Interim results: Underlying progress flattered by timing
H118 pre-tax profit (before valuation of derivatives) was sharply higher at £11.9m against £1.9m in H117. The increase was largely driven by Express Gifts, with a 103% operating profit increase from the Education division also contributing.
Exhibit 1: Summary of interim results
£m |
H117* |
H118 |
Growth |
Express |
159.5 |
176.6 |
10.7% |
Education |
53.5 |
49.4 |
-7.8% |
Total revenue |
213.0 |
226.0 |
6.1% |
Operating profit |
|
|
|
Express |
5.1 |
16.1 |
215.3% |
Express operating margin |
3.2% |
9.1% |
5.9% |
Education |
1.7 |
3.4 |
102.8% |
Central costs |
(0.3) |
(3.2) |
886.6% |
Total |
6.5 |
16.3 |
153.0% |
Operating margin |
3.0% |
7.2% |
4.2% |
Interest |
(4.6) |
(4.4) |
4.0% |
PBT |
1.9 |
11.9 |
538.1% |
Source: Findel. Note: *27 weeks.
The results included the positive effect of timing differences at Express, discussed below. However, the increase at Education represents significant early success in its change of strategy.
The company has reclassified its results presentation to absorb the now immaterial overseas sourcing operation into Express Gifts and to state central costs separately. The increase in central costs is an allocation issue related to the reorganisation process and we do not expect it to be sustained at this level. We present the results before revaluation of foreign exchange contracts. Those revaluations resulted in a £3.8m charge (H117: £1.4m credit). They relate to foreign exchange contracts that assure expected commercial margins, whose effect are in our forecasts, and we therefore do not believe that they are helpful in understanding the results at mid-year.
Express Gifts – online increases further
Express Gifts improved further on its full-year FY17 performance with like-for-like product revenue up 15.8% (FY17: 15.6%). This was in part the result of Studio starting its pre-Christmas marketing campaign in September this year, rather than October last year.
Exhibit 2: Express results summary
£m |
H117* |
H118 |
Growth |
Product |
110.4 |
125.3 |
13.5% |
Financial Services |
47.4 |
51.2 |
8.1% |
Overseas sourcing |
1.8 |
0.1 |
-93.8% |
Total revenue |
159.5 |
176.6 |
10.7% |
Product cost of sales |
(74.6) |
(83.4) |
11.8% |
FS cost of sales (bad debts) |
(16.0) |
(10.0) |
-37.5% |
Sourcing cost of sales |
(1.6) |
(0.1) |
-91.2% |
Total cost of sales |
(92.1) |
(93.6) |
1.5% |
Gross profit |
67.4 |
83.1 |
23.3% |
Product margin |
32.4% |
33.4% |
1.0pp |
Gross profit margin |
42.2% |
47.0% |
4.8% |
Marketing costs |
(19.9) |
(23.4) |
17.6% |
Distribution costs |
(16.3) |
(17.5) |
7.1% |
Administration costs |
(26.0) |
(26.0) |
0.1% |
Operating profit |
5.1 |
16.1 |
215.3% |
Source: Findel. Note: *27 weeks.
Online ordering was up from 63% for the full year FY17 to 66.4%, showing further progress towards the company’s stated aim of becoming a 100% online operation. The increase was led by new customers, over 80% of whom ordered online, against 71% during the full year FY17. The active customer base was up by 230,000, or 15.7% year-on-year, to reach 1.7 million.
Product gross margin improved 100bp for three reasons: firstly, as a result of a marketing-based approach and reducing dependence on price discounting; secondly, because of an increased mix of apparel, which achieves higher margins; and thirdly, because Showcase items (a selection of high-profile, discounted lines designed to excite customer interest) were on average priced at c 20% gross margin, compared to the prior year period, which was dominated by a laptop offer that was not profitable. Gross margin on financial services fell as a result of lower bad debt provisions; this is essentially a timing difference produced by the company’s new provisioning system and is expected to reverse in the second half. Marketing costs were £3.5m higher as a result of bringing forward the pre-Christmas campaign, with high-profile TV advertising targeted at the main customer group (for example, timed during I’m A Celebrity…). Distribution costs responded to the increased volumes, while administrative costs were held steady.
In current trading, whereas October was sluggish in common with retailers elsewhere, November has rebounded strongly, with product sales growth of 12% for the 34 weeks to Friday 24 November. Studio appears to be benefiting from the relative trend towards bargain-hunting on small ticket items.
The presentation above clarifies the profit, as well as the revenue significance of the financial services operation to the company, which underpins its value retail offer. The healthy 8% increase in revenue supports the growth in product revenue, and the number of new customers who carried over an account balance rose 8.8% in the period, demonstrating the popularity of the facility.
Findel has responded to the sensitivity of managing consumer credit with a range of actions, and has strengthened its team in this area. We would point to the successful implementation of Welcom Software’s Financier credit management platform in October, a development noted as having been delayed in the 2017 Annual Report. Management also delivered its new bad debt model early at the year end, and is on track with development work that will result in its being compliant with IFRS 9, the International Financial Reporting Standard on financial instruments effective 1 January 2018. Meanwhile, we note that the disposition of the customer refund provisions made at year end is proceeding to plan with £8.4m having been paid, and that there are no new exceptional items.
Exhibit 3: Education results summary
£m |
H117* |
H118 |
Growth |
Revenue |
53.5 |
49.4 |
-7.8% |
Cost of sales |
(34.9) |
(31.3) |
-10.3% |
Gross profit |
18.6 |
18.1 |
-2.7% |
Gross profit margin |
34.8% |
36.6% |
1.9% |
Marketing costs |
(3.1) |
(2.0) |
35.5% |
Distribution costs |
(5.9) |
(5.2) |
11.9% |
Administration costs |
(8.0) |
(7.5) |
6.3% |
Operating profit |
1.7 |
3.4 |
102.8% |
Source: Findel. Note: *27 weeks.
First half performance at the Education business reflected the early results of the revised strategy announced at the FY17 preliminary results. This targets an operational turnaround focused on four areas:
■
Digital: increasing online ordering to ease schools’ administration and aid customer loyalty. As planned, new websites were rolled out over the summer, linked to price comparison tools. As a result, online ordering is up from c 10% in March 2017 to over 25% in November 2017.
■
Value: reducing prices to improve competitiveness. Prices were reduced on c 800 items during September by up to 30%.
■
Product: increasing direct sourcing from the Far East. The benefit of this move is likely to be seen in early FY19.
■
Profitability: simplifying the business and reducing costs to target a 10% operating margin. Savings have been achieved on the warehouse consolidation of December 2016, and further initiatives worth an annualised £3-4m were identified at year end. Around £1m of those initiatives will be realised in the current year (we therefore estimate c £0.5m is reflected in the first half). Hence the cost benefits to come are substantial.
Management believes that its plans for the division are on track. Although the trading effects of the initiatives will be more clearly seen as the school year progresses, these results are very promising, showing a 100% improvement in operating profit, of which only c 30% is the result of overhead cost savings.
Guidance for the full year is unchanged, and we make no material change to our forecasts. Management advises that as a result of Studio’s marketing initiative in September rather than October, second-half revenue growth will likely be commensurately lower: we assume 8.5% to produce 10.6% for the full year.
At the PBT level, last year’s split was H1: £1.9m, H2: £20.3m, FY: £22.2m. Against this, in FY18, H1 was £11.9m and we forecast £14.1m in H2 to total £26.0m. Even allowing for the £3.5m marketing cost switch between H1 and H2, and the disparity in bad debt provisioning, this would appear to give better visibility of the full year result. With Studio posting 12% sales growth for the first eight weeks of the second half, we believe that the balance of risk for the full year has moved to the upside.
