Theworks.co.uk. Regulatory News (WRKS)

30 August 2023

TheWorks.co.uk plc 

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

Preliminary results for the 52 weeks ended 30 April 2023

Resilient performance delivered in FY23 against challenging backdrop. Well-positioned to capitalise on opportunities from execution of strategy and deliver growth in FY24.

The Works, the family-friendly value retailer of arts and crafts, stationery, toys, and books announces its preliminary results for the 52 weeks ended 30 April 2023 (the "Period" or "FY23") and an update on current trading.

Financial highlights

Business highlights

Following the recovery from the March 2022 cyber security incident, the Company made good strategic progress in FY23, providing solid foundations from which to build on in FY24:

Trading update for the 17 weeks ended 27 August 2023

Trading during the first 17 weeks of FY24 has been in line with our expectations, with store LFL sales growing by 5.4% and online sales declining by 18.4%, resulting in total LFL sales growth of 3.1%. Store sales are being driven by growth across all product categories, continuing the trend of positive store LFL growth seen throughout FY23. The Board is comfortable with the compiled estimate of the market's forecast for FY24, an Adjusted EBITDA of approximately £10.0m (5).

Board change

As announced alongside our FY23 results today, Steve Alldridge has advised the Board of his intention to step down from his role as CFO by the end of 2023. In line with our succession plans, we are delighted that Rosie Fordham, our current Head of Finance, will be appointed as CFO when Steve steps down.

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

"The Works delivered a resilient performance in FY23, despite facing some sizeable challenges. Revenue growth was driven by our strong portfolio of stores, bolstered by the sector-wide shift of customers returning to shop in-store post-COVID. Although inflationary pressures increased business costs and dampened consumer confidence, we ended the year in line with our rebased expectations. FY23 also showcased the enduring appeal of our value proposition. I'd like to thank our colleagues who have demonstrated their ongoing dedication to The Works and have continued to show customers how they can read, learn, create and play more on a budget.

"In the first half our focus was on protecting and rebuilding the business, but as the year progressed we were able to make more strategic progress. We have developed our brand and customer proposition, ensured that our ranging is aligned with customer demand and improved our store estate. We've also taken steps to enhance our online proposition and drive significant operational improvements across the business, the benefits of which we expect to be fully realised from FY24 onwards.

"Looking ahead, the macroeconomic environment remains uncertain. However, we are now well positioned to capitalise on strategic opportunities and given the momentum gained in the latter half of FY23 we expect to grow sales and profit in FY24. Reflecting confidence in the Group's prospects, the Board proposes a final dividend of 1.6 pence per share in respect of FY23."

Preliminary 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 arts and crafts, stationery, toys, and books, offering customers a differentiated proposition as a value alternative to full price specialist retailers. The Group operates a network of over 525 stores in the UK & Ireland, as well as an online store.

Cautionary statement

The financial information set out in this statement does not constitute the Company's statutory accounts for the periods ended 30 April 2023 or 1 May 2022, but is derived from those accounts. Statutory accounts for FY22 have been delivered to the Registrar of Companies and those for FY23 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 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.

This announcement may contain forward-looking statements with respect to the financial condition, results of operations, and business of the Group. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, the Group has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

Chair's statement

Introduction

Last year I wrote about the positive effect that the Group's new purpose - to inspire reading, learning, creativity and play - making lives more fulfilled - was having on the business soon after it was introduced. This year we embedded the purpose further across the business, informing the implementation of our "better, not just bigger" strategy, inspiring the creation of our ESG plan and providing clarity about the future direction of the business.

The purpose has also helped to guide colleagues as they served customers and reinforced the incredible culture at The Works, one of the enduring strengths and unique attributes of the business. And whilst the economic environment has been extremely challenging, colleagues at The Works have responded thoughtfully to this backdrop, using it as an opportunity to inspire customers to enjoy reading, learning, creativity and play on a budget, whilst also supporting local communities and our charitable causes. I am proud to chair such a creative and purpose-led business and would like to thank everyone at The Works for their efforts.

Performance

I have long been impressed by the resilience of The Works, its ability to adapt to unforeseen circumstances and manage challenging trading conditions. In FY23 these traits were seen again as The Works delivered a resilient performance, with revenue increasing by 5.8% to £280.1m. This growth was delivered despite the business still recovering from a cyber security incident late in the previous financial year and an uncertain macroeconomic backdrop. Thanks to Gavin's steady leadership and the action taken to protect the business, the resonance of our value customer proposition and the patience and flexibility of our colleagues, we ended the year on a more positive sales trajectory. Going into FY24, we can now confidently say that The Works is a more operationally robust business, with greatly strengthened cyber security, and remains financially strong.

The inflationary environment did impact our profit performance, particularly in the first half of the year given rising freight, energy and other business costs. However, as a result of these cost pressures easing and an improvement in store sales growth in the second half, we ended the year in line with our revised profit expectations. Although this is not where we expected to be at the start of the year, it is a creditable performance given the challenges the business faced and we ended the year in a financially secure position.

Strategy

The Works announced its "better, not just bigger" strategy in July 2021, committing to a greater focus on the customer and to strengthening the fundamentals of the business. This strategy not only made The Works more resilient during the COVID-19 pandemic and challenging economic environment that followed, it has also aligned business decisions more closely with our purpose, and ultimately the customer.

Strategic progress was slower in the first half of FY23 as the business was primarily focused on recovering from the cyber security incident and the external environment saw retailers facing great uncertainty. However, more progress was made in the second half of the year and the foundations have now been laid for significant improvements in the year ahead.

The evolved brand has been rolled out across the business and we are now building on this to demonstrate to customers why The Works is the best value destination for reading, learning, creativity and play. This will attract more customers to shop with us and through our relaunched 'Together' loyalty scheme we now have an opportunity to engage more with our growing and loyal customer community. Our active portfolio management continues. Our 14 new stores and 3 relocated stores opened during the year are performing ahead of expectations and, along with our 34 store refits undertaken in the year, continue to improve the overall quality of our store estate.

Our online performance has been disappointing, partly reflecting a normalisation of store / online sales mix post-COVID. Following a review of our website and online operations we now have the right resource and plans in place to improve the customer experience and profitability of this channel. During the year we implemented a number of structural changes to enable improvements in our stock allocation and distribution processes, which will help drive significant operational efficiencies across the business.

Together, these initiatives create a real opportunity for further strategic progress and a step-change in sales growth and improved profitability over the medium-term. We are excited by this potential and remain confident that our "better, not just bigger" strategy is the right direction for the business.

Environmental, Social and Governance (ESG)

The Board has continued to oversee development of the Group's Environmental, Social and Governance plan and to monitor progress. Whilst we have put more structure around the ESG strategy in FY23 and made progress in key areas, the Board recognises that there is still much more to be done.

Progress on ESG was mostly made in the second half of the year, namely the new initiatives to support colleague engagement, wellbeing and career development, as well as the creation of new climate targets and an improved system of monitoring our environmental impact.

We have now set a target to be net-zero by 2045, with an ambition to do so by 2040 (in line with the British Retail Consortium), and we are now fully compliant with the TCFD disclosure recommendations, including the reporting of Scope 3 emissions. We still have a long way to go to reduce our environmental impact but now have both the strategy in place and the mechanisms to track progress, which will guide our decision making in the years ahead.

Although I believe that The Works is already a diverse, inclusive and supportive business, Diversity & Inclusion (D&I) is an area that I feel very strongly about and there is scope for us to do more. This year we conducted a full review of D&I at The Works and undertook a survey to understand colleague perceptions and experiences. Based on these insights we have now developed a strategy through which we can make significant progress to improve our diversity and inclusion in the years ahead. This will inspire colleagues to be even more supportive and embracing of differences, encourage new talent to join The Works and strengthen our special, collaborative and supportive company culture.

CFO Succession

As announced alongside our FY23 results, Steve Alldridge has advised the Board of his intention to step down from his role as CFO by the end of 2023. In line with our succession plans, we are delighted that Rosie Fordham our current Head of Finance, will be appointed as CFO when Steve steps down.

Dividend and outlook

Despite delivering a resilient performance in FY23 and ending the year in a strong financial position, the Board hopes that FY23's EBITDA was a low point and that it will increase progressively in future. Some good strategic progress was made despite challenging trading conditions, and the underlying appeal and relevance of The Works' proposition continues to resonate with customers.

During the period in which the business works to rebuild its levels of profit, a compromise is sought, between maintaining a reasonable dividend for shareholders, whilst ensuring that the Group continues to maintain its cash reserves. Taking this into consideration, along with the Company's resilient FY23 performance, and its confidence in the Group's prospects, the Board proposes a final dividend of 1.6 pence per share in respect of FY23 and outlines its policy in relation to capital distributions, which is included at the end of the financial review.

The Board believes that the business is well positioned to take full advantage of the opportunities ahead, make further strategic progress and grow sales profitably, and we remain confident in the Group's future prospects.

Carolyn Bradley

Chair

30 August 2023

CEO Review

Introduction

The Works delivered a resilient performance in FY23, with sales growth driven by our fantastic network of stores and team of talented colleagues. The economic backdrop was challenging, characterised by high inflation and dampened consumer confidence. This, combined with the residual impact of the cyber security incident at the start of the year, meant that the end result was lower than we had anticipated heading into the year. However, by continuing to focus on our purpose and offering exceptional value for our customers, we have enabled them to continue reading, learning, creating and playing - demonstrating that our value proposition has enduring relevance.

Over the past few years we have dealt with a host of external challenges, such as the COVID-19 lockdowns and global supply chain disruption, as well as internal ones like the cyber security incident. This has meant that our focus has been primarily on protecting and rebuilding the business and supporting our dedicated colleagues. Having established a clearer runway, our strategic progress accelerated in the second half of FY23 and we expect to make even more significant improvements in FY24. We remain confident in our ability to become an even "better, not just bigger" business, driving a step-change in sales and profitability over the medium term.

Trading performance and financial results

The Works has always been a business that demonstrates its resilience when confronted with difficult trading conditions and the same can be said for FY23. The Group delivered a 5.8% increase in revenue to £280.1m and LFL sales growth of 4.2%, with store LFL sales increasing 7.5% and online sales declining by 15.0%. Outlined below are the main factors that contributed to this performance:

Profitability was constrained, particularly in the first half of FY23 given the lower than anticipated sales growth, high energy and freight costs and the absence of COVID-related business rates support, which had provided a boost in FY22. We revised our profit expectations for the year in August 2022 and have achieved a result in line with our rebased expectations, delivering a Pre-IFRS16 Adjusted EBITDA of £9.0m and Adjusted profit before tax of £10.1m. The statutory Profit before tax was £5.0m, after impairment charges of £5.1m. We believe this level of EBITDA is the low point that we will build from in the years ahead, supported by greater strategic progress that we are now set up to deliver.

Strategy

Our "better, not just bigger" strategy was announced in July 2021 to build on the existing strengths of the business - our loyal customer base, strong culture and fantastic store network. The strategy aims to provide The Works with a clearer purpose and a more focussed brand identity and customer proposition that will help to drive a step-change in sales growth, as well as enabling us to improve the operations of the business, making The Works a more customer-focussed and efficient retailer.

Since launching the strategy we have made decent progress in some areas, but the reality of the internal and external challenges noted above has meant more of our attention than we anticipated has been focused on protecting the business and not on growth. Strategic progress has been slower than we would have liked, however the business is now well-placed to deliver progress in FY24 and beyond, which we expect will drive the step change growth in sales and profitability that we want to achieve over the medium term.

Below is a summary of the strategic progress made in FY23 and the plans we have to accelerate this in the year ahead.

Develop our brand and increase our customer engagement: We are working hard to ensure that our customer proposition and brand are consistent with our purpose, which will help to change legacy perceptions of The Works as a 'pile it high, sell it cheap' discounter, encourage new customers to shop with us and increase the spend of existing customers.

In FY23 we rolled out our evolved brand to our stores and website to ensure that the visual representation of The Works accurately reflects our purpose and the modern, fun and engaging business that The Works is today. We have completed the first phase of this work and will now begin to more actively communicate this to customers by developing and executing a marketing strategy to bring our purpose and evolved brand to life, particularly through our social channels.

We began to refresh our product offering to be better aligned with our purpose, whilst maintaining our commitment to low prices. This included the launch of new own brand ranges such as our children's toys "PlayWorks" brand and a significantly extended range of front-list books, including titles by authors such as Colleen Hoover and Julia Donaldson, which helped to increase our book market share in terms of value by 0.7% and volume by 1.3% (to 3.9% and 10.3% respectively). There remains an opportunity to further increase market share in all categories and in the year ahead we will conduct an extensive refresh of our core art, craft and stationery ranges and launch new kids pocket money toys ranges.

We relaunched our "Together" loyalty scheme this year and re-engaged store colleagues to promote sign-ups. We welcomed over 700,000 new members in FY23, with over 1.7m active members of the scheme at the end of the year. Our loyalty customers typically spend 30% more than non-loyalty customers and shop more regularly. We will now focus on improving the insight we obtain from the loyalty scheme data through new software that will shortly be available, to support more effective CRM and loyalty activity.

Enhance our online proposition: Our customers and store colleagues want the experience of using our shopping channels to be more consistent and integrated, with the website acting as a shop window for our stores (and vice versa); however, to-date the website has operated too independently. This, combined with the fact that strategic progress in this area has been slower than planned, means that as online sales have declined and costs have risen, the website is not currently profitable.

We restructured the management of the online operation at the beginning of the calendar year to facilitate an increased rate of progress. We have also recently undertaken a series of website usability studies to inform areas of opportunity to improve the site, as well as introducing new tools to support performance analysis and provide insights into how best to improve the customer experience. To improve online profitability, we increased delivery charges to be more in line with peers, scaled back some online promotions and reduced fixed costs by reducing the space utilised at our third-party fulfilment centre.

Plans are in place to enhance the online customer experience and to trial using the new EPOS solution to enable customers to order products from our website whilst in our stores, providing more convenient access to online range extensions. We also expect online sales and profitability to improve as we derive benefit from the new analytical tools introduced in late FY23. There is much more work to be done to improve this channel which we hope will return to sales growth and profitability, in due course.

Optimise our store estate: We believe that a major strength of The Works is our large network of stores in communities across the UK and Ireland, which have been and always will be the main driver of sales.

This year we continued to optimise our store estate with 14 new store openings in great locations and are pleased that these new stores are trading ahead of expectations. We closed 13 stores and relocated a further three, trading from 526 stores at the end of the period. We also invested c.£1.4m in 34 store refits and continued to improve the store experience for customers by enhancing layouts, optimising the space utilisation across categories, and introducing clearer navigation and signage, supported by the evolved brand.

Sales densities in our stores remain relatively low and we believe there is a significant opportunity to increase this through winning new customers, better ranging and customer experience, space optimisation and improved product availability, all supported by a new labour structure put in place at the start of FY24. Whilst the priority in the short to medium term is to improve the existing store estate to realise its potential, in due course we will also consider whether to reintroduce a measured roll out programme, as we believe there is scope for the brand to trade successfully from at least 600 stores in the UK.

Drive operational improvements: Improving the operating effectiveness of the business is pivotal to our success. Although we will always maintain a lean operation, some areas of the business were previously inadequately resourced. This year we continued to invest ahead of time to ensure that we're capable of realising the sales potential we believe The Works can reach.

In FY23 we restructured the distribution centre management team. The new team made an immediate impact, reviewing the operation and proposing a series of improvements in the way we pick and fulfil store deliveries for implementation in FY24. We expect to see significant cost savings and improved product availability in-store as a result of these changes.

We implemented a new stock allocation system, Slimstock, to improve the quality of stock allocation decisions, which should improve store stock availability and therefore sales. At the start of the current calendar year we also significantly strengthened our merchandise planning function, and have been delighted to welcome some excellent new colleagues from respected retailers, which will drive a step change in our capability in this area. Allowing time for the new stock allocation system's algorithms to "learn" The Works' data and for our new merchandising team to get fully up to speed with it, we expect to see further benefits in FY24 and beyond.

Towards the end of FY23 we successfully launched the pilot of our new EPOS software in stores. Plans are in place to roll this new software out across the store estate by the end of FY24.

A new automated packing machine and robotics were introduced to the online fulfilment operation during the year (operated by a third-party provider, iForce). We continue to work with iForce to further improve the fulfilment cost per order and reduce our consumption of packaging. 

Late in the financial year, we launched a planned review of the business operating model. The first phase of this project entails documenting our current ways of operating, confirming the desired future ways of working and mapping the plan to migrate to the improved model. There will be significant changes to processes and IT systems over the next two to three years, which will fundamentally improve the way our business buys, moves and allocates stock, driving cost efficiencies and improved product availability for our customers.

Colleagues

In an unpredictable and challenging year, our colleagues have remained steadfast in their dedication to helping customers to read, learn, create and play. We have worked hard to build and maintain our unique culture, underpinned by our values and a team of committed and enthusiastic colleagues. I am proud that 10% of colleagues were promoted in the year and was delighted that we moved up one place to 12th in the "Best Big Companies to Work For" national list, from 13th in each of the past two years. We also maintained our 2* accreditation for 'outstanding' workplace engagement (3* being the highest possible accreditation).

To continue to support the engagement, development and wellbeing of our colleagues, we launched 'MyWorks', a communications and engagement platform to keep colleagues informed about company news and benefits, and to enable access to resources on physical mental and financial wellbeing. We also introduced the 'Can Do Academy', a system to support colleagues' learning and development, and in response to the challenges created by the cost-of-living crisis we launched Wagestream, an app that offers a range of financial wellbeing tools.

Looking ahead to FY24, we will continue to invest in our colleagues, including launching a new Reward and Recognition programme to positively reinforce our values, celebrate success and provide financial incentives linked to our purpose and values.

Environmental, Social and Governance (ESG)

This time last year we were at the fledgling stages of the environmental part of our ESG journey and I am pleased that we have made significant further progress since then. The business is now fully aligned around our mission of "Doing Business Better", which is about making positive and sustainable changes.

A key development was the appointment of a Sustainability Manager in January 2023. The business has also adopted a more structured and rigorous approach to the environment, for example, to set longer-term ambitions to reduce the impact of our products, packaging and waste. We are also continuing to work with a specialist third-party ESG consultancy and during the year we set carbon reduction targets for Scope 1, 2 and 3 emissions and developed roadmaps to achieve them. Our Scope 1 and Scope 2 targets, together with our ambition to achieve net zero by 2040, fully align with the British Retail Consortium's climate action roadmap and we became fully compliant with the Task Force on Climate-related Financial Disclosures (TCFD) in FY23.

We are committed to creating an inclusive environment at The Works where everyone feels they belong and where different experiences, cultures and perspectives are embraced. We completed a review of our existing Diversity and Inclusion (D&I) policies and practices and have now developed a D&I strategy. Implementation of this will increase our collective understanding of D&I, improve training, enhance practical awareness and accountability at all levels and ensure that barriers to inclusion are removed.

"Giving back" is part of our psyche and I am hugely grateful to our colleagues and customers for their generosity in supporting our charity initiatives. We are pleased to be developing a new charity partnership with the National Literacy Trust this year, which is closely aligned to our purpose of inspiring people to read, learn, create and play.

Outlook

I am proud of the way everyone at The Works navigated a challenging year. We expect FY23 to be the low point in The Works' profitability post-COVID given that cost headwinds have now eased, the financial performance improved throughout the second half of the year and we have started to make more meaningful strategic progress, the benefits of which are expected to be realised in FY24 and beyond.

The macroeconomic outlook remains uncertain and we have entered the new financial year with a degree of caution, however, I am encouraged by the enduring appeal of The Works' value proposition and excited by the opportunities presented in the year ahead, which the business is now better equipped to capitalise on. The Board and I are comfortable with the Company compiled estimate of the market's forecast, an EBITDA of £10m for FY24, and remain confident in our ability to deliver profitable growth in the medium term.

