margins. To increase volume and accuracy, the Group has invested in a new cutting and sortation system. This valuable addition to the distribution centre is currently being installed and is expected to be operational in the final quarter of our financial year. The Warehousing division is seen as a key element of service to the store network and, whilst it is not intended to generate a normal, commercial return, a modest ongoing profit is the target.

Property

The Property division leases properties from third parties and sublets those properties to the store network.

People

Once again, on behalf of the Board, I would like to thank our franchisees, supplier partners, employees and everyone connected with the Group for their contribution in the first 6 months of this year and for their continued efforts to ensure a successful outcome for the year as a whole.

Outlook

Demand for our good quality, great value flooring and beds will continue to support this business and its ability to deliver reasonable returns over the long-term. For the business to flourish requires a positive market environment which has not been the case for some time alongside the ongoing political uncertainties which has unsettled consumer confidence and also the housing market. In the face of further Brexit uncertainty and a snap General Election, the important trading period since 30 September has proven to be more difficult with like for like sales for the 11 weeks since the period end 3.5% down. While the Board remain confident in the United Carpets model, the outcome for the full year could be significantly influenced by the ultimate conclusion to Brexit and also in the event of any prolonged period of significant adverse weather conditions. The Board therefore remains cautious over the outcome for the full year.

Importantly, the fundamentals of the business in terms of being virtually debt free, operating from a stable store network, under a well-known and trusted brand means that the business remains well placed to benefit from any potential upturn.

Peter Cowgill

Chairman

20 December 2019

Consolidated Statement of Comprehensive Income

For the 6 month period ended 30 September 2019

*All activities relate to continuing operations and are attributable to the owners of the parent.

There were no other recognized gains and losses for the current period other than shown above and therefore no separate Statement of Other Comprehensive Income has been presented.

Consolidated Statement of Financial Position

At 30 September 2019

Consolidated Statement of Changes in Equity

For the 6 month period ended 30 September 2019

Consolidated Statement of Cash Flows

For the 6 month period ended 30 September 2019

Notes to the Condensed Consolidated Interim Financial Statements

1. Basis of preparation

United Carpets Group plc (the "Company") is a public limited company incorporated in England and Wales. The Condensed Consolidated Interim Financial Statements of the Company for the 6 month period ended 30 September 2019 comprise the Company and its subsidiary undertakings (together referred to as the "Group").

The Group financial statements for the year ended 31 March 2019 were prepared in accordance with International Financial Reporting Standards and International Financial Reporting Interpretations Committee pronouncements as adopted by the European Union, approved by the Board of Directors on 23 August 2019 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498(2) and 498(3) of the Companies Act 2006. These Condensed Consolidated Interim Financial Statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. These Condensed Consolidated Interim Financial Statements for the 6 month period ended 30 September 2019 are unaudited.

The accounting policies applied are consistent with those of the financial statements for the year ended 31 March 2019 and those that are expected to be adopted in the financial statements for the year ending 31 March 2020.

IFRS 16 'Leases'

IFRS 16 'Leases' has been applied in preparing these financial statements for the first time. IFRS 16 'Leases' replaces IAS 17 'Leases' and for lessees eliminates the classifications of operating leases and finance leases. Subject to exceptions, a right-of-use asset is capitalised in the statement of financial position, measured at the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a right-of-use asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease is recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition is replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs).

Under IFRS 16, the Group has recognised right-of-use assets of £18,338,000, capitalised lease liabilities of £20,544,000 and released a lease incentive accrual of £342,000 which in total, after an associated tax credit of £326,000, has reduced net assets by £1,538,000. The Group has recognised financial expenses on the lease liabilities of £466,000, reversed lease costs of £1,383,000 and recognised depreciation on the right-of-use assets of £1,071,000. The net impact on the Consolidated Statement of Comprehensive Income for the 6 month period ended 30 September 2019 being a reduction in profit before tax of £154,000. The following tables summarise the impacts of adopting IFRS 16 on the Group's Consolidated Statement of Financial Position at 30 September 2019 and its Consolidated Statement of Comprehensive Income for the 6 month period ended 30 September 2019.

Impact on the Consolidated Statement of Financial Position at 30 September 2019

Impact on the Consolidated Statement of Comprehensive Income for the 6 month period ended 30 September 2019

Reconciliation of total equity attributable to owners of the parent

Reconciliation of (loss)/profit for the financial period

2. Segment reporting

Segment information is presented in the Condensed Consolidated Interim Financial Statements in respect of the Group's business segments, which are the primary basis of segment reporting. The business segment reporting format reflects the Group's management and internal reporting structure.

Franchising and Retail is the income that the Group receives from its franchise activities together with the results of its corporate stores. The Instalment Payment Channel offers customers fixed, weekly payments with no hidden costs or extra charges. Warehousing reflects the results of the Group's in-house cutting operation which services the franchised and corporate stores and some third parties. The Property division leases properties from third parties and sublets those properties to the store network.

Inter-segment pricing is determined on an arm's length basis. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

3. Income tax expense/(credit)

 (a) Analysis of charge for the period

(b) Reconciliation of total tax charge for the period

The tax charge for the period differs from the standard rate of corporation tax in the UK of 19% (2018: 19%). The differences are explained below:

4. Property, plant and equipment

5. Earnings per share

Basic earnings per share

The calculation of basic earnings per share for the 6 month period ended 30 September 2019 was based on the loss attributable to ordinary shareholders of £8,000 (6 month period ended 30 September 2018: loss of £25,000, year ended 31 March 2019: profit of £160,000) and a weighted average number of ordinary shares outstanding of 81,400,000 for each period.

Diluted earnings per share

The calculation of diluted earnings per share for the 6 month period ended 30 September 2019 was based on the loss attributable to ordinary shareholders of £8,000 (6 month period ended 30 September 2018: loss of £25,000, year ended 31 March 2019: profit of £160,000) and a weighted average number of ordinary shares outstanding and potential ordinary shares during the 6 month period ended 30 September 2019 of 81,400,000 (6 month period ended 30 September 2018: 81,400,000, year ended 31 March 2019: 81,400,000).

6. Equity dividends

An interim dividend in respect of 2019/20 of £110,000 (2018: £110,000) being 0.135p per share (2018: 0.135p per share) has been declared but not provided in these financial statements.

7. Cash generated from operations

Reconciliation of the result for the period to cash generated from operations: