Theworks.co.uk. Regulatory News (WRKS)

27 August 2020

TheWorks.co.uk plc 

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

Preliminary results for the 52 weeks ended 26 April 2020

"Our performance this year demonstrates the resilience of our business and we are pleased to have delivered a creditable performance despite the challenging backdrop."

TheWorks.co.uk plc the multi-channel value retailer of gifts, arts, crafts, toys, books and stationery, announces today its preliminary results for the 52 weeks ended 26 April 2020 (the "Period" or "FY20").

Financial highlights

· Revenues grew 3.5% to £225.0 million (FY19: £217.5 million), with growth both online and in stores, despite the significant impact of COVID-19 in the latter weeks of the financial year.

· Pre IFRS 16 adjusted EBITDA for the year was £10.8m (FY19: £13.9m), albeit with the adverse trading impact of COVID-19 in the period estimated to be approximately £3.0m.

· Reported loss before tax for the period includes non-cash impairment charges resulting from COVID-19 of £19.5m, relating to goodwill and store assets, which have been treated as adjusting items.

· Despite a very positive performance since the reopening of stores in mid-June 2020, given the continued uncertainty presented by COVID-19, it is not yet possible to provide specific guidance for the financial year ahead and the Board will not be proposing payment of a final dividend for FY20.

Operational highlights

· Positive LFL sales growth, driven by new and constantly evolving product ranges, our ninth successive record Christmas and new merchandising initiatives for core stationery and art ranges, despite the absence of a Mega Trend4, which was present in the comparative period.

· A net 37 new stores opened in the year taking the total estate to 534 stores. Refocused strategy at the turn of the calendar year with fewer new stores openings planned and an increased focus on driving improvement and profitability across the existing estate.

· Further development of our multi-channel proposition through development of a new customer website (successfully launched in July 2020) and product proposition changes to increase average product price and drive profitable growth. 

· Increased online capacity to meet very strong demand during the lockdown period (sales increased over three times on the equivalent period last year) and reduced marketing and promotional activity, step-changing the profitability of our online channel.

· At the turn of the calendar year, we took decisive action to reduce costs and maximise efficiencies by limiting discretionary spending, reducing administrative costs and unlocking savings in distribution costs as part of the refocussed strategy.

· COVID-19 outbreak intensified management of cost base and cashflows, working with suppliers to review stock intake plans, negotiating with landlords to reduce rent payments and further careful management of all discretionary spend.

Trading update for the 17 weeks to 23 August 2020

· As anticipated, primarily reflecting the impact of the closure of all stores for the first 7 weeks of the financial year, total sales were down 26.0%.

· Stores reopened in a phased manner following the lifting of Government restrictions in the UK and Ireland from 15 June 2020.

· Performance since the reopening of stores has been well ahead of the Boards expectations with overall LFL sales increasing by 0.7% in the 10 weeks to Sunday 23 August. 

o Store LFLs are currently tracking at a high single digit decline with growth in average transaction value partially offsetting lower transaction volumes.

o Online performance remains strong with sales levels more than double last year's in the same 10 weeks. 

· Further investment made to increase online capacity to support sales over the peak Christmas trading period.

· Profit impact from lower sales partially mitigated through the successful execution of our refocused strategy; including higher product margins (reflecting reduced promotional activity) and careful cost management. Support from various Government schemes (furlough scheme and business rates relief) have also provided mitigation.

· Net debt position significantly better than initial expectations following the stronger trading performance and careful cost and cash management.

· Improved liquidity through £7.5m of funding via the Government's CLBILS scheme and an extension of our RCF expiry date to September 2022.

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

"Our performance this year demonstrates the resilience of our business and we are pleased to have delivered a creditable performance despite the challenging backdrop. I am incredibly proud of all colleagues for their relentless hard work over the last year and for their commitment and the can-do attitude they have shown during this challenging period.

"Christmas was a turning point and this positive momentum continued in the following months supported by new products and merchandising initiatives launched during the year driving LFL sales growth. The improved trading performance was supported by the increased focus on cost management.

"The closure of our entire store estate in March had a significant impact on our business, however we responded to the crisis with agility and were ready to bounce back once safe to do so. Our decisive action in response to the COVID-19 pandemic enabled us to protect colleagues and customers, meet the significant increase in online demand, and minimise the financial impact. We are encouraged by the trading performance since lockdown lifted and will continue to focus on improving our online capacity and customer experience in stores under social distancing as we head into peak Christmas trading.

"The current uncertainty means that we are unable to provide specific guidance. We will continue to monitor the situation closely and remain agile ahead of our key trading period. Our performance during the COVID-19 pandemic shows our customer proposition is more relevant than ever and, despite the significant uncertainty that remains, the Board continues to believe that we have many exciting opportunities ahead of us that will enable us to deliver value for all of our stakeholders in the long-term."

Preliminary results presentation

A presentation for analysts will be held today at 9.30am via video conference call. If you would like to attend, please contact theworks@teneo.com. A copy of the presentation will shortly be made available on the Company's website (www.theworksplc.co.uk/investors).

Footnotes to table on page 1:

[1] As a result of the COVID-19 pandemic and subsequent UK government restrictions introduced on 23 March 2020 that has resulted in significant and unprecedented market and business disruption, the Group has classified store impairments as adjusting items for the first time. The prior year's adjusted profit measures have increased by £0.1 million, being the net store impairment charge and onerous lease provision charge not treated as an adjusting item in 2019. Please refer to note 1 (c) and note 6 of the extracts from the financial statements.

[2] Adjusted profit figures exclude adjusting items. See Note 1 (c) of the attached extracts from the financial statements for further details.

[3] LFL sales are defined as the year-on-year growth in gross sales from stores which have been opened for a full 63 weeks (but excluding sales from stores closed for all or part of the relevant period or prior year comparable period), and from the Company's online store, calculated on a calendar week basis. LFL sales for FY20 are for the year to 22 March 2020 (the day before all stores were closed due to the COVID-19 outbreak). No adjustments have been made for prior year Mega Trend4.

 [4] Mega Trends are defined as any individual product, or collection of products, for which sales exceed 3 per cent. of weekly sales for a temporary period and for which management deem to be material in terms of impacting on the underlying performance of the Company.

The financial information set out in this statement does not constitute the Company's statutory accounts for the periods ended 26 April 2020 or 28 April 2019, but is derived from those accounts. Statutory accounts for FY19 have been delivered to the Registrar of Companies and those for FY20 will be delivered in due course. The auditor has reported on those accounts: their reports were (i) unqualified, (ii) included a reference to a material uncertainty that may cast significant doubt on the Group's and the parent company's ability to continue as a going concern as referred to in note 1(b) to the financial statements, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The audit of the statutory accounts for the period ended 26 April 2020 is now complete. Whilst the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards ("IFRS") this announcement does not itself contain sufficient information to comply with IFRS. 

Chairman's statement

Although much of this report is about the results for the financial year ended April 2020, these now seem to relate to a previous age. The COVID-19 pandemic has since overtaken our lives and has had a significant impact on our business.

The financial year to 26 April 2020 has seen TheWorks.co.uk plc deliver a creditable performance, with sales up 3.5 per cent. compared to the prior year despite the significant impact on our trading performance in the latter weeks of the financial year as a result of COVID-19 and the closure of all our retail stores due to the UK lockdown.

The COVID-19 pandemic has adversely affected the results we report, and may continue to do so in the short to medium term. It is also possible that consumer confidence will once again be impacted by Brexit as the deadline for the UK's departure approaches. Our accounting policies require these external factors to be reflected as non-cash charges in the FY20 accounts, resulting in a £19.5m write down in the carrying values of goodwill and our store assets.

Prior to the onset of COVID-19, the financial year was not without its challenges, with uncertainty brought about by Brexit and its associated impact on consumer confidence, along with the absence of a Mega Trend for us this year resulting in a disappointing first half of the year. We took corrective action, as announced at the turn of the calendar year, to refocus our strategy by opening fewer new stores, with a view to driving improved performance in our existing estate and increasing our focus on cost savings. This action was taken to improve short-term performance but also ensure that we are well-placed to deliver profitable growth in the medium-term.

It was pleasing to see the company return to LFL sales growth in the second half of the year and deliver another record Christmas, our peak trading period, across stores and online. This positive trading momentum continued into the new calendar year and our 4th quarter trading period, supported by other initiatives launched during the year, including new ranges, improved merchandising of our core art and stationery ranges in stores and development of our online proposition. The improved trading performance and the proactive action taken at the turn of the calendar year meant that the business was moving back in the right direction prior to the COVID-19 outbreak.

Since then, the whole country has been facing an unprecedented challenge as it responds to the COVID-19 pandemic and I am incredibly proud of how the management team have navigated through this period of great uncertainty and how our colleagues have pulled together during it. The health and wellbeing of our colleagues and customers has always been our key priority and it will continue to be so as we trade through a period of extended social distancing and beyond. 

Despite the circumstances and restrictions, our colleagues have delivered the very best in customer service, supporting the continued strong demand that we have seen online since the lockdown and in our stores since they reopened. I am very proud of the unique culture that has seen the company recognised for the second consecutive year in The Sunday Times' 25 Best Big Companies to work for. I would like to take this opportunity to thank all colleagues across the business for their continued support and dedication this year, particularly through the recent unprecedented period of uncertainty.

Board changes

In January, we were very pleased to appoint Gavin Peck as Chief Executive following a successful period as Chief Financial Officer. Using his deep industry knowledge and financial insights, Gavin has already made a strong mark on the business and the Board has every confidence in his steadfast leadership during this unprecedented period.

Gavin replaced Kevin Keaney who, after nine years in the role, decided to step down as Chief Executive. We thank Kevin for his contribution to the business and in helping establish TheWorks.co.uk plc as a leading multi-channel value retailer. In the year, we also appointed Stephen Alldridge as Interim CFO. Stephen's experience will be an invaluable support to Gavin and the business as we trade through the uncertain times ahead.

Dividend and outlook

Considering the uncertain consumer outlook, including the impact of social distancing on trading in stores, the Board has taken the prudent decision of not declaring a final dividend for the year. I am pleased that our bank has supported us in refinancing our debt facility, extending our £25m RCF to September 2022, providing additional covenant headroom, and access to a further £7.5m of funding via the Government's CLBILS scheme. This refinancing will help support the business through these uncertain times.

We have performed well since the reopening of our stores in June, with their initial sales well ahead of the Board's expectations and our online performance remaining strong. However, there remains much uncertainty due to COVID-19, in particular how this will impact on peak Christmas trading and the longer-term impact on the retail landscape. Notwithstanding this, the Board remains confident that the Company's differentiated multi-channel value proposition, in particular its focus on children's educational products, arts and crafts, games, activities puzzles and books will continue to resonate with customers in the current environment and position the Company well for the long term.

Chief Executive's Report

Introduction

In my first annual review, I would like to start by saying how delighted I am to have been appointed as the Chief Executive of TheWorks.co.uk. It has been clear to me since joining the business in 2018 that TheWorks.co.uk has both a special culture and a clear purpose; to provide customers with a variety of good quality, great value products in its specialist categories through a truly multi-channel shopping experience. My first months as CEO have clearly been challenging, as they have for the whole retail sector, given the impact of COVID-19. However, I strongly believe that our proposition is more relevant than ever and that, despite the challenges presented by COVID-19, we have many exciting opportunities ahead of us that will enable us to deliver value for all of our stakeholders.

Trading

Our trading performance over the last year demonstrates the resilience of our business. I am pleased to report that our revenues grew 3.5 per cent. in the year, with growth both online and in stores, despite the significant impact of COVID-19 on our trading performance in the latter weeks of the financial year with the closure of all our stores as part of the UK lockdown. The first half of the year was challenging, impacted by dampened consumer sentiment and the absence of a Mega Trend whilst trading against the Squishies Mega Trend in the first half of the previous year. Christmas was a turning point in the year as customers once again reacted well to our core Christmas ranges, complemented by a new 2 for £20 gifts offering and our products linked to the Frozen 2 movie release, resulting in our ninth record Christmas. The momentum from improved Christmas trading continued through to March as we began to see the benefits of new product ranges and merchandising initiatives launched in the first half of the year and our comparators eased as we no longer traded against the Squishies Mega Trend in the prior year. This resulted in overall like‐for‐like ("LFL") sales growth of 0.7 per cent. in the year to 22 March 2020 (the day before all stores were closed due to the COVID‐19 outbreak) with both stores and online delivering positive growth.

We saw a significant increase in sales, both in stores and online, prior to the COVID-19 enforced store closures on 23 March. This reflected strong customer demand for our products to support childrens' ongoing education, mindfulness materials to support mental health and products to "beat the boredom" during the period of lockdown. The strong demand online continued during the lockdown period, with sales up more than three times the equivalent period last year. We reopened our stores in a phased manner from 15 June 2020, as permitted by Government guidelines. Our sales performance since stores reopened has been well ahead of the Board's expectations with overall LFL sales in the 10 weeks to Sunday 23 August of 0.7 per cent. After strong initial sales, store LFLs are currently tracking at a high single digit decline with strong growth in average transaction value partially offsetting significantly lower transaction volumes (reflecting reduced retail footfall). Online performance has remained strong post stores reopening, with sales levels more than double last year's in the same 10 weeks. This robust performance further demonstrates the resilience of our business model and highlights that our proposition is playing an important part in the lives of our customers during these challenging times.

Profit performance

The pre IFRS 16 adjusted EBITDA for the year was £10.8m (FY19: £13.9m), a £3.1m or 22.3 per cent. decline compared to the FY19 result. However, we estimate the adverse trading impact of COVID-19 on this figure to be approximately £3.0m, comprising the net effect of sales lost due to the closure of stores, less the cost savings flowing from actions taken within the business, and from Government support via business rates relief and payroll furlough receipts. As such, in the absence of COVID-19, we would have expected adjusted EBITDA to have been broadly in line with the prior year, reflecting a much stronger performance in the second half of the year as the improved trading performance was supported by the increased focus on cost management.

As noted above, our trading performance was affected by the stores being closed for a period from 23 March. Furthermore, whilst the short to medium term effects of the COVID-19 pandemic are difficult to predict, it seems likely that it will take some time to return to previous levels of trading. It is also possible that consumer confidence will once again be impacted by Brexit, as the deadline for the UK's departure approaches. This has been reflected in non-cash charges being included in the FY20 accounts totalling £19.5m, to write down the carrying values of goodwill and our store assets. 

Strategy

We have continued to deliver on our strategy for sustainable growth, based on four pillars. At the turn of the calendar year, and following the disappointing performance in the first half, I announced a refocus of this strategy, reducing the number of new store openings with a view to driving improved performance in our existing estate and increasing our focus on cost control whilst continuing to develop our digital channel. This action was important to ensure the business was well-placed to deliver profitable growth in the medium term. COVID-19 has clearly had a significant impact on the business and the wider retail sector and, once the true extent of this is clearer, we will reflect on our strategy and adapt it as necessary. For now, our refocused four pillar strategy remains, albeit with accelerating development of our online proposition and capacity and cost control being more important than ever. An update on progress and initiatives in each area is set out below:

1. New store rollout

At its heart, our business has been rooted in bricks and mortar retail, and an important driver of growth in recent years has been the rollout of new stores. We opened a net 37 new stores last year, including our 500th store, located in Winchester. This was an important milestone for our business and our store openings in the year take the total number in our estate to 534 at the end of the financial year. Our disciplined approach to assessing new store opportunities ensured that stores opened in the year were on track to deliver a strong payback of around one year, prior to the impact of COVID-19.

Whilst we continue to believe in the opportunity to make our unique proposition accessible to many more catchments, as noted above, at the beginning of this calendar year we took the decision to refocus our strategy by opening fewer new stores to ensure that the business could focus on driving improvement and profitability through the existing estate.

In the near term, we will continue to undertake selective new store openings but on a much smaller scale than in recent years. These openings will primarily be part of an active portfolio management approach (e.g. taking the opportunity to relocate to a better location or to save property costs) but we will also continue to consider sites on our priority target list where the landlord is willing to fund our upfront capital expenditure.

2. LFL sales growth

Notwithstanding the challenging first half, TheWorks.co.uk has a good track record of delivering LFL sales growth both in store and online, as demonstrated once again by the return to positive LFLs for the full year (prior to the enforced closure of our entire store estate in response to the COVID-19 outbreak). Our strongest point of differentiation remains our ability to offer customers the experience of discovery, driven by a constantly evolving product range and seasonal offerings complementing our core everyday ranges. This element of "discovery" coupled with providing good availability of our "core" lines encourages regular, repeat customer visits.

We launched hundreds of new products across all of our categories in the year and, in the first half of the year, we also introduced new ranges including helium balloons and kids jigsaws that proved popular with our customers. Towards the end of the first half of the year we launched a new merchandising initiative for our core stationery and art ranges, improving product display consistency and availability to aid customers' shopping of these ranges, delivering strong, double digit, sales growth in these categories. We delivered our ninth successive record Christmas with strong LFL sales growth over this key trading period driven by continued improvements in our Christmas ranges, supported by the launch of a range of products related to the Frozen 2 film and a new 2 for £20 gifting offer.

There was no Mega Trend this year and, as mentioned above, this pulled our LFLs lower in the first half of the year as we traded against the Squishies Mega Trend in the prior year. Whilst we continue to seek, and to be first to market with, the next Mega Trend, as has always been the case, there can be no guarantee that one will materialise each year and therefore we remain focused on driving LFL sales growth through the ongoing improvement of our proposition across all of our product categories. The ongoing improvements to our proposition continue to drive increased average transaction values in stores, offsetting transactional declines from lower retail footfall.

Looking ahead to the current financial year, whilst the trading environment remains uncertain and although we expect our LFL sales to continue to be impacted during this extended period of social distancing, we believe that our unique value proposition will continue to resonate well with customers. We have invested in a new data warehouse and analysis tool that will enable us to better understand our customers and to tailor our product offering and promotions to drive sales growth. We also plan to roll out our new merchandising initiative across other categories, including our craft, kids art and craft and key seasonal ranges and will further refine our approach to space management to enhance our customer offering and drive further improvement in sales densities in our stores.

3. Multi-channel strategy

Our multi-channel offering remains one of our key differentiators in the value retail sector, with our digital channel providing customers with an extended range of products and more flexibility in the way they choose to shop.

We took the decision to make some changes to our online proposition at the start of the year, with a renewed focus on increasing the average ticket price to support profitability. This was achieved through reducing the mix of lines sold at lower price points, with these lines either being dropped from the site or pre‐bundled for a multi‐buy. This held back online sales growth in the first half of the year but positive momentum began to build again over the peak Christmas trading period and continued through the second half of the year. 

Working closely with our third party warehousing and fulfilment partner, we improved productivity, drove cost efficiencies and traded well through the peak Christmas period. Since the COVID-19 outbreak we have successfully increased our capacity to meet the significant increase in customer demand, with online sales post lockdown to the week ended 26 April 2020, up more than three times on the equivalent period last year. We continue to work closely with our partners to plan for increased capacity through peak Christmas 2020 trading.

Our loyalty scheme remains unique to our segment of the market, helping to drive repeat visits and customer engagement. As part of the continuing evolution of the loyalty scheme, we shifted our focus to nurturing our most loyal customers, rather than merely driving high levels of new customer sign ups. We still signed up over 750k new members to our loyalty scheme, and the total number of active members at the year-end was 1.2m. The investment in our customer insights capability, noted above, will ensure that we are able to better access the data that this scheme provides helping us to better understand our customers and to tailor our product offering and promotions to drive sales growth. Prior to the lockdown and store closures our click and collect channel continued to be our fastest growing channel, driving additional footfall to, and sales in, stores.

We plan to continue to invest in our online proposition and in-store technology. We successfully launched, as planned, our new customer website in July 2020, which provides enhanced functionality and an improved customer experience. Our investment in Wi-Fi in stores also opens up further exciting opportunities in the future, for example, enabling access to our expanded ranges and online ordering through terminals within stores.

Historically we have relied on heavy promotional offers and high marketing spend to attract customers and drive our online sales. However, with the increased demand since the onset of COVID-19, and as we sought to manage sales levels within our fulfilment capacity, we have been able to move away from this model resulting in a step change to our online profitability. Online sales have remained materially higher since the reopening of our stores and are likely to continue at these levels in the future, reflecting an acceleration of the ongoing channel shift. Digital growth will therefore become an increasingly important part of our future growth. Our new web platform, the product proposition changes, the investment in increasing our fulfilment capacity and the step change in our approach to promotions and marketing spend mean we now have a significantly more stable and profitable base to build on. 

4. Product margin and cost control 

As a value retailer, TheWorks.co.uk has always kept a close control of costs, striving to provide customers with great value products, whilst also delivering returns for shareholders. Ensuring progress against this pillar was of even greater importance this year, due to the challenging consumer backdrop, lower LFL sales in the first half (due, in part, to the prior year Mega Trend), the continued headwind of national living and minimum wage increases and the enforced closure of all stores towards the end of the period.

In light of these challenges, we took action to identify cost savings early in the financial year to maximise further efficiencies, limit discretionary spending, reduce administrative costs and unlock savings in distribution costs. Part of the rationale for reducing new store openings was to enable the property team to focus on maximising the rent savings on the 100 plus renewals in 2020 and we began to see the benefit of that starting to come through towards the end of the financial year. We also took action to grow product margins through a range of levers, including direct sourcing from Asia, helping to partially mitigate the adverse impact of foreign exchange rate movements and promotional activity used to drive sales in the first half of the year.

Although our main priority was to ensure the health and safety of colleagues and customers, the COVID-19 outbreak, and subsequent closure of all stores, meant that we took further swift action to manage our cost base and cashflows. This included reviewing all capital expenditure plans, negotiating with landlords to reduce rents, working with suppliers to review stock intake plans and careful management of all discretionary spend, including a significant reduction in both marketing and promotional activity.

Some cost reductions were temporary, for example, income received via the government's furlough scheme, and business rates relief, Director salary and fee reductions, and online marketing expenditure. Store occupancy costs such as energy and consumables also naturally reduced during the period when the stores were closed.

Once we are through the COVID-19 pandemic, further reducing the product cost of goods sold, driving productivity improvements and cost savings in our store estate and through our supply chain and careful control of all central costs, will continue to be a significant focus for the business in the medium-term. The flexibility of our store estate with, on average, less than 3 years to the next exit point, means we remain well-positioned to adapt to the changing retail landscape.

Colleagues

Our strong culture and the "can-do" attitude of our colleagues are the foundations of our business. Every time I visit a store I am blown away by the enthusiasm that our colleagues exude, creating a fun and safe workplace environment and providing customer service which is differentiated from many in the value retail space. 

I am incredibly proud that this strong, family, culture was recognised in The Sunday Times "Top 25 Best Big Companies" to work for, for the second year running. It was clear from listening to feedback from our colleagues as part of this survey that they wanted a new set of core values and behaviours that better captured what it means to be part of The Works Family, something that they could better relate to and be passionate about. We will shortly be launching a new Employer Brand Promise with a set of values and behaviours that capture the sense of the work ethic that we value, the spirit we value, and the core ability of the people we value.

We also launched our Save as You Earn ("SAYE") scheme to encourage share ownership across our workforce. It has been pleasing to see the level of interest from colleagues, with a 10 per cent. uptake. We have also welcomed 1,386 new colleagues this year and have promoted over 400. 

Our business has faced unprecedented challenges in recent months and I have been touched by the level of support provided by colleagues across the business and the understanding displayed in response to the difficult decisions we have had to make since the onset of the COVID-19 pandemic. We have made it our priority to keep colleagues informed about each business development and ensured that all furloughed colleagues continued to feel like a valued part of TheWorks family. A Facebook group was launched to keep colleagues connected during this period of uncertainty and their engagement with it has continued post-lockdown, with over 1,500 members. 

I would like to take this opportunity to thank our fantastic colleagues across the business for their relentless hard work and commitment over the last year, in particular for how they have come together in recent months to help ensure the future of our business.

During the year we continued to build the management team to drive the business through its next phase of growth, welcoming new directors to lead our Property, Retail Stores and IT teams.

Corporate social responsibility

We view each of our stores as playing an important role at the heart of communities; serving customers in a welcoming store environment, providing employment and contributing to the fabric of local life. 

As a responsible business, we recognise the importance of reducing our impact on those we interact with and the environment and communities we operate in. A key part of this includes our commitment to reducing waste packaging which we continue to focus on under our "Keen to be Green" initiative which includes the use of our "ReWorked" logo on products where we have reviewed our packaging to reduce waste. As an example, by reworking the 2020 Christmas card packaging, we saved over 3 tonnes of single use plastic. Other initiatives and changes to packaging this year as part of our re-worked strategy saved a further 4.5 tonnes of single-use plastic waste.

This year we have further developed our partnership with Cancer Research UK. Through the support of both our colleagues and customers we continued to make significant contributions to this worthy cause, and I am incredibly proud that, through the sale of branded products and specific fund-raising activities, we raised £360k this year, taking our total donation to £888k since our partnership began.

Summary and outlook

Despite the challenges our business has faced over the last year, I am pleased that we gained momentum during the second half of the year, with a return to positive LFL growth, before lockdown. We took decisive action at the turn of the calendar year to refocus our strategy, and the initiatives launched to drive further profitable growth will help us navigate these uncertain times. 

I am proud of the way we have navigated through the COVID-19 pandemic to date. During this period there have been two key considerations in all the decisions we have taken and will continue to take.

The first is the wellbeing of our colleagues. This is the reason we chose to shut stores before the Government enforced mandatory closures, has been our priority whilst enabling our online sales capacity to increase and was our primary consideration when planning the reopening of stores. We want our colleagues to feel safe whilst at work and will therefore continually review our social distancing measures to ensure they remain effective and appropriate.

The second consideration is the financial viability of our company. We welcome the support provided by the Government to businesses through the coronavirus pandemic, particularly the Coronavirus Job Retention Scheme and the business rates holiday. We have taken costs out of the business wherever possible, carefully managed cash and have agreed a refinancing with our banks which has provided access to a further £7.5m of funding via the Government's CLBILS scheme and extended our £25m RCF expiry date to September 2022.

We look ahead acknowledging that life and consumer behaviours will be different for some time. With an extended period of social distancing being likely, it is hard to predict the timing and extent to which store sales will return to previous levels. The four pillars of our strategy remain unchanged, however, we have refocused our short term priorities to reflect the current environment and our business performance, in particular accelerating our digital growth and focusing on cost control. Once the impact of COVID-19 on the business and the wider retail sector is clearer, and we have greater visibility of what the new normal looks like, we will reflect on our strategy and adapt it as necessary to ensure that it remains appropriate. Despite the challenges ahead, the Board and I remain confident in our multi-channel proposition and believe that, in the current environment, our product offering is more relevant than ever as supported by our performance since the reopening of our stores.

Financial Review

Overview & Covid-19 impact

The "FY20" accounting period relates to the 52 weeks ended 26 April 2020 and the comparative "FY19" accounting period relates to the 52 week period ended 28 April 2019.

The Group tracks a number of alternative performance measures, as it believes that these provide stakeholders with additional helpful information. Alternative performance measures used in this report include EBITDA, adjusted EBITDA and like for like ("LFL") sales. These are described more fully in note 2 of the extracts from the financial statements included within this report.

The statutory profit before tax ("PBT") for the year was a loss of £18.0m (FY19: profit of £2.3m) and the Adjusted PBT was £2.4m (FY19: £6.9m). Costs of £20.4m have been presented on the face of the Consolidated Income Statement as Adjusting Items (note 3), of which, £19.5m relates to non cash impairment charges. The pre IFRS 16 adjusted EBITDA was £10.8m (FY19: £13.9m), a £3.1m or 22.3 per cent. decline compared to the FY19 result.

FY20's financial performance was characterised by a disappointing first half of the year, followed by a much stronger performance over the key Christmas trading period, continuing into a good start to the new calendar year, before ours and the UK Government's response to the COVID-19 situation required the closure of all stores in March.

The closure of the stores for over a month of the financial year had a material impact on the year's trading financial performance, but the financial effects of COVID-19 were broader, requiring revisions to internal forecasts which resulted in impairment charges against the carrying values of goodwill and fixed assets

· We estimate that the adverse trading impact of COVID-19 on the pre IFRS 16 adjusted EBITDA was approximately £3.0m, comprising the net effect of sales lost due to the closure of stores, less the cost savings flowing from actions taken within the business, and from Government support via business rates relief and payroll furlough receipts.

· The impact of COVID-19 also resulted in the impairment of store assets and goodwill, of £3.3m and £16.2m, respectively, which have been treated as adjusting items. These items are described in more detail in notes 5 and 6 of the extracts from the financial statements.

The implementation during the year of IFRS 16 also had a material impact on the shape of the financial statements. Note 8 of the extracts from the financial statements includes detail of the transition. Notably, transitioning to accounting under IFRS 16 results in an initial reduction to net assets of £6.1m. The implementation of IFRS 16 does not impact the cash position or cash flows of the Group.

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 analysis

Total revenue during the year increased by 3.5 per cent. to £225.0 million (FY19: £217.5 million). LFL sales for the period from 29 April 2019 until 22 March 2020, the day before all stores were closed due to the COVID‐19 outbreak, increased by 0.7 per cent. compared with the prior year, with growth both in stores and online.

The table on the following page shows the quarterly LFL results, highlighting the return to positive growth during the second half of the year, prior to the closure of the stores. As noted in January's interim results statement, LFLs in the first half of the financial year did not benefit in the same way as in FY19 from a "mega trend".

Sales growth of £19.5m was generated from the net effect of 37 new stores opened during the financial year (51 opened and 14 closed), the full year sales effect of stores opened during FY19 prior to being classified as "like for like", less the reduction in sales from stores closed during the year which traded for a full year during FY19.

The table below shows LFL and non LFL sales growth, with a reconciliation of sales used to calculate the LFL, with revenue.

The cost of loyalty points issued declined as a result of an increased focus during the year on the most loyal customers, as part of the continuing evolution of the loyalty scheme. Previously, a greater emphasis had been placed on growing the absolute number of members, which entailed issuing more points.

Product gross margin and adjusted cost of sales

Product gross margin

Product gross margin is the difference between revenue and the cost of goods sold. The product gross margin declined by 90bps to 61.8 per cent. (FY19: 62.6 per cent.).

Adjusted cost of sales

Cost of goods sold

This comprises the cost of finished goods and other related costs including import duty and freight/carriage costs.

The cost of goods sold increased by £4.8m compared with FY19; £2.8m of this increase was due to the increase in revenue. In relation to the increase which was not volume related:

· There were underlying margin improvements as a result of initiatives to improve the bought in margin, for example increasing the proportion of purchases made directly from overseas suppliers rather than via importers and increasing the mix of product sourced from overseas, and increasing the mix of own brand product which carries a higher margin.

· The gains in bought in margin were more than offset by a higher level of discounting during the first half of the year, and unfavourable exchange rate movements compared to FY19, affecting dollar denominated stock purchases throughout the year.

Store payroll

Store payroll costs increased by £4.9m compared with FY19.

· £3.6m or 73 per cent., of the increase was a result of opening new stores; at the end of FY20, the group traded from 534 stores, compared with 497 at the end of FY19.

· The remainder was due to:

o The 4.9 per cent. statutory increase in national living and minimum wages, which affects the majority of store colleagues and, under normal operations, due to the characteristics of small stores, there is limited scope to mitigate against this.

o A £0.3m increase in the provision for holiday pay due to colleagues being unable to take holiday during the final quarter of the year due to the COVID-19 lockdown.

Store property costs

This heading includes store rents, business rates and service charges; store utility and maintenance costs are classified within "Other direct costs", as described below.

Store property costs increased by £3.1m compared with FY19. The increase in store numbers resulted in property costs increasing by £4.0m, which was partially mitigated by like for like rent reductions through negotiations with landlords.

Other direct costs of sale

This classification includes card payment transaction fees, store utility costs, store maintenance costs, online marketing costs, online fulfilment labour costs and store point of sale material costs (window graphics, in-store promotional signage etc.).

This cost category is largely variable in relation to the number of stores and to growth in online sales, and would therefore have been expected to increase by approximately £0.8m due to the opening of additional stores and from increased online sales. In FY19, costs were higher than normal, due to challenges faced fulfilling online sales during the first peak trading period with a new third-party logistics provider; these issues did not recur in FY20, resulting in a year on year saving and there were also other efficiency savings achieved in FY20.

Operating income and expenses (pre. IFRS 16 and adjusting items)

Other operating income

Other operating income was £4.7m (FY19: £0.0m). During the period from the beginning of lockdown in March until the year-end, the Group received £3.6m via the Government's Corona Virus Job Retention Scheme in relation to staff who had been furloughed following the reduction in operations in its distribution centre, and the closure of the Group's retail stores and head office. It also received £1.0m during this period in COVID-19 business rates relief.

Expenses

Distribution costs

Distribution costs include the cost of picking and delivery of stock, with the exception of direct labour costs incurred in fulfilling online orders, which are included in "Other direct costs" as described above. Distribution costs increased by £0.6m, 5.5 per cent. compared with FY19.

· A third-party provided online fulfilment services throughout the whole of FY20 whereas this applied only to part of FY19.

· Payroll costs increased due to inflation (statutory increases) and the increased volumes processed.

· Cost savings were achieved as a result of various internal initiatives to improve efficiency.

Administration costs

Administration costs include rent and rates for the Group's head office and distribution centre and the payroll and overhead cost of the head office and retail field support teams. Administration costs increased by £1.4m, 8.5 per cent. compared to the prior year.

· Head office payroll costs increased by £0.6m, principally due to the full year effect of an FY19 investment in supply chain capability, and pay increases in line with inflation.

· The most notable other variances were savings in travel costs, and increases in IT costs and professional fees. Professional fees included advice in connection with maximising the use of capital allowances, supply chain capacity during the peak trading period, and the full year effect of certain plc costs including company secretarial services.

Adoption of IFRS 16 - Leases

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 29 April 2019 using the modified retrospective approach, under which the cumulative effect of initial application is recognised as an adjustment to the opening balance of retained earnings at 29 April 2019 with no restatement of comparative information. Comparative information continues to be reported under IAS 17 and related interpretations.

The net impact on profit before tax for the period was an expense of £3.7m, which includes additional impairment charges relating to IFRS 16 of £2.8m. Before the additional impairment charge, the impact of the transition would have been an expense of £0.9m. Further information is provided in notes 1(b) (ii), 2 and 8 of the extracts from the financial statements. The net impact on Adjusted EBITDA was a credit of £23.4m, principally because IFRS 16 does not recognise the concept of rental charges.

Adjusting items

Adjusting items before tax in the period amounted to £20.4m (2019: £4.5m), analysed below. £19.5m relates to impairment of store property, plant and equipment, and goodwill to reflect the uncertainties associated with the current environment. Refer also to note 3 of the extracts from the financial statements.

Net financing expense

Net financing costs in the year were £4.5m (FY19: £0.8m), including £4.0m relating to interest on lease liabilities as a result of introducing IFRS 16. FY19's comparative included costs relating to the 2018 IPO, and part of FY19's net financing expense reflected the pre-IPO capital structure, which had higher levels of debt.

Bank interest payable was £0.4m (FY19: £0.2m), reflecting greater use of the Group's bank facilities during the year.

Foreign exchange

Over one-third of the Group's stock purchases are made in US dollars. The Group takes a prudent but flexible approach to hedging the risk of exchange rate fluctuations.

Adverse FX movements compared to FY19 increased the cost of sales in FY20 by £1.3m. FY20's average hedged rate was c. $1.27.

For FY21, most of the anticipated dollar requirements have been hedged via forward contracts, at an average rate of c. $1.30.

Hedge accounting is used to account for FX hedging contracts, to minimise unnecessary volatility in earnings.

Profit/loss before tax

The statutory loss before tax was £18.0 million in the year (FY19: £2.3 million profit).

Adjusted profit before tax

Adjusted profit before tax was £2.4 million in the year (FY19: £6.9 million). The adjusted profit before tax margin of the Group decreased from 3.2 per cent. to 1.1 per cent.

Tax

The Group's total income tax credit in respect of FY20 was £0.3m (FY19: charge of £1.2m). The effective tax rate on the total loss before tax was 1.5 per cent. (28 April 2019: 51.80 per cent.) whilst the adjusted tax rate was 21.7 per cent. (28 April 2019: 21.6 per cent.). 

The difference between the total effective tax rate and the adjusted tax rate for FY20 relates to goodwill impairment within adjusting items (notes 3 and 5) being non-deductible for tax purposes (FY19: related to certain non-recurring costs associated with the listing being non-deductible for tax purposes).

A provision of £0.8m has been included in connection with a review of duty rates paid on goods imported during the previous three years, which has been treated as an adjusting item. The rates of duty vary by product category, and judgements are required in the application of rates to individual products. The Company has been working with HMRC to quantify the underpayment, and the provision reflects the Company's best estimate of the average applicable rate, based on samples reviewed.

Earnings per share

The basic and diluted loss per share for the year were 28.3 pence (FY19: earnings of 1.9 pence).

Before adjusting items, basic and diluted underlying earnings per share for the year were 3.0 pence (FY19: 9.2 pence).

Capital expenditure

Gross capital expenditure amounted to £8.7 million in the year (FY19: £8.5m), of which £4.8 million related to new stores. Other capex included £1.4 million development costs of the new web platform (which was subsequently launched in July 2020) and £0.6 million to install Wi-Fi in stores and replace hand held product scanning devices to improve efficiency.

As a consequence of both the decision to open fewer new stores (taken pre COVID-19), and of the decision to reduce capital expenditure to preserve liquidity in light of COVID-19, capital expenditure during FY21 is expected to be approximately £3.0m.

A small number of new stores will open, where the Company was legally committed prior to the decision to reduce the opening programme; in addition, the Board will consider, on a case by case basis, opportunities to open stores in strategically important locations, where the landlord is prepared to fund fit out costs, such that the store is cash generative immediately following opening.

With the transition to IFRS 16, the separate analysis of fixed asset additions funded via a finance lease is no longer applicable, but the comparative is retained for FY19 to allow the totals in the table above to be linked to the financial statements.

Inventory

Inventory levels were £26.6m at the end of FY20 (FY19: £25.2m), an increase of 5.5 per cent. Given that the stores were closed during April, we are satisfied with this level of increase.

The loss of sales due to the store closures during lockdown has not created a heightened risk with regard to stock levels during FY21. This is a result of careful management of orders and working with suppliers to reduce or delay the intake of stock, and of higher than expected online sales since the beginning of the crisis, as well as store sales since re-opening.

Cashflow

The table on the following page shows an abbreviated summarised cashflow presentation to aid the description of the significant cashflow movements during the period. "Cashflow pre-working capital" in the table below is derived from management reports; the financial statements include a statutory consolidated cashflow statement.

During the year the Group drew down £10.0m of its £25.0m revolving credit facility ("RCF"). Prior to taking account of this the net cash outflow for the year was £11.1m (FY19: £3.8m).

Working capital outflows of £8.1m include a year-end debtor of £3.7m in relation to furlough receipts (received post year-end), an inventory increase of £1.4m and a £3.0m reduction in creditors which was timing related.

Borrowing, bank facilities and financial position

The Group's net drawing on its bank facilities as at 26 April 2020 was £7.1m (FY19: cash in hand of £3.7m). Please refer to note 7 of the extracts from the financial statements.

At the time of the Group's IPO in 2018, new bank facilities were put in place, principally comprising a £25m revolving credit facility, with a term of three years, expiring in July 2021.

On 13 August 2020, the Group completed an agreement with its lending bank to enhance and extend the facilities, as follows:

· The term of the RCF is extended, to expire in September 2022, with step downs from the initial £25.0m facility, of £2.5m in January 2021 and £2.5m in January 2022, to reflect the profile of the expected facility requirement.

· Provision of an additional £7.5m term facility, under the Government's CLBILS scheme, which also expires in September 2022. No repayments are due until the expiry date.

· The facility includes financial covenants in relation to the level of EBITDA, net debt and capital expenditure 

These enhancements to the facility provide useful additional headroom, and greater certainty as to the availability of funding, and indicate continued support for the business from its bank.

As a result of the COVID-19 pandemic, the Board has taken steps to reduce costs and increase liquidity. It has also produced scenarios to quantify the possible impacts on liquidity of applying differing assumptions about how the pandemic might affect future trading. Further details are included in note 1 (b) of the extracts from the financial statements.

Dividends

At the time of IPO, the Board stated an intention to adopt a progressive Dividend Policy. A final dividend of 2.4 pence per share in respect of FY19 was paid in September 2019 and an interim dividend of 1.2 pence per share in respect of FY20 was paid in March 2020.

As noted above, the Group has emerged from the spring 2020 COVID-19 lockdown period with adequate liquidity. Notwithstanding this, the outlook remains uncertain, and continuing to maximise liquidity will remain a top priority until the Board has sufficient certainty about the future to take a different stance or, the liquidity buffer reaches a level where maintaining a higher level of liquidity would be deemed unnecessary. Consequently, the Board will not be proposing payment of a final dividend in relation to FY20.

Gavin Peck

Director

27 August 2020

Consolidated Income Statement

For the year ended 26 April 2020

Profit for the period is attributable to equity holders of the Parent.

Consolidated Statement of Comprehensive Income

For the year ended 26 April 2020

Consolidated Statement of Financial Position

As at 26 April 2020

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

For year ended 26 April 2020

Notes

1. Accounting policies

(a) General information 

TheWorks.co.uk plc (the Company) is a public limited company (11325534) domiciled in the United Kingdom and its registered office is Boldmere House, Faraday Avenue, Hams Hall Distribution Park, Coleshill, Birmingham, B46 1AL. These consolidated financial statements for the year ended 26 April 2020 comprise the Company and its subsidiaries (together referred to as 'the Group'). 

TheWorks.co.uk plc is one of the UK's leading multi-channel value retailers of; gifts, arts & crafts, stationery, toys, and books offering customers a differentiated proposition as a value alternative to full price specialist retailers. The Works sells its quality products at affordable prices across four specialist categories comprising; Kids; Arts, Crafts & Hobbies, Stationery and Family Gifts, which are supplemented by both seasonal and regional offerings.

The Group operates a network of over 500 stores in the UK & Ireland. Stores can be found on high-streets, in retail parks, shopping centres, factory outlets and as concessions in various locations. The Works also has a significant and growing online presence that enables customers to shop any time of the day, with an extended range of products not available in stores. This multi-channel offering is one of the first of its kind in the value retail sector and includes a popular Click & Collect service, driving additional footfall and sales in store.

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

(b) Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRS IC) interpretations, as adopted by the European Union, and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The preparation of financial statements in conformity with Adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience, future budgets and forecasts, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The Group's significant judgements and estimates relate to the classification of adjusting items, hedge accounting, and impairment of property, plant and equipment, right of use assets and intangibles, and are described in Note 1(v).

(i) Going concern

The 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 the Group's current position and the potential impact of the principal risks documented on pages 44 to 50.

The Group operates a plan, within which, scenario planning and stress testing has been carried out.

In assessing the basis of preparation the Directors have considered:

· The external environment.

· The Group's financial position and bank facilities.

· Measures taken to increase and maintain liquidity.

· The potential impact on the financial performance of the business of the risks described in the Strategic Report.

· The output of a "Base Case" scenario financial model, which includes the impact on the Group's three year plan of the recent COVID-19 lockdown, and an estimate of the most likely continued effect on trading.

· The resilience of the Group to the manifestation of a more severe impact of these risks, evaluated via a revised model referred to as the "Reasonable Worst Case" ("RWC") scenario financial model.

· The availability and expected effectiveness of any mitigating actions that would be taken in response to circumstances arising such as those modelled under the RWC.

· The Board has considered the impact on the Group's cash flows, headroom and covenants.

These factors are described below.

The Base Case and RWC scenario models cover a period of three years. The outputs of the models for the first eighteen months of this period (the "Going Concern Period") have been used to make a judgement regarding using the Going Concern basis of preparation of the financial statements.

External environment

There continues to be significant uncertainty as to the future impact on the Group of the COVID-19 global pandemic; the potential effects of this have been considered as part of the Group's viability assessment and its confirmation of the adoption of the going concern basis. In March 2020, all of the Group's retail stores closed to protect its employees and customers, in accordance with various national government requirements.

The online channel traded successfully throughout the period of lockdown; certain retail concession stores reopened in May 2020, with the majority of stores opening during June when the easing of government restrictions permitted. Sales from the online channel, during lockdown, and store sales since the end of lockdown, have been better than the Board's initial expectations. Despite this, there remains uncertainty, for example, over how long social distancing measures will be required to be in place and the possible effects on the level of consumer demand.

The lack of clarity arising from the UK leaving the European Union also creates increased levels of economic and consumer uncertainty and, consequently, the longer-term impact this may have on the Group also remains uncertain.

Financial position and bank facilities

The cash and borrowings of the Group at the period end are shown in note 7 (Borrowings) of the extracts from the financial statements.

The Group's net debt balance drawn from its principal lending bank at 26 April 2020 was £7.1m (2019: net cash of £3.7m), which comprised a draw-down of £10.0m against its revolving credit facility ("RCF") and cash balances of £2.9m.

At the time of the Group's IPO in 2018, new bank facilities were put in place, principally comprising a £25m revolving credit facility, with a term of three years, expiring in July 2021.

On 13 August 2020, the Group completed an agreement with HSBC to enhance and extend the facilities, as follows:

• The term of the RCF is extended, to expire in September 2022, with step downs from the initial £25.0m facility, of £2.5m in January 2021 and £2.5m in January 2022, to reflect the profile of the expected facility requirement.

• Provision of an additional £7.5m term facility, under the Government's CLBILS scheme, which also expires in September 2022. No repayments are due until the expiry date.

• The facility includes financial covenants in relation to the level of EBITDA, net debt and capital expenditure.

• The EBITDA and net debt covenants are based on limits set and measured every month. The EBITDA covenant is measured with reference to EBITDA over the last twelve months (LTM). The group's ability to meet the EBITDA covenant is heavily influenced by trading during the peak months of November and December.

Measures to maintain liquidity

The Directors have implemented a number of measures to maintain or improve liquidity including cutting costs, temporarily suspending dividends, scaling back capital expenditure, agreeing rent reductions and/or deferrals with landlords, cancelling or deferring stock purchases and agreeing revised payment terms with suppliers. 

The Group will also benefit from approximately £13m of business rates relief between the beginning of lockdown and the end of FY21. In addition, the government's job retention scheme to help meet the cost of furloughed roles contributed cash savings of approximately £8m, between the beginning of lockdown, and the end of July 2020.

As a result of the steps taken by the Board and the support received from the Government schemes, the Group's cost base was significantly lower than normal during the lockdown period. Although the reopening of stores has inevitably resulted in expenditure increasing from lockdown levels, operating and overhead cost savings will be maintained to the fullest extent possible. 

Given the foregoing, and as noted above, to assist the Board in confirming the continued appropriateness of using the going concern basis in the preparation of the financial statements, and in making its assessment of the Group's viability, two financial scenarios have been prepared to quantify the possible impacts on liquidity of applying differing assumptions. These scenarios cover the FY21 to FY23 financial years (the "Projection Period"). It is emphasised that these are not forecasts, but models used to assist the Board in connection with viability and going concern considerations.

Potential impact of risks on financial scenarios

The "Principal risks and uncertainties" section on pages 44 to 50, sets out the risks that the Board considers could threaten its business model, future performance, solvency or liquidity. 

It is considered unlikely that all risks would manifest themselves simultaneously and/or all in a direction that would adversely affect the business. The Directors have estimated what a reasonably likely combination of risks might be that could materialise within the next three years and how the business might be affected. The most prominent risks in the near term would appear to be connected with COVID-19, which could affect sales, costs and liquidity. Other risks, such as market and economic environment could have similar manifestations to COVID-19, and Brexit could impact these areas as well as supply chain.