Gavin Peck

Chief Executive Officer

30 August 2023

Financial review

The FY23 accounting period relates to the 52 weeks ended 30 April 2023 (also referred to as the Period) and the comparative FY22 accounting period relates to the 52 weeks ended 1 May 2022.

The Group refers to alternative performance measures (APMs) as it believes these provide management and other stakeholders with additional information which may be helpful. These measures are used by management in running the business, and include pre IFRS 16 Adjusted EBITDA ("EBITDA") and like for like ("LFL") sales. Accordingly, reference is made to these measures in this report.

The Group made a profit before tax of £5.0m (restated FY22: £14.2m). This result includes a £5.1m impairment charge, most of which relates to the notional right of use asset created as a result of following the requirements of the IFRS 16 accounting standard. As in previous periods, impairments have been treated as Adjusting items. The Adjusted profit before tax excluding impairment charges was £10.1m (restated FY22: £16.5m).

The Pre IFRS16 Adjusted EBITDA for the Period was £9.0m (FY22: £16.6m). The FY23 Adjusted PBT is greater than the EBITDA because of the effect of IFRS 16. We would normally expect the Adjusted PBT to be less than the EBITDA. Please refer to page 14 of this report and note 3 of the condensed financial statements for further information.

The FY23 results have been published later than originally intended. The delay was due to significant additional work being undertaken, principally in relation to asset impairment charges and related impacts on IFRS 16 calculations. As well as affecting the FY23 result, this also entailed the restatement of comparative figures for prior periods. Whilst the delay has been frustrating, we highlight that the issues in question have not affected the Board's assessment of the underlying performance of the business (for example, as represented by the EBITDA) and had no direct cash impact. Information regarding the restatements is included in note 11 of the condensed financial statements.

Overview

The result for FY23 was in line with the revised forecast we referred to in August 2022. During the Period:

· Revenue increased by £15.5m, driven by 7.5% growth in store LFL sales and sales from new stores exceeding sales forgone from closed stores (through optimisation of the store estate). Online sales declined by 15%.

· The product gross margin percentage declined due to the planned increase in the mix of sales of lower margin books, and increased costs of stock, principally freight. These negative effects were partly offset by supplier rebates which were collected (£0.6m of which related to periods prior to FY23).

· Costs increased due to:

o  The cessation of COVID-19 business rates relief.

o  The increase in the National Living Wage by 6.6% in April 2022.

o  Electricity price inflation.

· There was a net increase in EBITDA of approximately £0.6m due to the opening and closure of stores during the year. Although the number of stores trading had only increased by one at the year end, we benefitted from being able to time the openings and closures such that we had a net six more stores trading during the peak Christmas period. In addition, the average sales levels from the new stores were greater than for the stores which were closed.

· The Group experienced a cyber security incident in March 2022. We believe the residual effects of this adversely affected FY23's result due to the Group taking a measured and cautious approach to reinstating systems whilst simultaneously accelerating the implementation of strengthened IT security. Due to the impossibility of accurately estimating the financial effect, it has been absorbed within the EBITDA result and not identified separately as an Adjusting item.

We noted in the FY22 Annual Report that the net cash balance on 1 May 2022 was higher than normal as it included the benefit of increased creditor balances. These mostly related to the continuing effect of events connected with COVID-19 (such as rent deferrals) and, as expected, unwound finally during FY23. Therefore, although the FY23 net cash balance of £10.2m is lower than the prior year's £16.3m, it represents a more typical Period-end level, and has grown progressively compared with the £0.8m net cash balance at the end of FY21 and £7.1m of net debt at the end of FY20.

It has been reassuring, particularly during the periods of heightened uncertainty in recent years, to have the benefit of a large (£30.0m at the Period end) revolving credit bank facility, however, there is a cost associated with maintaining such a facility. Our forecasts indicate that even under a sensitised downside scenario, it is unlikely that we would ever use the entire facility. With this in mind, we have recently reduced the size of the facility to £20.0m, which will save approximately £0.15m in annual facility maintenance fees and, at the same time, extended the term of the facility so that it terminates at the end of November 2026 rather than November 2025.

The Board will be recommending to shareholders at the AGM a final dividend of 1.6 pence per share in respect of FY23. Updated information regarding the Group's policy on dividends and capital distributions is included at the end of this report.

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 increased by 5.8% to £280.1 million (FY22: £264.6 million). 

Total gross sales (1) increased by 6.1% compared to FY22. Two thirds of the total sales increase was from LFL sales (2) which grew by 4.2%, with positive growth in stores but a decline in online sales. The remaining sales growth was from the continued optimisation of the store estate (see table and narrative on the following page).

The quarterly LFL sales summary in the table below and the narrative which follows shows how store LFLs strengthened progressively during FY23 but that we were unable to achieve positive sales growth online, due to a combination of internal and external factors.

(Definitions of gross sales and LFL are included in the footnotes on the following page).

· Q1 highlights

o  Sales in Q1 FY23 were constrained, particularly online, a significant cause of which was the residual impact of the March 2022 cyber security incident.

o  We also annualised against strong FY22 comparatives, which were the result of pent up demand following the end of the final COVID-19 lockdown in April 2021. The strong demand in early FY22 was also driven by a larger than usual post lockdown sale, which included stock that would normally have been sold in January/February 2021, and strong sales of "fidget frenzy" toys. 

· Q2 highlights

o  The Works had a good summer 2022. The newly refreshed outdoor play range performed well and the 'Back to School' season sales were very good.

o  The LFL sales growth rate softened slightly in the latter part of Q2 due to losing a full trading day for the additional bank holiday in late September, as well as the comparatives in September and October 2021 being strong, when we believe Christmas shopping was brought forward due to consumers' concern about possible further lockdowns affecting Christmas shopping in 2021.

· Q3 highlights

o  In contrast, Q3 comparatives with the prior year weakened due to concerns in late 2021 about the potential effects of the emerging Omicron COVID-19 variant, supply chain disruption, and the FY22 January sale being low key.

o  Sales strengthened sharply just before Christmas, suggesting that consumers shopped much later than in 2021. We delivered strong store sales over Christmas, which continued in the January sale.  

o  Online sales were disappointing, impacted by reduced consumer confidence in fulfilment (due to postal strikes in late 2022) as well as the normalisation of shopping behaviour away from online, as seen across the retail industry.

· Q4 highlights

o  Trading was steady following the January sale, with store sales continuing to grow positively, and online sales continuing to be in decline. The rate of overall sales growth increased slightly during this quarter as the prior year comparatives weakened due to the aftermath of the March 2022 cyber security incident.

