Theworks.co.uk. Regulatory News (WRKS)

18 January 2024

TheWorks.co.uk plc 

("The Works", the "Company" or the "Group")

Interim results for the 26 weeks ended 29 October 2023 and trading update for the 11 weeks ended 14 January 2024.

Pressures on sales and profitability seen in H1 FY24 continued into H2. Short-term focus is on margin growth and cost reduction. Guidance for FY24 maintained.

The Works, the family-friendly value retailer of books, arts and crafts, stationery, toys and games, announces its interim results for the 26 weeks ended 29 October 2023 (the "Period" or "H1 FY24") and an update on current trading for the 11 weeks ended 14 January 2024.

H1 FY24 Financial summary

H1 FY24 Operational summary

Trading update

Overall, LFL sales declined by 4.9% in the 11 weeks ended Sunday, 14 January 2024. This was lower than anticipated and was primarily a result of the challenging consumer environment and subdued demand over the festive period. Family finances were under pressure, meaning many customers prioritised spend on food and essentials, whilst cutting back on gifting. The extended period of discounting seen across the sector continued throughout November and December, resulting in a highly competitive market and pressure to maintain promotional activity.

In addition to the external challenges faced, some ranges, such as kids' books, did not deliver as expected. We also experienced some teething problems at our Distribution Centre following the implementation of a new pick-process (expected to deliver significant savings in the long-term), which intermittently disrupted the flow of stock. Trading has improved post-Christmas in part reflecting a more impactful January sale, and the operational challenges in the DC have eased.

Outlook

We entered the new calendar year with stock levels in line with our original plans, having taken action to reduce planned intake and with seasonal stock selling through as expected. Our cash position improved following Christmas, with £18.4m of cash as of 14 January 2024 and we expect to end the financial year debt-free.

Pressure on profitability from lower sales and margins has increased since our last trading update and we have pivoted to focus on resetting our cost base, growing our gross margin and scaling back non-essential investments and spend in the short-term. The action undertaken is already having the desired impact, albeit with most of the cost savings to be realised in the next financial year.

Given the more positive sales trajectory in recent weeks, coupled with expected benefits from cost action and new ranges, the Board's expectation for FY24 pre IFRS 16 Adjusted EBITDA of approximately £6.0m currently remains unchanged. We remain mindful that the outlook for consumer spend remains unpredictable and of uncertainty relating to external factors such as stock delays and increased freight costs as a result of supply chain disruption in the Red Sea.

Gavin Peck, Chief Executive Officer of The Works, commented:

"Market conditions have been persistently challenging, putting pressure on our sales and profit performance in the first half and throughout the festive period. It is clear that many families celebrated Christmas on tighter budgets this year, and whilst we offered excellent value, we were not immune to this reduced spend. I am proud of the way that our colleagues have rallied together to deliver for customers during these challenging times.

"We have started the new calendar year on an improved sales trajectory, with a strengthened leadership team to drive forward our strategy and exciting Easter and summer toy ranges due to land later this year. However, we are also mindful of external challenges, including recent supply chain disruption in the Red Sea.

"Our focus for the remainder of the year will be on cost reduction, rebuilding margin and profitability, and conserving cash. It is necessary to take this action now to stabilise the profitability of the business during this challenging period, however we remain confident that our "Better, not just Bigger" strategy is the right direction for the business and will enable a return to sustainable growth in the long term."

Interim results presentation

A presentation for sell-side analysts will be held today at 9.30am via video conference call. A copy of the presentation will shortly be made available on the Company's website (www.corporate.theworks.co.uk/investors).

Footnotes:

Notes for editors:

The Works is one of the UK's leading family-friendly value retailers of books, arts and crafts, stationery, toys and games, offering customers a differentiated proposition as a value alternative to full price specialist retailers. The Group trades from over 520 stores in the UK & Ireland and online.

Chief Executive's Report

Trading performance

The first half of FY24 was characterised by a challenging consumer retail environment, with high inflation and cost of living pressures resulting in softened consumer demand. Against this backdrop The Works delivered total revenue growth of 3.1% and a total LFL sales increase of 1.6%.

Stores delivered a LFL sales increase of 3.5%. We saw stronger sales during the early summer months, driven by soft comparatives with H1 FY23 (due to the impact of the cyber security incident) and a good performance of new toys and games and summer "Out to Play" ranges. Key product categories struggled in late summer and the market became increasingly difficult from mid-late September onwards, resulting in more competition and extensive discounting across the sector, which we responded to with increased levels of promotional activity. Reduced footfall caused by unseasonable weather towards the end of the period further impacted sales, although our extended Halloween range performed well, with further opportunity to grow and refine our offering for this increasingly significant seasonal event in 2024.

Online sales declined by 12.2%. Although weaker than stores overall, consistent with the broader trend seen across the sector,1 our online performance gradually improved throughout the Period. This was a result of improvements made to the customer experience of the website and the strong performance of online promotional activity implemented in October. The poor weather seen towards the end of the period also saw some customers shift from shopping in store to online, which provided a temporary boost.

Profitability was constrained in the first half with a pre-IFRS 16 Adjusted EBITDA loss of £8.5m (H1 FY23: £6.4m loss) and Adjusted loss before tax of £7.8m (H1 FY23: £7.3m loss).2 The main impacts on profitability were higher business costs due to inflation and the significant increase in the National Living and Minimum Wages. Profitability was further constrained by operational investments in our merchandising team and a new way of picking at the Distribution Centre being slower than expected to deliver benefits and efficiencies. Product gross margin increased to 57.2% from 56.3% in H1 FY23 but was lower than expected, reflecting the benefit of lower freight rates throughout the Period being partially offset by the product mix (strong sales of lower margin toys, games and fiction books) and elevated levels of market-driven promotional activity towards the end of the Period.

Given the persistent pressure on our sales and profitability, towards the end of the Period we took decisive action to reduce costs across the business. This includes reducing the number of labour hours in stores, reassessing marketing spend and keeping other discretionary costs to a minimum. We are targeting further rent reductions, particularly on low-profit stores, and have strengthened middle-management in the Distribution Centre to drive the expected efficiency savings from the new ways of working. At the same time we have identified opportunities to accelerate margin growth through cost reduction and supplier rationalisation. We are pleased with the action already taken, with some positive impact over the remainder of the current year, but given the lead time for these measures to fully bed in we expect that most of the cost savings will materialise in FY25.

The Group had net bank borrowings of £2.5m at the Period end (H1 FY23: £7m net cash), reflecting the build of stock prior to peak trading season, and the corresponding low point in cash levels. There was £17.5m of headroom within our £20.0m bank facility.

Strategy

Our "better, not just bigger" strategy provides The Works with a clearer purpose and a more focussed brand identity and customer proposition to drive a step-change in sales growth, as well as enabling us to improve the operations of the business. Although the aims of this strategy, to make The Works a more customer-focussed and efficient retailer, are relatively straightforward, the extent of change required across our business to deliver it has always been extensive and complex in nature.

Since launching the strategy we have made good progress in key areas, but did not anticipate facing such a persistently challenging external environment, which has hindered our ability to deliver as expected in recent years. We still believe this is the right strategic direction for the business and are confident that we have made the right investments. However, the combination of an adverse trading environment, significant cost headwinds and slower than expected progress have meant we have now entered an unforeseen and temporary interim period between investment and return. Our present focus is on delivering returns on those investments and cutting costs where we can, which will see us scaling back non-essential investments. This is a short-term, corrective course to stabilise the profitability of the business to see us through a difficult period.

Updates on our strategic pillars in H1 FY24 include:

Environmental, Social and Governance (ESG)

As a business we are committed to "Doing Business Better" and our dedicated ESG steering group continues to meet quarterly to ensure we are fulfilling our mission to make positive and sustainable changes for our people, our communities and our planet which will enable us to continue to inspire reading, learning, creativity and play for generations to come.

Progress during the period includes:

Leadership changes

Following the announcement of the CFO succession at our preliminary results, Rosie Fordham has now been appointed CFO and joined the Board effective 31 December 2023. Together with the appointment of Lynne Tooms as Commercial Director and Simon Peck as Marketing Director, we now have a strengthened leadership team to help steer the business through the next phase of development.

Outlook

The Board's expectation for the full year results currently remains unchanged.3 Our trading performance in the run up to Christmas was lower than expected, however this is balanced by an improving sales trajectory in recent weeks and optimism about new ranges landing in the spring. Furthermore, operational investments in our merchandising team and a new way of picking at the Distribution Centre are expected to start delivering results in the remainder of the Period, supporting the cost action we have already taken. In line with the normal working capital cycle, we have exited Christmas with significant levels of cash and expect to end the financial year debt-free.

However, there is still a great deal of uncertainty as we move into 2024. We continue to face significant cost headwinds, the consumer outlook remains unpredictable and the supply chain disruption caused by recent attacks on ships in the Red Sea creates the potential for stock delays and increased freight costs, which we are carefully monitoring.