Taking these factors into consideration, the Directors have prepared scenarios which seek to show how these risks might affect the business, in a Base Case and RWC scenario, as described below.

The Base Case incorporates the Board's estimate of the most likely level of risk impact arising from the factors noted above. The RWC assumes that the effects are more severe, particularly in relation to COVID-19.

Base case scenario

The Base Case scenario has been modelled using the following key assumptions/incorporating the following information:

1 The closure of the Group's retail stores during lockdown, with the majority of stores remaining closed until mid-June 2020.

2 Continuing social distancing measures and a potential downturn in the economy have been assumed to have an adverse impact on store sales throughout the Projection Period. Sales during the peak pre-Christmas 2020 trading season have been assumed to be 10% lower than in FY20 and sales throughout FY21 are modelled as being below FY20 levels. Only a partial recovery has been assumed in FY22, such that sales in the model are still lower than in FY20.

3 Online revenue as a proportion of total revenue is higher than previously, reflecting the strong growth experienced during lockdown, albeit sales are not expected to continue to grow at the same rate.

4 An improved gross margin rate reflecting the expected benefits of implementing improved sourcing strategies.

5 The impact of cost saving measures implemented or identified.

6 Significantly reduced capital expenditure, of approximately £3.0m in FY21 and £3.5 million per annum in FY22 and FY23.

7 Initiatives to preserve cashflow, for example, revised supplier and landlord payment terms already agreed, and the suspension of dividend payments.

Under the Base Case scenario, the Group expects to have sufficient financial resources to continue to be viable and the Going Concern basis of preparation of the financial statements is appropriate.

Reasonable Worst Case scenario

Under the RWC scenario, store revenues are 10% and 7% lower than in the Base Case in FY21 and FY22 respectively, and 20% and 30% below FY20 levels on a like-for-like basis during November and December 2020 respectively, illustrating a situation whereby trading is affected more severely by social distancing measures and the potential consequences of a more severe and sustained economic downturn. Note that the Base Case model for FY21 already incorporates an assumption of lower sales post lockdown than in FY20, and only a partial recovery in FY22. 

This scenario does not build in the benefit of additional mitigation that, in practice, would be implemented in these circumstances. These may include, further reducing stock purchases, stock liquidation, and further reductions in capital expenditure. In addition, other than to the extent that they are directly variable with revenue, the company's forecast cost base has not been significantly reduced in this RWC scenario.

Actual trading results since the beginning of the FY21 financial year have been better than factored into the Base Case and RWC assumptions. This, together with the opportunity to take mitigating actions as described above, and the assumption that the Group would continue to be able to access the liquidity from its bank facilities, in the opinion of the Board, provides sufficient financial resources for the Group to continue to be viable under the RWC, albeit with limited headroom. 

Conclusion regarding basis of preparation

In addition to the foregoing, in considering the appropriateness of adopting the going concern basis of preparation, the Directors also took account of the fact that it is difficult to predict with confidence the overall impact of COVID-19 on the Group's profitability in the next financial year. 

As there remains considerable uncertainty over the potential development of the COVID 19 pandemic, any future Government response and the economic impact of those developments on the cash flow forecasts of the Group, it is difficult to rule out the potential for further increases in local social distancing measures or even the possibility of a further national lockdown and the effect that that will have on the forecast cash flows. Whilst the RWC referred to above, after mitigating actions, shows headroom, as the level of headroom is relatively small, a further decline over and above the 20% and 30% sales declines in November and December 2020, could result in a potential breach of the EBITDA covenant later in 2021. Whilst the Group believes that it would have time before a potential breach to mitigate further, there is no certainty as to the size of the potential breach and, therefore, whether the mitigating actions could resolve this in time.

In light of this level of uncertainty over the duration and severity of any disruption, there are scenarios under which the Group could breach its EBITDA covenant, which represents a material uncertainty that may cast significant doubt on the Group's and the Company's ability to continue as a going concern.

Based on all of the above considerations, and having carefully considered the material uncertainty and mitigating actions available, the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis.

(ii) New accounting standards

The Group has applied the following new standards and interpretations for the first time for the annual reporting period commencing 29 April 2019:

- IFRS 16 Leases.

- IFRIC 23 Uncertainty over Income Tax Treatments.

- Amendments to IFRS 9 Prepayment Features with Negative Compensation.

- Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures.

- Amendments to IAS 19 Plan Amendment, Curtailment or Settlement.

- Annual Improvements to IFRS Standards 2015-2017 Cycle (Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23).

The nature and effect of the changes to the Group's accounting policies as a result of the adoption of IFRS 16 is set out below. Details of the impact of the adoption to IFRS 16 are given in note 6 (property, plant and equipment), note 7 (borrowings) and note 8 (impact on transition). 

The adoption of the other standards and interpretations listed above has not led to any changes to the Group's accounting policies or had any other material impact on the financial position or performance of the Group.

IFRS 16

In the current period, the Group has applied IFRS 16 (as issued by the IASB in January 2016) that is effective for annual periods that begin on or after 1 January 2019. The date of initial application of IFRS 16 for the Group is 29 April 2019. 

IFRS 16 provides a single model for lessees which recognises a right-of-use asset ("RoUA") and a lease liability for all leases, with exceptions available for short-term and low-value leases. The impact of IFRS 16 is to recognise a lease liability and a corresponding asset in the Group Balance Sheet for leases previously classified as operating leases.

The most significant impact has been that the Group's retail store operating leases are now recognised on the Group Balance Sheet as right-of-use assets representing the economic benefits of the Group's right to use the underlying leased assets, together with the associated future lease liabilities. Previously lease rentals payable under operating leases were not recognised in the Consolidated Balance Sheet and were charged to the Consolidated Income Statement on a straight-line basis over the term of the relevant lease.

The Group adopted IFRS 16 from 29 April 2019 using the modified retrospective transition approach as described in paragraph C5 (b) of the standard. The comparative information presented for the 52 weeks ended 28 April 2019 has not been restated and therefore continues to be shown under IAS 17 'Leases.'

(c) Alternative Performance Measures

In reporting financial information, the Group presents alternative performance measures (APMs). These 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 following items were included in Adjusting Items in the 52 weeks ended 26 April 2020:

· Impairment charges, including those resulting from the COVID-19 pandemic. As a result of the COVID-19 pandemic and subsequent UK government restrictions introduced on 23 March 2020 that has resulted in significant and unprecedented market and business disruption, the Group has classified store impairments as adjusting items for the first time. The impact of the COVID-19 pandemic on the Group's operations is discussed within the principal risks and uncertainties on pages 44 to 50 as well as set out within the basis of preparation in note 1 (b) above. 

The prior year has been restated on a consistent basis. The restatement of the prior year has no impact on the prior year's statutory measures of reported profit or on the Group's cash flows or financial position for the year ended 28 April 2019. The prior year's adjusted profit measures have increased by £0.1 million, being the net store impairment charge and onerous lease provision charge not treated as an adjusting item in 2019.

· Under-declared duty and penalties for late payment associated with the misclassification of certain imported goods in prior years.

Refer to note 3 below for a summary of the adjusting items. 

(d) Critical accounting judgements and 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 accounting policies. Where a significant risk of materially different outcomes exists due to management assumptions or sources of estimation uncertainty, this will represent a key source of estimation uncertainty. Estimates and judgements are continually evaluated and 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.

The estimates which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next 12 months are discussed below.

Critical accounting judgements

Adjusting items

The directors believe that the adjusted profit and earnings per share measures provide additional useful information to shareholders on the performance of the business. These measures are consistent with how business performance is measured internally by the Board and Operating Committee. The profit before tax and adjusting items measure is not a recognised profit measure under IFRS and may not be directly comparable with adjusted profit measures used by other companies. The classification of adjusting items requires significant management judgement after considering the nature and intentions of a transaction. The Group's definitions of adjusting items are outlined within both the Group accounting policies and Note 6. These definitions have been applied consistently year on year, with additional items included this year relating to store impairments, including those resulting from the COVID-19 pandemic.

Note 3 provides further details on current year adjusting items and their adherence to Group policy.

Hedge accounting

The Group is exposed to foreign currency risk, most significantly to the US dollar as a result of sourcing certain products from Asia which are paid for predominantly in US dollars. The Group hedges these exposures using forward foreign exchange contracts and hedge accounting is applied when the requirements of IFRS 9 are met, which include that a forecast transaction must be "highly probable".

The Group has applied judgement in assessing whether the forecast purchases remain "highly probable", particularly in light of the decline in expected sales resulting from the COVID-19 pandemic and the related temporary store closures.

The Group's policy is that approximately 50% of the forecast purchase requirements are initially hedged, approximately 12 months prior, with incremental hedges taken out over time, as the buying period approaches and therefore as certainty increases over the forecast purchases. As a result of this progressive strategy, reducing the supply pipeline of inventory, should this occur, does not immediately lead to over-hedging and the disqualification of "highly probable". If the forecast transactions were no longer expected to occur, any accumulated gain or loss on the hedging instruments would be immediately reclassified to profit or loss.

Key sources of estimation uncertainty

Impairment of property, plant and equipment, right of use assets and intangibles

Property, plant and equipment, right-of-use assets and intangible assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Directors consider an individual retail store to be a cash-generating unit ('CGU'). The UK government trade restrictions implemented on 23 March 2020 as a result of the COVID-19 pandemic are considered an impairment trigger and as a result all stores have been tested for impairment.

Management performs an impairment review for each CGU that has indicators of impairment. When a review for impairment is conducted, the recoverable amount of an asset or CGU is determined based on value-in-use calculations using the Group's latest forecast cash flows, covering a three-year period to April 2023 (the "three-year Plan") and are discounted using the Group's pre-tax discount rate.

The three-year plan has regard to historic performance and knowledge of the current market, together with the Group's views on the future achievable growth and the impact of committed cash flows. The cash flows reflect the Board's current best estimate of the range of possible impacts arising from COVID-19, which anticipates a significant reduction in sales and profits in the short to medium-term compared to previous estimates. Cash flows beyond this three-year period are extrapolated using a long-term growth rate based on management's future expectations.

Pre-tax discount rates are derived from the Group's weighted average cost of capital, which has been calculated using the capital asset pricing model, the inputs of which include a country risk-free rate, equity risk premium, Group size premium, a forecasting risk premium and a risk adjustment (beta).

Goodwill is reviewed for impairment annually on the same basis as described above for the period covered by the three-year plan together with a terminal value based on an assumed long-term growth rate.

The value in use method requires the Group to determine appropriate assumptions (which are key sources of estimation uncertainty) in relation to the growth rates of sales and cash margins, operating costs, long-term growth rates and the post-tax discount rate used to discount the assumed cash flows to present value. Future events could cause the forecasts and assumptions used in impairment reviews to change with a consequential adverse impact on the results and net position of the Group as actual cash flows may differ from forecasts and could result in further material impairments in future years.

See notes 5 and 6 below for further details on the Group's assumptions and associated sensitivities.

2. Alternative Performance Measures ("APM")

The Group tracks a number of alternative performance measures 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 alternative performance measures, 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. These alternative performance measures are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these alternative performance measures are also used for the purpose of setting remuneration targets.

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

Like-for-like sales

These are defined as the year-on-year growth in gross sales from stores which have been opened for a full 63 weeks (but excluding sales from stores closed for all or part of the relevant period or prior year comparable period), and from its e-commerce platform, calculated on a calendar week basis. The measure is used widely in the retail industry as an indicator of sales performance. A reconciliation of revenue to revenue on a like-for-like basis is set out below. Like-for-like sales include a full 52 weeks of trading for the year ended 28 April 2019, as such the reconciliation below shows LFL sales pre lockdown and post lockdown:

EBITDA, Adjusted EBIDTA and Adjusted profit after tax

EBITDA is defined by the Group as earnings before interest, tax, depreciation, amortisation and profit/loss on the disposal of fixed assets. Adjusted EBITDA is calculated by adding back or deducting Adjusting Items to EBITDA. See note 1 for a description of Adjusting Items.

As consequence of the adoption of IFRS 16 during the year, the Group has shown another measure of Adjusted EBITDA, which removes the impact of IFRS 16 to allow the reader to compare against the prior year. The following table provides a reconciliation of Adjusted EBITDA to profit after tax, and shows the impact of IFRS 16 on adjusted EBITDA:

Profit before tax and IFRS 16

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

Adjusted profit metrics

Key profit measures include operating profit, profit before tax, profit for the period and earnings per share are calculated on an adjusted basis by adding back or deducting Adjusting Items. See note 1 for a description of Adjusting Items. These adjusted metrics are included within the consolidated income statement and statement of other comprehensive income, with further details of adjusting items included in Note 3 below.

3. Adjusting items

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

1 This relates to onerous lease provision charges for loss making stores in the prior year.

2These relate to fixed asset impairment charges and reversals of prior year impairment charges.

3 This relates to a provision recognised regarding an ongoing HMRC review of the Group's Duty rates

4This includes the loss on disposal of the fixed assets associated with the e-commerce picking tower at the Group's distribution centre in Coleshill, Birmingham, which was disposed in the prior year following completion of the transition to the third party logistics provider for the e-commerce warehouse and order fulfilment.

5This relates to the impairment of goodwill during the year. Refer to note 5 below for further detail.

6Salary costs relate to payments to past Directors.

7Professional fees relate to IPO and refinancing costs incurred in the prior year.

8Staff incentive on IPO represents nil cost share options awarded to an employee in preparation of the IPO.

9This includes £386,000 in relation to capitalised loan costs written off in the prior year on the loan repaid on IPO, offset with a release of £626,000 of interest and fees in relation to the borrowing facilities repaid on IPO.

4. Operating profit

Operating profit (before adjusting items) is stated after charging / (crediting) the following items:

1For the year ended 26 April 2020 these balances relates to non IFRS 16 operating lease rentals during the year, please refer to note 8 for further details of these balances

5. Intangible assets

Goodwill impairment testing

Goodwill of £16.2 million arose in 2015 when The Works Investments Limited acquired The Works Stores Limited (TWSL) in a share for share transaction. As such, all of the goodwill has been allocated to one cash generating unit (CGU) being TWSL.

Goodwill is not amortised but is tested annually for impairment with the recoverable amount being determined from value in use calculations. Goodwill is monitored by management at a country level and has been tested for impairment on that basis.

The annual impairment test has resulted in an impairment charge of £16.2 million, reflecting the adverse impact of COVID-19 on the business' short to medium prospects. The basis on which the value in use has been determined is described below.

The key assumptions for the value in use calculation are those regarding the discount rate, long-term growth rates and expected trading performance (sales, cash margin and operating costs).

The post-tax cash flows used for impairment testing are based on the Group's latest forecast cash flows, covering a three-year period to April 2023 (the "Three-year Plan"), which have regard to historical performance and knowledge of the current market, together with the Group's views on the future achievable growth and the impact of committed cash flows. The cash flows include estimates of ongoing capital expenditure required to maintain the store network, but exclude any significant growth capital initiatives not committed. The Three-Year Plan reflect the Board's current best estimate of the range of possible impacts arising from COVID-19, which anticipate a significant reduction in sales and profits in the short to medium term compared to previous estimates. 

Cash flows beyond this three-year period are extrapolated using a long-term growth rate based on the Group's current view of achievable long-term growth. The Group's current view of its achievable long-term growth is 2%, reflecting its best estimate.

Management estimates discount rates that reflect the current market assessment of the time value of money and the risks specific to the Group. The post-tax discount rate is derived from the Group's post-tax weighted average cost of capital (WACC) which has been calculated using the capital asset pricing model, the inputs of which include a country risk-free rate, equity risk premium, Group size premium, a forecasting risk premium and a risk adjustment (beta). The rate used to discount the forecast cash flows is 14.0% (last year: 10.26%), which reflects the additional risks presented by COVID-19 as at 26 April 2020.

As a result of this analysis, the goodwill balance has been impaired to nil. No further downside sensitivities have therefore been performed by management.

6. Property, plant and equipment