The table below shows the reconciliation of LFL sales used for year-on-year comparisons, with statutory revenue.

(1) "Total gross sales" include VAT and are stated prior to deducting the cost of loyalty points which are adjusted out of the sales figure in the calculation of statutory revenue.

(2) LFL sales growth has been calculated with reference to the FY22 comparative sales figures. In FY22's Annual Report, two year comparatives were used because the use of a normal one year LFL comparative was prevented by the various disruptions to store trading brought about by COVID-19 restrictions in the FY21 comparative period.

The year on year increase in the cost of loyalty points shown in the table above is larger than normal because the FY22 comparative was unusually low (as reported last year) due to the write back of expired points previously issued and accounted for. The underlying cost of loyalty points redeemed by customers during the year increased in the way we expected, both as a result of the year on year increase in sales, and due to the additional focus placed by the business on signing up new members and encouraging existing members to re-engage with the loyalty scheme.

Store numbers

The number of stores trading increased by one during the period, from 525 to 526. Despite this small change between the beginning and end of year numbers, the additional sales from new/closed stores in the table above shows a notable increase compared with the prior year. This was principally because we benefitted from being able to time the openings and closures such that a net six more stores were trading during the peak Christmas period, and secondarily because the new stores individually also generated more sales than the stores that were closed. The new stores are trading with sales levels at or above their financial appraisal targets.

Product gross margin and gross profit

The product gross margin rate decreased by 170bps to 57.6% (FY22: 59.3%). The most significant factors in the year on year movement were:

· An increase in the sales mix of front-list, lower margin books (as has been described previously) which reduced the margin percentage by approximately 100bps. We believe this generated incremental cash margin due to selling higher volumes of items which were higher priced.

· Higher freight costs, which remained high on a spot basis during H1 before falling significantly in H2. The interval between incurring the freight cost and selling the goods is such that the higher rates continued to affect FY23's margin for some time after the spot rates had fallen. This timing factor makes it difficult to estimate the precise impact on the margin rate, our best estimate of which is approximately 100bps.

· There was a small year on year margin rate increase due to other factors including stock provision movements, supplier rebates/retrospective discounts and pricing changes. Towards the end of FY23, prices of some lines were increased to reflect the rise in inflation generally experienced during the year, to ensure that the business achieves an acceptable balance between offering value to customers and a reasonable margin.

Store payroll costs increased by £3.3m.

· The annual rise in the National Living Wage (NLW) accounted for £2.1m or 64% of the year on year increase, including the additional cost of maintaining sensible differentials between pay grades for colleagues paid more than the NLW, in light of the increased base wage level.

· The optimisation of the store estate, entailing the opening of 14 stores, the closure of 13, and the relocation of 3 stores, created an additional £0.7m of store payroll costs. This increase appears disproportionately high given that only one more store had been added by the year end, however, the timing of the openings and closures which benefitted the sales line (i.e. having more stores trading during the Christmas peak) also incurred corresponding additional costs.

Store property and establishment costs increased by £8.1m.

· The largest component of the increase was £5.8m of business rates charges. These costs had been comparatively lower in FY22 due to COVID relief, but payments resumed in full during FY23.

· Electricity costs increased by £1.0m due to inflation.

· Despite a year on year reduction in like for like rents, total rent charges increased by £1.0m

o  The ongoing process of renegotiating and renewing expiring leases resulted in a reduction of £0.6m in rents in the LFL store estate, including the release of accruals established in some situations where the effective date of the decrease was backdated to a prior period, due to the protracted nature of the rent negotiations (in these situations, we continue to accrue for the higher rent level until the reduction is confirmed in writing).

o  The timing of opening and closing stores referred to above, plus the full year cost of stores opened part way through FY22, resulted in additional rent costs of £0.7m (i.e. effectively a "volume" related increase).

o  During COVID-19 rent negotiations with landlords (for example, where we were seeking rent concessions in respect of enforced store closures), concessions were sometimes informally agreed via a credit note, to be formalised subsequently. A provision is maintained for credit notes relating to amounts that have not been recovered after 2 years (although we still pursue and expect to recover most of the amount provided for), and this provision increased by £0.5m during FY23.

o  Turnover rents increased by £0.4m due to sales increases in the 129 stores where the rent is based wholly or partially on a percentage of turnover. Turnover rent mechanisms typically look back to earlier periods to calculate the applicable rent and, in FY22, the look back periods often included periods during FY21 when stores were closed due to COVID-19 restrictions. There have also been sales increases in some stores (overall store LFL sales growth was 4.2%) which have triggered the payment of, or increased, turnover rents.

· Service charges increased by £0.3m due to the new/closed store timing effect described above, and service charge inflation.

Online variable costs decreased by £0.3m.

· The decrease was due to the year on year decrease in sales, and the consequential reduction in marketing, fulfilment, transaction and other variable costs which were £1.3m lower than in FY22.

· These savings were partially offset by higher costs at the iForce fulfilment facility (third party operated) and higher packaging costs. The efficiency of the operation has been reviewed with iForce, and changes have been implemented for FY24 which are expected to reduce the fulfilment cost per unit, including a reduction in the space allocated in the facility.

Adjusting items and prior year adjustment

· Adjusting items were £5.1m in FY23 (restated FY22: £2.3m), and comprised impairment charges. The prior period comparatives have been restated to reflect the allocation of central overheads to individual stores, which resulted in a higher impairment charge being required in respect of FY22 and prior periods. This is described in note 11 of the condensed financial statements.

· 70% or £3.6m of the £5.1m FY23 impairment charge relates to the notional "right of use" asset which arises through the operation of IFRS 16.

· Consistent with the approach the Group has taken previously, impairment charges (and reversals) are treated as Adjusting items. As well as being consistent, this is appropriate due to the size of the total impairment charge, which is more reflective of the broader UK macro-economic environment impacting many retail businesses than of the underlying performance of individual stores.

IFRS 16 impact

· IFRS 16 has had the effect of significantly increasing the Adjusted profit before tax in FY23, by £7.0m compared with the non IFRS 16 figure (see note 3 of the condensed financial statements). This £7.0m broadly comprises £10.7m included within cost of sales per the table above and £0.4m included within administrative costs, less £4.1m of IFRS 16 interest charges.

· Due to the restatement of impairment charges in relation to prior periods, there is a significantly greater IFRS 16 impact than reported in previous years, particularly on Adjusted profit. The additional impairment charges reduced the net book value of the IFRS 16 "right of use" asset, as a result of which, the IFRS 16 depreciation charges were reduced. Meanwhile, the actual rents paid were unaffected, resulting in a greater disparity between the rents and the IFRS 16 P&L charges. Please refer to note 3 of the condensed financial statements for a detailed analysis of the impact of IFRS 16 on the profit before tax.