Shareholder return of capital and consultation exercise

Following resolution 2 relating to the declaration of the final dividend not passing at the last AGM on 4 October 2023, we conducted a shareholder consultation exercise. This consultation covered alternative forms of capital distributions, with some of our major shareholders expressing a preference for share buybacks over the payment of dividends at the AGM. The consultation also covered resolutions 13, 14 and 15 as set out in our notice of AGM. We are required under the UK Corporate Governance Code to provide an update within six months of an AGM where more than 20% of votes were cast against a resolution.

We have listened to the views of our shareholders in relation to the above resolutions and taken this consultation exercise into consideration. In light of current trading, we are now focused on retaining cash within the business and the Board will therefore not be proposing any form of shareholder returns in the short-term. The Board will continue to consider shareholder feedback on returns of capital within the context of the Company's cash position on an ongoing basis.

Gavin Peck

Chief Executive Officer

18 January 2024

Footnotes

Financial Report

Overview

This report covers the 26 week period ended 29 October 2023 ("H1 FY24", "H1" or "the Period") and refers to the comparative "H1 FY23" period of the 26 weeks ended 30 October 2022.

The result for the Period was an Adjusted loss before tax of £7.8m compared with a restated loss before tax of £7.3m for H1 FY23. The pre-IFRS 16 Adjusted EBITDA was a loss of £8.5m (H1 FY23: loss of £6.4m). The result reflects the impact on sales and significant cost headwinds faced in the challenging macro-economic environment. The seasonality of the business typically results in a loss in the first half of the financial year, with all profit being substantially generated through Christmas trading in H2.

The table below summarises the movements between the H1 FY23 and H1 FY24 EBITDA results. Revenue increased by 3.1% and the margin rate improved slightly (albeit less than expected) but there were cost headwinds such as the increase in National Living and Minimum Wages (NLMW) and electricity along with investment in IT infrastructure and support centre headcount which more than offset this. Further details are provided below.

At the balance sheet date the Group had net debt of £2.5m (H1 FY23: net cash of £7.0m) (excluding lease liabilities). Stock was purchased earlier compared to the prior Period to mitigate the risk of delays to key seasonal lines that we experienced in FY23 and the cash position at the end of the Period fully reflects this build of stock.

(1) The Group tracks a number of alternative performance measures ("APMs") including pre-IFRS 16 EBITDA, pre-IFRS 16 Adjusted EBITDA and like for like ("LFL") sales, as it believes these provide stakeholders with additional helpful information. These are described more fully in Note 1(c) and 4 of the condensed unaudited financial statements.

Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.

Revenue

Total revenue during the Period increased by 3.1% to £122.6 million (H1 FY23: £118.9 million). LFL sales increased by 1.6%, with store LFLs increasing by 3.5% and online sales decreasing by 12.2%.

The number of stores trading decreased by five, from 526 to 521 at the end of the Period. Five new stores were opened, ten were closed and three stores were relocated to new sites.  

The table on the following page shows an analysis of sales and a reconciliation to statutory revenue.

The effective VAT rate was higher than in H1 FY23 due to the higher sales mix of toys and games compared to the mix of zero rated books in the comparative year.

Gross profit

· Product gross margin increased to 57.2% from 56.3% last year. This was due to:

o  A significant reduction in 2023 container freight rates versus 2022 rates. This more than offset the negative margin impact of the factors outlined below.

o  The hedged FX rate on payments made in US dollars during H1 was adverse year on year and continues to be a headwind in H2. Margin was further impacted from the unwind of the adverse hedging adjustment recognised in stock held at FY23 year end.

o  New toys and games ranges delivered as part of improving our customer proposition saw double digit growth in the Period, however these attract a lower margin percentage.

o  Increased promotional activity, particularly in October, also moderated gross margin percentage.

· Store payroll costs increased due to the 9.7% increase in the NLMW and the corresponding retail management increases. These were partially mitigated by the changes to our store labour structure implemented at the start of the Period.

· Store property and establishment costs increased by £0.3m due to:

o  A £0.7m increase in electricity costs year on year as a result of adverse hedged prices and higher non consumption rates due to inflation.

o  Service charges were £0.5m higher than the prior year which included the headwind of £0.2m of one off credits received in the prior Period.

o  Total rent charges were broadly in line with the previous year.

o  £1.3m favourable business rates as a result of the rates revaluation offset the majority of the above increases.

· Online variable costs (marketing and fulfilment) in H1 FY24 were primarily lower due to lower sales volumes, however further cost savings resulted from improvements in the order profile; average order value and average ticket price increased. Efficiencies continued to be delivered as a result of improvements made to the online fulfilment picking process during the prior Period.

· The IFRS 16 impact in the table above (and in the Administration costs table below) represents the additional IFRS 16 depreciation on the notional right of use asset created, less rent, which is not recognised under IFRS 16. The difference in the size of the adjustment compared with H1 FY23 is due to the FY23 store impairment of Right of Use Assets ("RoUAs") resulting in a gain on modification of leases. Note 4 of the financial statements provides a reconciliation between pre and post IFRS 16 profit.

Store distribution costs

Store distribution costs increased by £1.7m to £6.7m. Note that online fulfilment costs are included within the cost of sales.

· Labour costs in our retail distribution centre increased by £1.4m as a result of the 9.7% increase in the NLMW and a higher mix of agency staff, (which incurs a higher hourly rate).

· Stock was brought into the business earlier to mitigate the risk of delays to key seasonal lines that we experienced in FY23, this resulted in increased volumes, and increased labour costs in September and October. However, costs were further impacted by adverse performance metrics due to; increased average size of product stored and shipped; the higher mix of agency staff, along with inefficiencies as a result of the implementation of a new grid picking process.

· Third party delivery charges increased by £0.3m, primarily due to increased product cube which resulted in higher outbound pallet volumes.

Administration costs

Administration costs increased by £2.4m to £13.3m.

· Support centre payroll costs increased by £1.0m, £0.3m of which was due to inflationary payrises, which includes the impact of the 9.7% NLMW increase. The remaining increase is due to the annualisation of structural changes made in FY23 (a new Merchandising team was recruited in late FY23).

· £0.8m increase in IT infrastructure costs which included dual running costs as we piloted the new EPOS software, continued investment in the strengthening of our IT security and higher costs as more software transitions to a SaaS basis.

Adjusting items

Due to the challenging macroeconomic environment and the existence of a material brought forwards impairment charge, all cash generating units (CGUs) other than stores which have been open for less than 12 months have been assessed for impairment at the Period end. No impairment review was performed during the 26 weeks ended 30 October 2022 and therefore no impairment charges or reversals were recognised in the comparative interim financial statements. During the 26 weeks ended 29 October 2023, an impairment charge of £10.1m was recognised against 284 stores. An impairment reversal of £2.6m relating to 73 stores and £0.6m relating to the website has also been recognised. The net impact is an impairment charge of £6.9m. Refer also to Note 5 of the condensed unaudited financial statements.

Net financing expense

Net financing costs in the Period were £2.4m (H1 FY23: £2.3m), mostly relating to IFRS 16 notional interest on the calculated lease liability.

Interest relating to bank facilities was £0.3m (H1 FY23: £0.3m) and comprised facility availability charges and amortisation of the cost of setting up the facility.

Loss before tax

The loss before tax was £14.8m (H1 FY23: £7.3m loss) which includes the £6.9m (H1 FY23: Nil) impairment charge recognised in Adjusting items (described above). Due to the seasonality of the business, the first half of the financial year is typically loss making, although the loss for the year was worse than the prior year as a result of the net impairment charge in Adjusting items (H1 FY23: Nil) and the cost variances described above.

Tax

The Group's total income tax credit in respect of the Period was £3.76 million (H1 FY23: £1.99 million). The effective tax rate on the total loss before tax was 25.4% (H1 FY23: 27.4%), the Adjusted tax rate was 32.9% (H1 FY23: 27.4%). 

The difference between the total effective tax rate and the Adjusted tax rate relates to certain costs and depreciation charges (including impairment) being non-deductible for tax purposes.

Earnings per share

The basic and diluted losses per share for the Period was 20.5 pence (H1 FY23 restated: 8.4 pence loss).

Capital expenditure

Capital expenditure in the Period was £3.1 million (H1 FY23: £2.5m).

Lower leasehold contributions from landlords compared to H1 FY23 resulted in higher new store capex.

The other notable area of capital expenditure was on store refits (19 undertaken in the Period).

Capital expenditure for the full year is still expected to be approximately £6.5m.

Stock

Stock was valued at £56.1m at the end of the Period (H1 FY23: £53.6m), an increase of £2.5m.

The operating cycle of the business causes maximum stock levels to occur prior to the Christmas sales peak, and therefore stock levels typically increase at the half year end compared with the levels at the year end. In addition to this seasonal build, the stock value was higher than normal at the end of H1 FY23 due to the following:

· Stock was purchased earlier to mitigate the risk of delays to key seasonal lines that we experienced in FY23, such as diaries and calendars.

· The cost value per unit of stock was approximately 3% higher than in the prior year, primarily reflecting inflationary increases in cost prices.

· Stock provision values are lower than the prior year due to the introduction of full '4-wall' counts in FY23 and the subsequent reduction in the obsolescence provision.

The higher stock level at the end of H1 is expected to unwind in the second half of the year resulting in the year end stock value being broadly in line with the prior year.

Cashflow

The Group ended the period with net debt of £2.5m. The timing of the October month end (29th October 2023) resulted in payments falling into H2 FY24, thereby creating a favourable timing difference (£3.0m). The cash position at the end of the Period fully reflects the build of stock prior to the peak trading season.

The net cash outflow for the Period was £12.8m (H1 FY23: outflow of £9.3m). The size of the outflow during H1 FY24 was increased by the larger increase in stock as described above, along with increased capital expenditure on new stores.

The table below shows an abbreviated summarised cashflow analysis.

Bank facilities

The Group's bank facilities comprise an RCF of £20.0m expiring 30 November 2026. The facility includes financial covenants in relation to the level of net debt to LTM EBITDA and 'Fixed Charge Cover' or ratio of LTM EBITDA prior to deducting rent and interest, to LTM rent and interest.

£5.0m was drawn under the Group's RCF facility during October 2023.

Dividends

At the AGM shareholders expressed a preference for share buybacks over dividends and we have continued to consult with our major shareholders. In light of current trading we are focused on retaining cash within the business and the Board is not proposing an interim dividend.

When conditions, such as trade, profit levels and liquidity support returning cash to shareholders we will re-visit the capital distribution policy.

Rosie Fordham

Chief Financial Officer

18 January 2024

Unaudited Condensed Consolidated Income Statement

For the 26 weeks ended 29 October 2023

All results arise from continuing operations. The loss for the period is attributable to equity holders of the Parent company.

Unaudited Condensed Consolidated Statement of Comprehensive Income

For the 26 weeks ended 29 October 2023

Unaudited Condensed Consolidated Statement of Financial Position

As at 29 October 2023

Unaudited Condensed Consolidated Statement of Changes in Equity

1 Hedging reserve includes £391k in relation to changes in forward points which are recognised in other comprehensive income and accumulated as a cost of hedging within the hedging reserve (£NIL for the 26 weeks ended 30 October 2022, £170k for the 52 weeks ended 30 April 2023).

Unaudited Condensed Consolidated Cash Flow Statement

For the 26 weeks ended 29 October 2023

Notes to the Unaudited Condensed Consolidated Interim Financial Statements

For the 26 weeks ended 29 October 2023

1 Accounting Policies

(a) General Information

TheWorks.co.uk plc ('the Company') is a public limited company domiciled in the United Kingdom and its registered office is Boldmere House, Faraday Avenue, Hams Hall Distribution Park, Coleshill, Birmingham, B46 1AL. These unaudited condensed consolidated interim financial statements ('interim financial statements') as at and for the 26 weeks ended 29 October 2023 comprise the results of the Company and its subsidiaries (together referred to as 'the Group').

(b) Basis of preparation

The interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting, and should be read in conjunction with TheWorks.co.uk plc financial statements for the 52 weeks ended 30 April 2023. The interim financial statements do not include all of the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual financial statements.

The consolidated financial statements are presented in pounds sterling and all values are rounded to the nearest thousand (£000), except when otherwise indicated.

(i) Going concern

The unaudited condensed financial statements have been prepared on a going concern basis, which the Directors consider appropriate for the reasons set out below.

The Directors have assessed the prospects of the Group, taking into account its current position and the potential impact of the principal risks which have been identified through the Group's risk evaluation process.

In preparing its FY23 Annual Report and financial statements (which were approved on 30 August 2023), the Group prepared a cash flow forecast. On 9 November 2023, the Group issued its half year trading update and included a revision to the profit forecast reflecting the adverse impact on sales and significant cost headwinds faced in the challenging macro-economic environment. The revised forecast covers a period of 18 months from the date of approval of these unaudited condensed financial statements, and is henceforth referred to as the 'Base Case' scenario. In addition, a 'severe but plausible' 'Downside Case' sensitivity was prepared to support the Board's conclusion regarding going concern, by stress testing the Base Case to indicate the financial headroom resulting from applying more pessimistic assumptions.

In assessing the basis of preparation the Directors considered:

? The external environment.

? The Group's financial position including the quantum and expectations regarding availability of bank facilities.

? The potential impact on financial performance of the principal risks.

? The output of the Base Case scenario, which represents the Group's estimate of the most likely financial performance over the forecast period.

? Measures to maintain or increase liquidity in the event of a significant downturn in trading.

? The resilience of the Group to these risks having a more severe impact, evaluated via the Downside Case which shows the impact on the Group's cash flows, bank facility headroom and covenants.

? The response to situations in which consumer market conditions are more severe than the Downside Case.

These factors are described below.

External environment

The risks which are considered the most significant to this evaluation relate to the economy and the market, specifically their effect on the strength of trading conditions, and the Group's ability to successfully execute its strategy. The risk of weaker consumer demand is considered to be the greater of these risks, due to the continued high level of inflation and its potential effect on economic growth and consumer spending.

An emerging risk has been noted in relation to the possible effects of climate change, but this is not expected to have a material financial impact on the Group during the forecast period.

Financial position and bank facilities

At the Period end the Group held net debt (excluding lease liabilities) of £2.5m (HY23: £7.0m) (Note 15).

The Group's bank facilities comprise a £20.0m revolving credit facility (RCF) which terminates at the end of November 2026. The facility includes two financial covenants which are structured in a way that is typical for a retail business of this size and are tested quarterly:

1. The level of net debt to LTM (last twelve months') EBITDA (maximum ratio 2.5x).

2. The "Fixed Charge Cover" or ratio of LTM EBITDA prior to deducting rent and interest, to LTM rent and interest (minimum ratio 1.20x until 31 October 2025, 1.25x until 31 October 2026 and 1.30x thereafter). In December 2023, the Group agreed an Amendment to the facility agreement which resulted in a reset of the fixed charge cover. Prior to the amendment, the ratios were, minimum ratio 1.20x until 31 October 2024, 1.25x until 31 October 2025 and 1.30x thereafter).

Potential impact of risks on Base Case and Downside Case scenarios

The 'Principal risks and uncertainties' section of the Strategic report on pages 49 to 53 of the Group's FY23 Annual Report, sets out the main risks that the Board considers relevant.

It is considered unlikely that all the risks would manifest themselves to adversely affect the business at the same time. The Directors have estimated what the most likely combination of risks might be that could materialise within the going concern assessment period and how the business might be affected; this combination of risks is reflected in the Base Case assumptions. As noted above, the most prominent risk in the near term is considered to be the risk of lower consumer spending due to a weakened economy, which could affect sales, costs and liquidity.

The Downside Case scenario takes into consideration the same risks as the Base Case but assumes that their effects are more severe, especially if consumer spending weakens further.

Base Case scenario

The Base Case scenario assumptions reflect the following factors:

· The Base Case sales growth in H2 FY24 reflects the trading results over the Christmas period to end of December 2023.The remaining forecast period reflects a stabilising consumer environment, and product proposition changes and operational improvements, offset with supply chain risk

· The Base Case gross margin percentage reflects the expected continuation of discounting, offset with favourable freight rates from stock purchased earlier in the year. FY25 and FY26 margin reflects improvements as a result of implementing operational changes in the buying team following the appointment of the new commercial director, favourable hedged FX rates, offset with temporarily higher ocean container freight costs expected as a result of the disruption in the Red Sea.

· Anticipated further inflationary effects, in particular the increase in the National Minimum Wage. In respect of other costs, notably property occupancy costs, it is not expected that there will be further significant inflationary effects during FY25, following the significant increases (for example in electricity costs) already experienced.

· Capital expenditure levels are in line with the Group's strategic plan. A significant proportion of the Group's capital expenditure is discretionary, particularly over a short-term time period. As a result, if required, it can therefore be reduced substantially, for example, in the event the Group needing to preserve cash.

· The anticipated costs of the Group's net zero climate change commitments have been incorporated within the Base Case model. As set out in the climate related disclosures in the annual report, the impact on the Group's financial performance and position is not expected to be material in the short term.

Under the Base Case scenario, the Group expects to make routine operational use of its bank facility each year as stock levels are increased in September-October, prior to peak sales occurring.

The output of the Base Case model scenario indicates that the Group has sufficient financial resources to continue to operate as a going concern and for the financial statements to be prepared on this basis.

Measures to maintain or increase liquidity in the event of a significant downturn in trading

If necessary, mitigating actions can and would be taken in response to a significant downturn in trading such as is described below, which would increase liquidity.

These include, for example, delaying and reducing stock purchases, stock liquidation, reductions in capital expenditure, the review of payment terms and the review of dividend levels. Some of these potential mitigations have been built into the Downside Case model, and some are additional measures that would be available in the event of that scenario, or worse, actually occurring.

Severe but plausible Downside Case scenario

The Downside Case makes the following assumptions to reflect more adverse macroeconomic conditions compared to the Base Case:

· Store LFL sales are assumed to be 0.5% lower than the Base case for the remaining year to go in FY24),4.5% lower than the Base Case in FY25 and 4.3% lower in FY26.

· In this scenario online sales are assumed to be lower than in the Base Case during the forecast Period by 4.4% in FY25 and 4.1% in FY26.

· The product gross margin assumptions are 1.0 percentage lower than the Base Case for FY25 and 1.2% lower than FY26, reflecting a scenario of increased and extended disruption in the Red Sea adversely impacting container freight rates. The majority of expected FX requirements are hedged until the end of FY25. Other gross margin inputs are relatively controllable, including via the setting of selling prices to reflect any systematic changes in the cost price of goods bought for resale.

· Volume related costs in the Downside Case are lowered where they logically alter in a direct relationship with sales levels, for example, forecast online fulfilment and marketing costs. The model also reflects certain steps which could be taken to mitigate the effect of lower sales, depending on management's assessment of the situation at the time. These include adjustments to stock purchases, reducing capital expenditure, reductions in labour usage, a reduction in discounts allowed as part of the Group's loyalty scheme and the suspension of FY25 capital contribution payments.

o  The combined financial effect of the modified assumptions in this scenario compared with the Base Case, during the forecast period, including implementing some of the mitigating activities available, would result in a reduction in store net sales of approximately £13.9m.

o  a reduction in online net sales of approximately £1.4m.

o  a reduction to EBITDA of approximately £6.5m.

Under the Downside Case scenario, the Group expects to make routine operational use of its bank facility each year as stock levels are increased, prior to peak sales occurring.

The bank facility financial covenants are complied with during the period.

On the basis of this Downside Case scenario with the "severe but plausible" set of assumptions as described, the business would continue to have adequate resources to continue in operation.

However, the Fixed charge covenant headroom at the quarterly testing points falling within the going concern period is limited, and there are reasonably plausible scenarios in which this headroom could be eroded and create a borrowing requirement. For example, if sales decreased by a further 1% during the going concern period compared with the Downside Case, a breach of the covenant could arise, however the Group would likely be in a net cash position at this point. The Group has a strong relationship with its bank, HSBC, and has a recent track record of working collaboratively with the bank to resolve potential covenant issues, for example, a waiver was agreed by HSBC in 2021 as noted in the Group's FY21 Annual Report and, as noted above, in December 2023 a covenant amendment was agreed. Despite this strong relationship with the bank and the recent evidence of successfully managing comparable situations, if a borrowing requirement arose when the financial covenants are not complied with, there is a risk that the Group would not be able to utilise its borrowing facilities if required.

The Directors believe that, should such a situation arise in practice, it would have time before a potential breach to mitigate further, and potentially to make arrangements with the bank, as has occurred previously, to adjust the covenant levels to prevent a breach. Furthermore, the Group has successfully managed through challenging conditions during the COVID pandemic, and the Directors believe it unlikely that comparably challenging conditions will be experienced during the forecast period, despite the concerns regarding the current macroeconomic conditions. Nevertheless, despite the Directors' confidence in relation to these matters, there is no certainty as to whether the mitigating actions would provide the level of liquidity required in the time available to implement them, nor whether the bank would make adjustments to the financial covenants.

Conclusion regarding basis of preparation

Based on all of the above considerations the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis. However, these circumstances indicate the existence of a material uncertainty related to events or conditions that may cast significant doubt on the Group's and the Company's ability to continue as a going concern and, therefore, that the Group and Company may be unable to realise their assets and discharge their liabilities in the normal course of business. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.

(ii) Accounting policies

The interim financial statements have been prepared on a basis consistent with the accounting policies published in the Group's financial statements for FY23.

(c) Alternative performance measures and Adjusting items

The Group tracks a number of alternative performance measures (APMs) in managing its business, which are not defined or specified under the requirements of IFRS because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS, or are calculated using financial measures that are not calculated in accordance with IFRS.

The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. They are consistent with how the business performance is planned and reported internally, and are also consistent with how these measures have been reported historically. Some of the APMs are also used for the purpose of setting remuneration targets.

The APMs should be viewed as supplemental to, but not as a substitute for, measures presented in the consolidated financial statements prepared in accordance with IFRS. The Group believes that the APMs are useful indicators of its performance but they may not be comparable with similarly titled measures reported by other companies due to the possibility of differences in the way they are calculated.

The key APMs that the Group uses include: like-for-like sales growth (LFL); Pre-IFRS 16 Earnings before interest, tax, depreciation and amortisation (Pre-IFRS 16 EBITDA), Profit before tax and IFRS 16, Pre-IFRS 16 Adjusted EBITDA, Adjusted Profit; and Adjusted earnings per share. The APMs used by the Group and explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant, are set out in Note 4.

"Adjusted" measures are calculated by adding back or deducting Adjusting Items. Adjusting items are material in size and unusual in nature or incidence and, in the judgement of the Directors, should therefore be disclosed separately on the face of the financial statements to ensure that the reader has a proper understanding of the Group's financial performance and that there is comparability of financial performance between periods.

Refer to Note 5 for information regarding items that were treated as Adjusting.

(d) Key sources of estimation uncertainty

The preparation of consolidated financial statements requires the Group to make estimates and judgements that affect the application of policies and reported amounts.

Critical judgements represent key decisions made by management in the application of the Group's accounting policies. Where a significant risk of materially different outcomes exists, this will represent a key source of estimation uncertainty.

Estimates and judgements are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Key sources of estimation uncertainty which are material to the interim financial statements are described in the context of the matters to which they relate, in the following notes:

2 Segmental reporting

IFRS 8 requires segment information to be presented on the same basis as is used by the Chief Operating Decision Maker for assessing performance and allocating resources.

The Group has one operating segment with two revenue streams, bricks and mortar stores and online. This reflects the Group's management and reporting structure as viewed by the Board of Directors, which is considered to be the Group's Chief Operating Decision Maker. Aggregation is deemed appropriate due to both operating segments having similar economic characteristics, similar products on offer and a similar customer base.

3 Revenue

The Group's revenue is derived from the sale of finished goods to customers. The following table shows the primary geographical markets from which revenue is derived.

Seasonality of operations

The Group's revenue is subject to seasonal fluctuations as a result of peaking during the approach to Christmas, from October to December. Therefore, the first half of the financial year, from April to October, typically produces lower revenue and profit than the second half.

4 Alternative performance measures ("APMs")

Like-for-like ("LFL") sales

LFL sales are defined by the Group as the year-on-year growth in gross sales from stores which have been trading for a full financial year prior to the current year and have been trading throughout the current financial period being reported on, and from the Company's online store, calculated on a calendar week basis. The measure is used widely in the retail industry as an indicator of sales performance. LFL sales are calculated on a gross basis to ensure that fluctuations in the VAT rates of products sold are excluded from the like-for-like sales growth percentage figure.

Pre-IFRS 16 Adjusted EBITDA (EBITDA) and Adjusted profit after tax

EBITDA is defined by the Group as pre-IFRS 16 earnings before interest, tax, depreciation, amortisation and profit/loss on the disposal of fixed assets, after adding back or deducting Adjusting items. See Note 5 for a description of Adjusting items. Pre-IFRS 16 EBITDA is used for the bank facility LTM EBITDA covenant calculations.

The table provides a reconciliation of pre-IFRS 16 EBITDA to profit/(loss) after tax and the impact of IFRS 16:

1 Brought forward impairment charges result in a large discrepancy between the right-of-use asset and the lease liability for impaired stores. As such, where lease modifications arise due to a reduction in rental charges or lease term, any reduction to the lease liability must also be applied to the right-of-use asset. Where this reduction takes the right-of-use asset below zero, the credit is taken to the statement of comprehensive income.

Profit before tax and IFRS 16

The following tables provides a reconciliation of (loss)/profit before tax and IFRS 16 adjustments to (loss)/profit before tax.

Other adjusted profit metrics

Other key profit measures including operating profit, profit before tax, profit for the period, and earnings per share are also calculated on an Adjusted basis by adding back or deducting Adjusting items. These adjusted metrics are included within the consolidated income statement and statement of other comprehensive income, with details of Adjusting items included below in Note 5.

5 Adjusting items

During the period, the items analysed below have been classified as Adjusting:

1 These relate to fixed asset impairment charges and reversals of impairment charges.

6 Finance income and expense