Distribution costs to stores

The costs of picking stock and delivering it to stores increased by £1.2m compared with FY22.

· Distribution labour costs increased by £0.5m, due to wage rate inflation from the increase in the NLW, and an increase in the volume of items picked. Approximately half of the cost increase was due to inflation, and the remainder to the increase in volumes.

· The costs of delivering pallets from the DC to stores increased by £0.4m. Higher volumes accounted for £0.15m with the remainder due to inflation passed on by the pallet delivery company to which we outsource this task.

· Storage costs of £0.15m were incurred to accommodate additional stock prior to the Christmas sales peak. This was a precaution taken to mitigate against the risk of a repetition of the disruption experienced in the prior year.

Administration costs

Administration costs (before depreciation and IFRS 16) decreased by £0.3m compared with FY22. The largest change was a £2.3m decrease in bonus costs, as no bonus will be paid in respect of FY23.

Head office salary and related costs (NI, pension etc.) increased by £1.3m due to the planned growth in headcount as well as wage rate inflation. Average salary rates for head office staff (including management) increased by 3.0%, a significantly lower rate than the 6.6% increase in the National Living Wage.

There was a net increase of £0.7m in other administration costs, due principally to IT software licence and maintenance costs, higher audit fees, and stock taking costs.

Net financing expense

Net financing costs in the period were £4.4m (FY22: £5.2m), mostly relating to IFRS 16 notional interest.

Gross cash interest payable was £0.3m, in relation to facility availability charges (FY22: £0.4m). £0.2m of interest was received in FY23 (FY22: £Nil).

Tax

The impairment charges noted above, by reducing the taxable profits of prior periods, created available brought forward tax losses, which significantly reduced the effective tax rate and overall tax charge for FY23. As a result, there was a net tax credit of £0.3m (restated FY22: £0.3m expense) consisting of a £0.4m current tax credit and a £0.1m deferred tax charge. The £0.3m overall tax credit equated to an effective tax rate of (5.3%) (restated FY22: 1.9%).

The average headline corporation tax rate for FY23 was 19.5%, as the rate changed from 19% to 25% 11 months into the financial year (FY22: 19.0%). Deferred tax has been calculated at a rate of 25.0% in both periods.

Earnings per share

The Adjusted basic EPS for the year was 16.5 pence (restated FY22: 26.0 pence).

The Adjusted diluted EPS was 16.4 pence (restated FY22: 25.6 pence).

The difference between the Adjusted basic and Adjusted diluted EPS figures is due to the exclusion from the diluted EPS calculation of outstanding potentially dilutive share options.

Capital expenditure

Capital expenditure in the Period was £6.7m (FY22: £3.0m).

· New stores and relocations - the net investment in new stores and relocations increased by £0.6m compared with FY22. 14 new stores were opened and 3 stores relocated to new units (FY22: 5 new stores, 6 relocations). In FY23, approximately 50% of the capital costs of opening the stores was funded by landlord contributions, a lower proportion than in FY22 when most of the investment was landlord funded.

· Store refits, maintenance and lease renewal costs - 34 stores were refitted in FY23 at a cost of £1.4m (FY23: 16 refits costing £0.4m). Maintenance capex was £1.2m (FY22: £0.4m) and lease renewal costs were £0.4m (FY22: £0.2m).

· IT hardware and software - the largest item of expenditure was the cost of configuring and testing the new store EPOS software prior to its implementation in stores during FY24.

FY24 capex is expected to be approximately £7.0m.

Inventory

Stock levels were £33.4m at the end of FY23 (FY22: 29.4m).

Gross stock, £31.3m, increased by 5% compared with FY22. This is a lower percentage increase than the corresponding year on year increase in the cost of sales (10%) and is due to an increase in the average cost per unit of stock (due to mix as well as an increase in overall cost prices), as the number of units in stock at the Period end declined year on year.

Stock provisions decreased significantly, due to both volume and rate effects.

· The provision for unrecognised shrinkage decreased due to the introduction of full "4-wall" stock counts in all stores between Christmas and the year end. As a result, the time elapsed between the date of the most recent store stock count and the year end, which is one of the key variables affecting the calculation, was significantly less than in the prior year, resulting in a lower provision. The other key variable, the underlying weekly rate of store stock loss, was not materially different to the rate in FY22.

· There was a further reduction in the stock obsolescence provision (it was £1.8m at the end of FY21), due to continued improvements in the management of terminal and slow moving stocks.

Cash flow

The table shows a summarised non IFRS 16 presentation cash flow. The net cash outflow for the year was £6.1m (FY22: inflow of £15.5m).

As noted at the end of FY22, the cash balance at that time included favourable working capital timing differences which have unwound in FY23 and resulted in a negative movement in working capital during the Period. In most years, there would be expected to be a broadly neutral or slightly positive movement in working capital. The other main year on year variable which affected the cashflow was the reduction in profit level compared with FY22.

Bank facilities and financial position

The Group ended the Period in a strong financial position, with net positive bank balances of £10.2m (FY22: £16.3m). At the Period end the Group had liquidity availability of £40.0m, including its undrawn £30.0m bank facility.

Since the Period end, the Group has implemented a reduction in the size of the facility, which was undrawn throughout most of FY23, to £20.0m, and simultaneously extended its term such that it now expires on 30 November 2026 rather than 30 November 2025. The reduction in the facility will save approximately £0.15m in annual cash interest costs, and the smaller facility continues to provide liquidity availability significantly in excess of the actual anticipated requirement.

Basis of preparation of the financial statements

The Directors believe that it is appropriate to prepare the financial statements on a going concern basis. We note for completeness that, despite the Directors' confidence in the Group's financial position and prospects, note 1 (b) of the financial statements includes reference to a "material uncertainty " in relation to the adoption of the going concern basis of preparation of the financial statements. The reasons for this are explained in the note.

Capital distributions and FY23 final dividend recommendation

Following a strong performance in FY22, the Group paid a final dividend of 2.4 pence per share in respect of that year, in November 2022. The FY22 Annual Report stated that future payment levels will be reviewed based on conditions at the time, with the Group confirming its intention to resume a progressive dividend policy in due course once conditions stabilise.

The business has an ongoing capex requirement (including discretionary capex) approximately in line with its non-IFRS 16 depreciation charge and generates strong cashflows. However, in setting the capital distribution policy, the Board is mindful of the principal risks that the Group faces, as outlined in the FY23 Annual Report. At present two of these risks, in relation to macro-economic conditions and the execution of the Group's strategy, are at increased levels. In these circumstances, we will operate with a capital structure and capital distribution approach that ensures the business remains financially resilient, whilst making appropriate returns to shareholders.

Our objective is to ensure that, under normal circumstances, ordinary dividends (in pence per share) are 2.5x covered by Adjusted EPS. We do not believe that normal circumstances apply in the context of setting the FY23 dividend, as outlined below.

FY23 dividend

As noted previously in the report, the Board hopes that FY23's EBITDA was a low point and that it will increase progressively in future. During the period in which the business works to rebuild its levels of profit, a compromise is sought, between maintaining a reasonable dividend for shareholders, whilst ensuring that the Group continues to maintain its cash reserves.

We believe that in FY23, the effects of

· impairment charges (including the effect of prior year adjustments on earlier periods);

· IFRS 16, and

· an unusually low tax charge,

have resulted in an Adjusted EPS which is inconsistent with our perception of the underlying profitability as represented by the Adjusted pre IFRS 16 EBITDA. Using EBITDA as an alternative reference point for illustration, if the FY23 dividend was set by pro rating using the ratio of the FY23 EBITDA (£9.0m) to the FY22 EBITDA (£16.6m), it would be 1.3 pence per share.

Taking into account the foregoing and, in seeking to achieve a reasonable compromise between returns to shareholders and prudence, the Board will propose at the forthcoming AGM a final dividend for FY23 of 1.6 pence per share (amounting to a £1.0m total payment).

Although this is a smaller dividend than was paid in relation to FY22, we believe that it is in keeping with FY23's performance (for example, the EBITDA did not meet the threshold for payment of executive bonuses). However, it does not reflect a reduction in the Board's belief in the future prospects of the business, in which it remains confident.

Indicative outlook for FY24 dividend

As previously noted, the Company compiled estimate of the market's forecast for FY24 is an EBITDA of approximately £10.0m. If the actual result for FY24 transpires to be in line with this forecast, it is anticipated that the total dividend for FY24 would grow approximately in proportion with the EBITDA. Assuming that the effects of non-cash accounting variables such as IFRS 16, and tax, are more neutral in FY24, we would expect that the resulting cover from this approach would be more in line with the 2.5x objective outlined above.

Other forms of distribution

It is anticipated that distributions will be made solely via ordinary dividends for the foreseeable future.

In the event that performance improves at a faster rate than anticipated, and that this is sustained, or that for some other reason the Group accumulates cash reserves which it deems surplus to requirements for operation and investment purposes, and for which it can envisage no requirement to maintain on the balance sheet, other forms of distribution will be considered, such as share buy backs.

Decisions as to the quantum and frequency of such alternative distributions would be made at the time, in light of the specific circumstances.

Share buybacks for the purposes of share schemes

To avoid dilution of existing shareholder interests, the Board's intention is for the Group to purchase shares in the market for re-issue under employee share schemes.

Steve Alldridge

Chief Financial Officer

30 August 2023

Consolidated income statement

For the period ended 30 April 2023

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

Consolidated statement of comprehensive income

For the period ended 30 April 2023

Consolidated statement of financial position

As at 30 April 2023

These financial statements were approved by the Board of Directors on 30 August 2023 and were signed on its behalf by:

Steve Alldridge

Chief Financial Officer

Company registered number: 11325534

Consolidated statement of changes in equity

1 Hedging reserve includes £170k (FY22: £175k) 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.

Consolidated cash flow statement

For the period ended 30 April 2023

Notes to the condensed consolidated financial statements

(Forming part of the financial statements)

1. Accounting policies

Where accounting policies are particular to an individual note, narrative regarding the policy is included with the relevant note; for example, the accounting policy in relation to inventory is detailed in Note 17 (Inventories).

(a) General information

TheWorks.co.uk plc is a leading UK multi-channel value retailer of arts and crafts, stationery, toys, games and books, offering customers a differentiated proposition as a value alternative to full price specialist retailers. The Group operates a network of over 500 stores in the UK & Ireland and online.

TheWorks.co.uk plc (the 'Company') is a UK-based public limited company (11325534) with its registered office at Boldmere House, Faraday Avenue, Hams Hall Distribution Park, Coleshill, Birmingham B46 1AL.

These consolidated financial statements for the 52 weeks ended 30 April 2023 (FY23 or the 'Period') comprise the results of the Company and its subsidiaries (together referred to as the 'Group') and are presented in pounds sterling. All values are rounded to the nearest thousand (£000), except when otherwise indicated.

(b) Basis of preparation

The Group financial statements have been prepared in accordance with UK-adopted International Accounting Standards.

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the application of policies, and the 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 going concern and fixed asset impairment; these are described in Note 1(f).

(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 its current position and the potential impact of the principal risks documented in the Strategic report on pages [•] to [•]. The financial statements have been prepared on a going concern basis, which the Directors consider appropriate having made this assessment.

The Group has prepared cash flow forecasts for a period of at least twelve months from the date of approval of these financial statements (the going concern assessment period), based on the Board's forecast for FY24 and its 3 Year Plan, referred to as the 'Base Case' scenario. In addition, a 'severe but plausible' 'Downside Case' sensitivity has been 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 have 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 risks described in the Strategic report;

• the output of the Base Case scenario, which mirrors the Group's 3 year plan and therefore represents their 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.

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 end of FY23 the Group held net cash at bank of £10.2m (FY22: net cash at bank of £16.3m).

After the Period end, the Group extended the tenor of its bank facility by one year and it now expires on 30 November 2026. At the same time, following a review of the historic utilisation of the facility, the Group's anticipated future cash requirements, and the costs of maintaining the facility, the Group requested that HSBC reduce the size of the facility from £30m to £20m.

The facility includes two financial covenants which are tested quarterly:

1. the "Leverage Ratio" or level of net debt to LTM (last twelve months') EBITDA must not exceed 2.5 times during the life of the facility.

2. the "Fixed Charge Cover" or ratio of LTM EBITDA prior to deducting rent and interest, to LTM rent and interest. This covenant increases in steps to reflect the expectation of progressively improving financial performance during the life of the facility, as follows: until October 2023, the ratio must be at least 1.20 times; for the following 12 months the ratio must be at least 1.25 times, and thereafter at least 1.30 times.

The Group expects to be able to operate and have sufficient headroom within these covenants during the forecast period.

Potential impact of risks on financial scenarios

It is considered unlikely that all the risks described in the Strategic report would manifest themselves to adversely affect the business at the same time. The Base Case scenario/the Group's 3 year financial plan, implicitly already takes into account the risks described, and assumes that they manifest themselves in a way or to an extent that might be considered "neutral".

The Downside Case scenario assumes that there are more severely negative effects than in the Base Case. In particular, the Downside Case assumptions are that macroeconomic conditions are significantly worse, resulting in reduced consumer spending and lower sales. It should be noted that the Base Case already takes into account the current subdued consumer market conditions. The Downside Case assumes that conditions become worse still from the second half of the FY24 financial year.

Base Case scenario

The Base Case scenario assumptions reflect the following factors:

• Store sales (which represent over 85% of total sales) during the first part of FY24 are above the Base Case requirement but online sales are below it. The Group is implementing plans to improve its online profitability in the medium term; in the short term, costs relating to the online business are being tightly controlled to ensure that they reflect the reduced sales level.

• The Base Case gross margin percentage reflects the expected full year effect in FY24 of targeted price increases applied since the beginning of 2023 and also significantly lower ocean container freight costs. These favourable factors are partially offset by a less favourable hedged FX rate than in FY23.

• Anticipated further inflationary effects, in particular the increase in the National Living Wage. In respect of other costs, notably property occupancy costs, it is not expected that there will be further significant inflationary effects during FY24 and FY25, following the significant increases (for example in electricity costs) already experienced during FY23.

• 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 on pages [36 to 42], the impact on the Group's financial performance and position is not expected to be material in the short term.

• The plan makes provision for dividend payments.

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. This is consistent with the normal pattern experienced prior to COVID-19. 

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 circumstances such as are described below

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 5% lower than in the Base Case from October 2023 until January 2025.

· In this scenario online sales are assumed to be lower than in the Base Case during FY24 despite the Group's attempts to increase them, but show recovery in FY25.

· The product gross margin assumptions are the same as in the Base Case other than in January 2024 when it is lower, to allow for the clearance of stock which is assumed would have accumulated due to the inability to reduce stock purchases immediately in response to the lower sales level. Expected FX requirements are hedged until mid FY25, and freight rates are hedged until the end of 2023. Beyond that time, it is not anticipated that there will be any interruption to global freight systems as was experienced as a result of the COVID pandemic, which were a consequence of unique circumstances. 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 dividend payments.

· The combined financial effect of the modified assumptions in this scenario compared with the Base Case, during FY24 and FY25, including implementing some of the mitigating activities available, would result in:

o  a reduction in store net sales of approximately £34m.

o  a reduction in online net sales of approximately £1m.

o  a reduction to EBITDA of approximately £9m.

Under this scenario the Group will draw on its bank facility prior to Christmas 2023 but, as a result of the mitigating actions that would be taken in H2 FY24 in response to a downturn in sales, particularly in reducing the value of stock bought for resale, it would not make subsequent use of the bank facility.

The bank facility financial covenants are complied with during the pre-Christmas 2023 period when the facility is being used, but the forecast indicates that the Fixed Charge covenant will not be complied with throughout FY25, although at this time, the facility is not expected to be in use under this scenario. 

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 cash headroom at the quarterly covenant testing points in FY25 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 small borrowing requirement could arise. 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. 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 recent 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.

Going concern and basis of preparation conclusion

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) New accounting standards

The Group has applied the following new standards and interpretations for the first time for the annual reporting period commencing 2 May 2022:

• Annual Improvements to IFRS 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41)

• Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37)

• Property, Plant and Equipment - Proceeds before Intended Use (Amendments to IAS 16)

• References to the Conceptual Framework (Amendments to IFRS 3)

• COVID-19 Related Rent Concessions beyond 30 June 2021 (Amendments to IFRS 16)

The adoption of the 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.

As at the date of approval of these financial statements, the following standards and interpretations, which have not been applied in these financial statements, were in issue, but not yet effective:

• Insurance Contracts (IFRS 17)

• Initial Application of IFRS 17 and IFRS 9 - Comparative Information (Amendments to IFRS 17)

• Extension to the Temporary Exemption from Applying IFRS 9 (Amendments to IFRS 4)

• Disclosure of Accounting Policies (Amendments to IAS 1)

• Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to IAS 12)

• Definition of Accounting Estimates (Amendments to IAS 8)

The adoption of the standards and interpretations listed above is not expected to have a material impact on the financial position or performance of the Group.

(c) 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 financial statements are described in the context of the matters to which they relate, in the following notes:

2. Other operating income/(expense)

Accounting policy

The business was classified as a 'non-essential retailer' during the COVID-19 pandemic and was therefore required to close its shops during periods of lockdown in the FY20 and FY21 financial years. Accordingly, the Group made full use of the support schemes available from the Government to partially mitigate the loss of profit caused by the various periods of closure of the retail stores.

The £119k charge noted in the prior period is to correct an immaterial overstatement of the Coronavirus Job Retention Scheme (CJRS) income reported in respect of FY21.

The COVID-19 business rates relief received during the year was £227k (FY22: £5,828k), which is included within cost of sales.

3. Alternative performance measures (APMs)

Accounting policy

The Group tracks a number of 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.

Like-for-like (LFL) sales

The FY23 like-for-like (LFL) sales increase has been calculated with reference to the FY22 comparative sales figures. In FY22's Annual Report, two-year comparatives were used because the use of a normal one-year LFL comparative was prevented by the various disruptions to store trading brought about by COVID-19 restrictions in the FY21 comparative period. Furthermore, for the last five weeks of FY22, it was necessary to calculate the LFL percentages with reference to the corresponding weeks in FY19, because the equivalent weeks during FY20 were also affected by enforced store closures. Similar comparison periods were also used for the total sales growth figures.

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.

A reconciliation of IFRS revenue to sales on an LFL basis is set out below:

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 6 for a description of Adjusting items. Pre-IFRS 16 EBITDA is used for the bank facility LTM EBITDA covenant calculations.

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

1 Also adjusted for profit and loss on disposal of right-of-use assets and liabilities, property, plant and equipment and intangible assets.

Profit before tax and IFRS 16

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

Adjusted profit metrics

Profit measures including 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. These adjusted metrics are included within the consolidated income statement and consolidated statement of other comprehensive income, with further details of Adjusting items included in Note 6.

4. Adjusting items

Adjusting items are unusual in nature or incidence and sufficiently material in size that in the judgement of the Directors merit disclosure 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.

The Directors believe that the Adjusted profit and earnings per share measures included in this report provide additional useful information to users of the accounts. These measures are consistent with how business performance is measured internally. 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.

If a transaction or related series of transactions has been treated as an Adjusting item in one accounting period, the same treatment will be applied consistently year on year.

In relation to FY23, the items classified as 'Adjusting', as shown below, were related to transactions that had been treated as Adjusting in prior periods.

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

5. Operating profit

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

1 These balances relate to non-IFRS 16 operating lease rentals during the year; please refer to Note 15 for further details of these balances.

Auditor's remuneration:

6. Staff numbers and costs

The average number of people employed by the Group (including Directors) during the year, analysed by category, was as follows:

The corresponding aggregate payroll costs were as follows: