25 June 2020

FULL YEAR RESULTS FOR THE 52 WEEKS ENDED 29 FEBRUARY 2020 AND TRADING UPDATE FOR Q1 FY21

Refreshed strategy to return N Brown to sustainable growth

1 Adjusted EBITDA is defined as operating profit, excluding exceptionals, with depreciation and amortisation added back. The directors believe that adjusted EBITDA represents the most appropriate measure of the Group's underlying trading performance.

2 Defined as excluding exceptionals and fair value movement on financial instruments. The directors believe that adjusted profit before tax/EPS represents the most appropriate measure of the Group's underlying profit before tax/EPS as it removes items that do not form part of the recurring operational activities of the Group.

3 Excludes debt securitised against receivables (customer loan book) of £419.7m and lease liabilities of £6.9m. The directors believe this is the most appropriate measure of the Group's net debt in relation to its unsecured borrowings and is used to calculate the Group's leverage ratio, a key debt covenant measure.

4 Total liabilities from financing activities less cash, excluding lease liabilities. The directors believe this is the most appropriate measure of the Group's overall (I.e. secured and unsecured) net debt.

FY20 Results Highlights

Critical year for the Group's transition to digital

·  85% of FY20 product revenue generated through digital channels, an increase of 6 percentage points

·  Digital revenue growth: Womenswear up 5.5%, Menswear up 5.5%

·  98% of Simply Be revenues were digital, Jacamo 97%, JD Williams 81%, Ambrose Wilson 60%

·  Well-progressed strategic plan to reduce unprofitable non-digital and digital sales

Industry-wide regulatory actions affected Financial Services performance

·  New Financial Services strategy to respond to lower revenue and margin environment with enhanced and upgraded FS offering

·  Transition to a smaller but higher quality credit book over time

Operating costs down 9.9% due to strategic focus on cost base

·  Better targeted, data-driven marketing spend.  Embedded efficiencies to deliver sustainable cost base

Adjusted profit before tax down 28.8% to £59.5m

·    Driven by lower gross profit and lower than expected IFRS9 provision benefit

Material increase in statutory profit before tax to £35.7m

·  Reflects significantly lower exceptional charges
 

Q1 FY21 Trading Highlights

Trading has continued to improve from the sudden and significant decline experienced in March

·  Group revenue down 22%

·  Product sales down 28.8% but last three weeks down 21%

·  Financial Services revenue down 8.2%

·  91% of product sales now digital

·  Successful online launch of new "Home Essentials" brand on 1^st April

Financial Services collections stable

·  Financial Services cash collections remain in line with prior year

Swift and decisive action on cost base

·  Operating costs down 42.6% with material reduction in marketing expenditure

Improvement in liquidity and reduction in debt

·  Amended financing facilities provides Group with significant headroom

·  As at 19 June, net debt was down 9.9% from year-end to £447.9m

Refreshed strategy to support sustainable future growth

Five growth pillars developed to reflect the focus of the business and the external environment:

1.    Distinct brands to attract broader range of customers

2.    Improved product to drive customer frequency

3.    New Home offering for customers to shop more across categories

4.    Enhanced digital experience to increase customer conversion

5.    Flexible credit to help customers shop

Steve Johnson, Chief Executive, said:

"The business has responded strongly to the challenges posed by the Covid-19 outbreak, highlighting our resilience as a business and I thank every single one of our colleagues who have worked so hard to keep us operational, with safety and our customers in the front of their minds.  The crisis will cast a lasting shadow over the sector, but we are confident that our agile approach and attractive brand offerings, with clear target customer segments, position us well to navigate the issues and emerge as a stronger business.

In a year of restructuring for the Group, Simply Be, JD Williams, Jacamo and Ambrose Wilson all grew digital revenue and following further progress in the first quarter of this financial year, 91% of our product revenue now comes from digital channels. The retail environment remains heavily promotional and the regulatory challenges in financial services have required us to adapt and evolve our offer, but our commitment to driving operating efficiencies is creating the right platform for the future.

Trading in the first quarter of this financial year was impacted by Covid-19 but sales in recent weeks have shown an improving trajectory and cash collections have been stable.  Operating costs are significantly lower than last year and net debt has decreased.

As we move forward, we have refreshed our strategy, evolved our key pillars of growth and are pushing on with further work to streamline our brand portfolio, improve our product, create a brand new Home proposition whilst improving our digital capabilities and developing our financial services offer.  Challenges remain in the year ahead, but we are focused on accelerating the business and are confident we are taking the right actions to create a sustainable, profitable business for the long term which has the potential to generate significant value."

Webcast for analysts and investors:

An audio webcast and presentation of these results will be available on our website www.nbrown.co.uk from 7.00am on 25 June 2020. Management will host a Q&A conference call for analysts and investors at 10:00am.  Please contact Nbrown@mhpc.com for further information. 

For further information:

About N Brown Group:

N Brown is a top 10 UK clothing & footwear digital retailer. We are size inclusive, focusing on the needs of underserved customer groups - size 20+ and age 50+. We offer an extensive range of products, predominantly clothing, footwear and homewares, and our financial services proposition allows customers to spread the cost of shopping with us. We are headquartered in Manchester where we design, source and create our product offer and we employ over 2,200 people across the UK.

Q1 FY21 TRADING UPDATE

Responding to the Covid-19 pandemic

Our absolute priority has been to protect the wellbeing of our colleagues, both across our distribution centres and at Head Office, whilst maintaining continuity of service for our customers shopping our brands.  We are immensely grateful for the effectiveness and dedication which our colleagues and supplier partners have shown in adapting to a more flexible way of working during this difficult period and their continued unstinting commitment to supporting our loyal customer base.

The Company took a number of immediate and proactive measures to reduce costs and strengthen liquidity, including:

·   A significant reduction in marketing expenditure;

·   Cessation and deferral of all non-essential capital expenditure;

·    The furloughing of 30% of colleagues across the business; 

·    Recruitment and salary freezes;

·    Voluntary pay reductions from April to June for PLC Board, Management Board and senior leadership team; and

·    Agreement with HMRC to defer certain tax and duty payments associated with our normal operating activities as well as certain legacy tax payments which were expected to be paid in H1 FY21.

Improved sales trajectory

Trading has continued to improve from the sudden and significant decline experienced in March with product sales down 21% in the last three weeks compared to the prior year.  Group revenue was down 22% in the quarter, with product sales down 28.8% and Financial Services revenue down 8.3%.  Apparel sales have started to recover from mid-March levels and demand for Home & Gift, supported by the launch of Home Essentials on 1^st April, has remained well above the prior year.  Product sales have been stronger in brands more resonant with younger customers (Simply Be -16.2%) compared to our brands serving more mature customers (Ambrose Wilson -44.4%).

Financial Services cash collections have performed well and remain broadly in line with the prior year.  However, as previously guided, we expect cash collections to trend lower over the coming months due to FCA guidance to give customers the option to defer payments.

Swift and decisive action on cost base

The Group took swift and decisive action to maximise operating efficiency and strengthen liquidity.  As a result, operating costs declined 42.6% in the first quarter, significantly more than the reduction in revenue.  The majority of these savings were in Marketing costs but the Group also reduced Warehouse & Fulfilment and Admin & Payroll costs in the quarter.  This is further demonstration of the Group's agile and flexible operating cost base.

Cash and liquidity significantly improved

On 18^th May 2020, the Group agreed new amended financing facilities:

·    A new up to £50 million 3-year Term Loan facility, provided by our lenders under the Government's Coronavirus Large Business Interruption Loan Scheme ("CLBILS");

·    Amendment of certain terms and covenants of the securitisation facility, to mitigate a significant amount of the impact that Covid-19 may have in 2020 on the facility.  This is to address variations in collection rates and customer behaviour, and to enable the Group to continue to offer its customers enhanced flexibility.  The amendments to the facility are in place until late December 2020 and are intended to fully cover the impact of the current period of the FCA's Covid-19 forbearance; and

·    The widening of certain covenants at the August 2020 half-year test date in its existing unsecured £125 million RCF and the introduction of quarterly covenant tests.

As at 19th June 2020, drawings under the securitisation facility and RCF stood at £518.8 million.  As at the same date cash balances stood at £70.9 million and the overdraft facility was undrawn.  As a result of our focus on cash generation, net debt has reduced by £49.3m (9.9%) since the end of FY20 and net cash generation was £23.4m in the period.  As at 19^th June 2020, the Group's liquidity headroom had improved to £148.4m compared to £75.0m at the end of FY20.

FY21 Guidance

Since the initial significant impact of Covid-19 on product revenue, trends have continued to improve.  Financial Services revenue has been impacted by the effects of Covid-19 on our markets.  Product gross margin pressure is expected to continue due to mix and the highly promotional retail market.  Financial Services gross margin will decline as a result of previously guided regulatory pressures and an increase in bad debt provisioning due to the impact of Covid-19.   The Group is confident of offsetting at least 75% of the Group gross margin decline through operational cost savings with bad debt provision movements being the primary driver negatively affecting EBITDA.

We expect our cost mitigations and significant reductions to capex (expected to be c.£20m) and exceptional costs (expected to be less than £10m) to drive improved cash generation in FY21 leading to net debt to be in the range of £380m to £400m at the year end.  

RETURNING N BROWN TO SUSTAINABLE GROWTH

Strategy overview

Over the last two financial years the Group has undertaken a significant restructuring programme which has created the right platform for sustainable growth.  Digital penetration has significantly increased, international markets have been exited and the store estate has been closed.  As we enter the new financial year, N Brown is now a top 10 UK clothing & footwear digital retailer, supporting underserved mature and size inclusive markets.  Digital capabilities have been enhanced, the executive and senior leadership team has been refreshed, with a clearer strategic focus and the cost base is now more appropriate for a digital retailer, with further cost saving opportunities identified.

During the financial year we undertook a detailed review of our strategy focused on returning N Brown to sustainable growth and built a plan based on driving profitability through the Retail business, whilst defending the Financial Services business.  The recent outbreak of Covid-19 has fundamentally altered the broader retail landscape and this disruption will likely continue for the foreseeable future.  We have successfully restructured our operating model and believe that our refreshed strategy is the right one to deliver sustainable long-term growth, completing our transformation from a traditional to a digital retailer.

An important element of restructuring our operations has been to identify key factors contributing to poor historical performance, and to address them within our strategic plan, with significant action already undertaken.

We have already started putting in place the building blocks for the refreshed strategy.

We will now begin an "accelerate" phase driven by five growth pillars which have been developed to reflect the focus of the business and the external environment:

1.    Distinct brands to attract broader range of customers

2.    Improved product to drive customer frequency

3.    New Home offering for customers to shop more across categories

4.    Enhanced digital experience to increase customer conversion

5.    Flexible credit to help customers shop

These growth pillars will be underpinned by our people & culture, data and a sustainable cost base appropriate for a digital retailer.

1.    Distinct brands to attract broader range of customers

We undertook a thorough review of the markets in which we operate, which highlighted that we are serving a specific set of customers well but that we need to extend our reach to a broader set of customers to drive growth.  Doing this requires a portfolio of brands with clearer, more focused propositions. Therefore, from this financial year we will simplify our portfolio to four apparel brands, supplemented with one standalone home brand.  Our clear brand proposition will standout against the market and each other. The brand architecture and target customer segments are as follows:

·    Simply Be - an online fashion & beauty brand for plus size women, targeting plus size women aged 25-45.

·    Jacamo - an online fashion & grooming brand for plus size men, targeting plus size man aged 25-50.

·    JD Williams - an online boutique experience showcasing fashion and home product for 45-65 year old women.

·    Ambrose Wilson - a womenswear fashion led brand supported by home, available on and offline that truly values the mature customer.

·    Home Essentials - a standalone one stop home brand focused on modern homeware and enabled by a credit offering. The target customer will be families with children at home.

Our other brands will either be folded into our main brands or closed down.  As we execute our plan, we will be focused on protecting our loyal and valuable customers to ensure that they continue to receive the product they want and the customer service they have come to expect.  This refined brand strategy ensures that our brands have a clear proposition, appealing to distinct customers segments in order to return N Brown to growth.

2.    Improved product to drive customer frequency

Refining and improving our product offering is key to driving our new brand propositions, encouraging customer loyalty and frequency. We will focus on three key areas. 

·    We will improve our product 'handwriting' through clearly defined designs for each brand, investing in fabric, quality and consistency of fit.  Our focus will be on delivering trends for customers at the right time in the right way.  This will result in a better product, which is more relevant to customers, thereby driving loyalty.

·    Secondly, we will renew our 'good / better / best' product architecture.  This will be done through increasing the importance in our 'own designed' ranges in Womenswear, Menswear and Home, better curation of branded products and a well-defined and responsive pricing strategy. These initiatives will help to drive increased order frequency and customer loyalty.

·    Finally, we will continue to focus on ethical and sustainable sourcing, ensuring a consistent and consolidated supply base.  Our proactive approach has resulted in a 50% supplier reduction in the last 18 months and we will increase the mix of UK and European sourcing to increase flexibility and speed to market.  We also have a clearly defined roadmap to deliver enhanced level of sustainability.  By evolving our sourcing model, we will be able to respond with increasing flexibility to shifting customer demands, while reducing our lead times.

3.    New Home offering for customers to shop more across categories

Previously our Home proposition extended across our apparel brands with no consistent, curated offer.  The separation of our Home offering from our apparel brand sites represents a significant market opportunity for the Group, enabling cross sell into our existing apparel-focused customer base and attracting new customers.

Our new Home Essentials trading website launched on April 1^st and is a standalone home brand targeting young families who are balancing their budgets.  The brand focuses on soft furnishings, helping customers "dress their home," while still providing access to larger items and white goods.

The Home Essentials launch was timely, coming just one week after commencement of the "UK lockdown". The launch had an immediate impact on the Group's Home sales and the strength of demand has subsequently been sustained, demonstrating the exciting opportunity that this presents for the Group.

4.    Enhanced digital experience to increase customer conversion

We will invest to support our strategic priorities, improving our digital capabilities and ultimately improving the customer experience.  Through FY20, we substantially changed how we delivered technology projects, moving away from largescale, waterfall delivery to a more agile methodology focused on driving frequent, incremental value gains.  Working under this methodology has already delivered a new Home Essentials trading website, Android & iOS apps for JD Williams, Simply Be, Jacamo, Ambrose Wilson and Home Essentials and Artificial Intelligence enabled search. 

For the next two financial years we will focus on progressing N Brown with a "digital first" mentality.  Our investment will be focused on new front-end websites, providing significant benefit to the customer experience, and improving site speed to drive performance of organic search.  In addition, we will invest in a new Financial Services platform to support new credit products.

5.    Flexible credit to help customers shop

Our credit proposition is a key differentiator. It enables us to provide convenient financial services to customers, while using data to provide personalised and targeted offers to our customers. Our credit customers are also loyal to N Brown and have improved purchasing power, helping to drive demand for our products.

We will be resolutely focused on continuing to provide convenient Financial Services to our core customers, delivering ongoing improvements to customer outcomes and, at the same time, continuing to improve the quality of the debtor book.  As the refined brand propositions attract a broader and more affluent section of the market, we will develop new financial products that are familiar to these customers and drive higher volumes of full price incremental retail sales.  The new Financial Services platform will support the delivery of these new credit options. 

We will also enhance our use of data sources and analytical tools & techniques to improve our lending proposition. Our partnership with Aire Labs is already driving incremental improvement and we see further opportunities in this area. 

Finally, flexible credit is a key enabler of the new Home proposition which will allow us to compete within the market by ensuring the relevancy and appeal of our Home products.

These five growth pillars will continue to be supported by our key enablers:

People and Culture

Underpinning our refreshed strategy is our people. It is fundamental that we create the right culture within the business to allow colleagues to thrive and deliver a great experience for our customers.  Within the last 12 months we have hired a new CFO, Chief Brand Officer, CEO of Financial Services, CEO of Retail and Director of Strategy Transformation. In addition to this, almost a third of our senior leadership team has joined the business within the last 18 months, bringing in further relevant capabilities to support the business. We have also re-aligned our organisation design to support the needs of a digital retailer. Multi-functional trading squads are now in place, focusing on each brand and driving performance. 

Data

The use of data within the business is key to powering our refreshed strategy and we are prioritising building on the foundations that have been put in place in the last year.

We will continue to increase our use of data across the business to get to know our customer better and drive continued efficiencies in revenue, marketing and product ranging.  We have enhanced our use of data by implementing Bloomreach to increase data driven search across our sites.  We have also improved Financial Services decisioning and customer outcomes through partnering with the fintech company Airelabs. 

Sustainable cost base

Key to enabling our refreshed strategy is an appropriate cost base which will help build retail profitability.  As part of our review of strategy we undertook a thorough benchmarking analysis of our cost base.  This activity identified two cost areas which were higher than peers: marketing expenditure and Payroll & Admin.

We began a cost reduction program in FY20, with a 13.8% reduction in marketing spend achieved by removing unprofitable expenditure through attribution modelling and a focus on driving more efficient marketing channels.  This will be accelerated in FY21 with more data-led initiatives to further reduce spend and improve efficiency.  We also expect Payroll & Admin to be lower, in-line with continued head office efficiencies and creating the right, sustainable cost base for a digital retailer.

There is further scope to focus on operating efficiencies in light of recent, unprecedented events. In addition to our focus on reducing operating expenditure, we also have a strong emphasis on working capital efficiency to drive future cash generation.

Summary

We have undertaken significant steps in restructuring our business over the last two financial years and taken swift and decisive action in the current, unprecedented trading environment.

The Group has developed a clear and compelling strategy to unlock significant addressable market potential in the future, based on five deliverable pillars and underpinned by our three enablers.  We are excited about the opportunity for N Brown to return to growth, building on the strong platform that we have created through our restructuring, with a priority to deliver long-term, sustainable shareholder returns.

REVIEW OF FY20

This year was a period of restructuring for the business as we made the required changes to our business model and ways of working to strengthen our position as a leading digital retailer.  Whilst our financial performance was impacted by ongoing challenges from a promotional retail market, combined with industry-wide regulatory changes in financial services, we made good operational progress and the necessary building blocks for success are being put in place. 

Group revenue declined 6.1% to £858.2m, with a 7.8% decline in product revenue, as we continued the managed decline of our legacy offline business. There was also a 2.7% decline in financial services revenue, as a result of proactive measures undertaken on the implementation of credit limit increases and affordability assessments. 

Brand development and UK focus

We closed down our International division and exited marketing directly to the USA, removing an unprofitable part of our business.  This has enabled us to re-deploy key skills to support the UK business.  We now have a clear and single-minded focus on the UK.

We delivered digital growth of 5.5% on our three Womenswear brands (Simply Be 8.2%, JD Williams 2.0%, and Ambrose Wilson 10.5%).  Menswear (Jacamo) has delivered 5.5% digital growth.  Significantly, we are now an 85% digital business which represents a 6 percentage point increase from the 79% delivered in the previous financial year, as we continue to actively manage the decline of our offline business. 

We have invested more in our Womenswear and Menswear brands in the last 12 months, launching new campaigns for JD Williams, Simply Be and Jacamo and bringing in new specialist fashion agency partners, raising production quality.  We have focused our investment on established channels such as TV and Press, and newer brand building channels such as outdoor media.  During the year we also relaunched our social media strategy and are now using social for storytelling to gain a deeper engagement with followers.  This will continue to be a focus in this financial year.  Recent examples include the launch of Simply Be's New Icon model search, which was executed purely through social media. 

Product and Fit

We have placed the customer at the heart of decision-making across the business and have focused on understanding our customers' views on our product.  In particular, we have taken learnings from digital product reviews and through weekly 'blind testing' sessions of our products vs. competitors.  The strongest feedback we receive about our products is from our customers and we have now ensured that listening to our customers is more deeply embedded in our culture.

We are working with Bloomreach which uses machine learning and artificial intelligence to offer advanced merchandising tools that optimise and personalise each customer's digital experience. This includes the capability to serve every customer a personalised product list based on their preferences.  Bloomreach launched on Jacamo in April 2020 and further roll out is planned across our core brands in H1 FY21.

Our size and fit recommendations service, powered by the US innovator, 'True Fit', is now live across JD Williams, Simply Be, Ambrose Wilson and Jacamo.  The service aims to improve confidence when purchasing and reduce the number of times customers buy multiple sizes to find their perfect fit, reducing returns rates. 

We have made good progress in improving our branded portfolio to complement our own label ranges offering our customers an improved proposition. In September we launched Sea-Salt, Joules and Hobbs as new brands for JD Williams, and in October, we launched Tommy Hilfiger and Calvin Klein as new brands for Jacamo.  Both Ralph Lauren and Hugo Boss have also agreed to work with Jacamo and launched this Summer.

Driving improvements through digital, data and innovation

Our IT squads are driving continuous improvements to our apps. These improvements will deliver a better customer experience, higher conversion rates and is a step towards our technology vision. 

We have continued to drive further innovation through our market-leading body scanning technology and 3D design & product development to deliver continued fit improvements.  We now have a much better understanding of our customers' shape, having scanned over 1,000 to date.  This has fundamentally changed our approach to fit, moving it forward as a competitive differentiator.  We also selected our first clothing ranges using virtual technology which enabled us to design and select hundreds of styles in less than two weeks.   This will drive sustainable cost efficiencies as it will significantly reduce our development time and negate the need for sample production.

We also launched our automated returns facility at our warehouse in Shaw.  This investment delivers benefits to the customer through faster refunds, better stock availability and improved presentation of items returned to stock.  It has also delivered operational benefits, by removing 66% of receiving and sortation activity.

In the last financial year our use of data has continued to improve customer insight in the business.  We have moved to customer lifetime value ("CLTV") investment models in our digital marketing strategy to drive a more sustainable financial outcome.  We have also adopted a data led approach to media spend, which has helped accelerate the business to be 85% digital. 

Within Financial Services, data decisioning tools are also helping us to serve a broader range of customers. We are the first lender to adopt Aire's enhanced affordability assessment at scale across our brands to improve credit decisioning and ultimately improve the customer experience for our credit customers.  We continue to develop our own in-house capability and have established a Data Science team led by the newly appointed Director of Data Science to continue to drive this critical area in the digital world.

Strengthening our team

We have also improved the expertise around the business to support the refreshed strategy by making significant new hires across our Executive Board and senior leadership team.  We have introduced our new Vision, Mission and Purpose into the business, whilst also refreshing our company Values.  We launched these to our colleagues in the Autumn to give them a clearer indication of the direction the business is heading in, and how we behave.  The process has been developed bottom up, not top down, and is an important step in creating an engaged and dynamic culture. We measure colleague engagement through our Vibe survey which achieved an overall score of 72% for FY20 (vs 68% FY19). We are encouraged by the improvement in score, particularly given large amounts of internal change and external factors such as the challenging retail market.

Financial Services

During the year, in response to wide-sweeping regulatory intervention across the financial services sector, the Group continued to make a number of significant changes to the way it manages Financial Services.  Revenue declined 2.7% in the year due to lower balances and associated interest income and due also to a fall in administration fees as fewer customers entered into arrears.  As a result of lower product revenue, the gross debtor book declined 3.7% to £656.9m.

Over the last 18 months there has been a significant amount of industry-wide regulatory change.  We are committed to improving outcomes for customers and have made several changes to policies and procedures over the past few years to do this and ensure full compliance with regulation.  We are facing two particular headwinds in Unsolicited Credit Limit Increases ("UCLI") and Persistent Debt.

UCLI was introduced in 2 phases with first phase starting in March 2019.  Changes were made to our credit limit increase process whereby customers were given 30 days before any proposed increase in a credit limit was applied and were provided the option to 'opt-out'.  Further rule changes came into effect as part of phase 2 in December 2019.  Customers were given more control over credit limit increases by giving them the option to 'opt-in' vs. 'opt-out' when signing up for credit and providing options to change their preference throughout the customer lifecycle.  On phase 2 we also introduced hard policy rules around arrears and persistent debt.  These changes have reduced the number of credit limit increases that are offered to customers.

Persistent debt is defined as where, over a period of 18 months, a consumer pays more in interest, fees and charges than they have repaid of the principal.  From June 2019, we communicated with our customers identified to make them aware of the implications of continuing to make low repayments and sign-post our customers to not-for-profit-debt-advice.  From March 2020 we sent a further reminder to customers at 27 months whose payment profile indicates that they would still be persistent debt by December 2020.  Finally, we are required to take intervention starting in December 2020 by proposing ways to help customers repay their balance more quickly and within the defined reasonable period (3-4years), for example by increasing their minimum repayment level or transferring their balance to a fixed sum fixed term loan.

We expect that the steady improvement in the quality of our debtor book and the changes that we have made in response to the new regulatory environment will have further medium-term consequences for the performance of our Financial Services business.  Improved credit quality has reduced the IFRS9 bad debt provision; our IFRS9 bad debt provision ratio declined to 10.9% as at the end of the financial year.  This compares with a 17.9% provision when IFRS9 was first introduced at the start of FY19.  In addition, changes to our policies and procedures will have a significant influence on the size and shape of our debtor book. The Group continues to assess its strategies to mitigate the impact of these changes, including the phased introduction of new financial products and further reductions in its operating cost base.

FINANCIAL REVIEW

1.         Menswear is the Jacamo brand

2.         Product brands are Fashion World, Premier Man, House of Bath, Marisota, Oxendales, High & Mighty and Figleaves

Revenue

Group revenue declined 6.1% to £858.2m, driven by a 7.8% decline in product revenue and a 2.7% decline in financial services revenue.

Product revenue declined as a result of the continued managed decline of the legacy offline business, the shift in focus away from USA and the impact of the closure of our store portfolio in the prior years.  Excluding stores and USA, product revenue was down 5.7%.

The Group's transformation to a leading digital retailer continues, with digital sales now accounting for 85% of product revenue, an increase of 6 percentage points over the last 12 months.  In the year digital revenue grew by 0.2% compared to FY19 and was ahead by 5.5% for our Womenswear and Menswear brands combined. 

Womenswear revenue was down 1.3% in the year as we continued to reduce unprofitable marketing and offline recruitment. However, in line with our strategy Womenswear digital revenue increased 5.5% in the year.  JD Williams revenue was down 4.0% but digital revenue grew 2.0% compared to the previous period.  Simply Be grew revenue by 6.6% during the period excluding stores and reported an 8.2% growth in digital revenue compared to the prior period.  Ambrose Wilson revenue was down 11.5% but our focus has been on growing its digital revenue which increased 10.5% in the period - the highest digital growth rate of any of our brands.  Menswear, which is the Jacamo brand, increased revenue by 4.5% and delivered digital revenue growth of 5.5% in the year.

Product brands revenue declined 16.0% in the period with digital revenue down 7.5%.  Strength in revenue growth at Oxendales was more than offset by the managed decline of House of Bath, Premier Man and High & Mighty.  As outlined in the Chief Executive Officer's strategic update some product brands will either be folded into our main brands or closed down.

Digital Product analysis

1.         Menswear is the Jacamo brand

2.         Product brands are Fashion World, Premier Man, House of Bath, Marisota, Oxendales, High & Mighty and Figleaves

Financial services revenue

Financial services revenue decreased 2.7% to £290.5m.  Revenue was lower in the year as a result of lower product revenue and proactive measures on the implementation of credit limit increases and affordability assessments.  In the year credit account interest was down 1.5% reflecting management initiatives such as risk-based pricing.  This decrease was accompanied by a 13.4% reduction in other financial services revenue as a result of lower admin fees.

1. Adjusted EBITDA is defined as operating profit, excluding exceptionals, with depreciation and amortisation added back. The directors believe that adjusted EBITDA represents the most appropriate measure of the Group's underlying trading performance.

2. Defined as excluding exceptionals and fair value adjustments on financial instruments. The directors believe that adjusted profit before tax/EPS represents the most appropriate measure of the Group's underlying profit before tax as it removes items that do not form part of the recurring operational activities of the Group.

Gross margin

The Group's gross margin was 51.3%, down 310bps compared to FY19.  This was as a result of a 390bps reduction in the financial services gross margin to 55.3%, and a 290bps decline in the product gross margin rate to 49.2%. 

Product gross margin declined as a result of the highly promotional market, product mix reflecting an increase in Home sales, strategic decisions taken to exit the USA and the impact of an increased year-end stock provision reflecting discontinued brands and lower apparel sales.

Financial services gross margin decreased due to a lower rate of recovery from external debt markets, this was partially offset by system and other cost savings relating to the legacy USA proposition. 

Operating costs before exceptionals

We made strong progress in the year on operating expenses before exceptionals which decreased by 9.9%.  In line with the Group's strategy of scaling back offline marketing and recruitment and improving marketing efficiency, Marketing costs were down 13.8% year on year to £136.0m.  We also made strategic investment in building our brands in the period and expanding our social media presence.  Admin and payroll costs decreased by 6.9% to £119.1m, driven predominantly by continued Head Office efficiencies.  Warehouse and fulfilment costs decreased by 7.0% to £78.1m, primarily driven by lower volumes

Adjusted EBITDA and operating profit before exceptional items

Adjusted EBITDA decreased by 16.6% to £106.7m and adjusted EBITDA margin decreased by 160bps to 12.4% (FY19: 14.0%).  Overall, operating profit before exceptional items was £76.6m, down 21.8% year on year, with operating margin decreasing by 180bps to 8.9%.  Statutory operating profit (i.e. after exceptional items) was £48.1m an increase of £95.8m compared to the prior year.

Depreciation and Amortisation

Depreciation and Amortisation was flat on the prior year at £30.1m.

Net finance costs

Net finance costs were £17.1m, up 19.6% compared to last year primarily driven by an increase in net debt due to exceptional items.

Exceptional items

As previously announced, we, in line with the wider industry, saw a significant increase in customer redress information requests and complaints in the final days leading up to, and including, the 29 August 2019 PPI deadline.  The deadline has now passed and as a result of the August spike in information requests and complaints, an additional provision for customer redress of £25m was made during the first half of the year.  The final amount of customer redress including that relating to estimated Official Receiver complaints was less than envisaged as at 31 August 2019 and therefore in the second half of the year a £2.1m credit for customer redress was recorded, resulting in a £22.9m charge for the full year.

During the period, the Board has undertaken a thorough review of strategy.  Fundamental to delivering this strategic transformation is a material level of cost reduction and increased focus and refinement of the Group's key five brands.  As part of this initiative, the Group has incurred costs that are substantial in scope and impact, and incremental to the Group's normal operational and management activities and have therefore been recognised within exceptional costs.  Total costs of £3.8m incurred relate to £1.7m of redundancy costs, £1.8m of consultancy costs incurred in relation to the brand refinement and £0.3m being the write off of stock relating to brands that will no longer continue to trade.   Further details of Exceptional Items are contained in Note 5.

Allianz claim and counterclaim

The Group is currently involved in a claim and counterclaim with Allianz Insurance plc regarding the sale of historical insurance products.  The claim and counterclaim are extremely complex, are at an early stage of proceedings and both parties will need to gather detailed and factual expert evidence in relation to multiple elements of the claim and counterclaim.  The Group has concluded that these issues mean it is not possible to reliably estimate the amount of any potential settlement and has, therefore, not made provision for this claim at this time and instead a contingent liability has been disclosed.  Further details are contained in note 18.

Adjusted profit before tax and statutory profit before tax

Adjusted profit before tax was £59.5m, down 28.8% year on year as a result of lower gross profit and increased net finance costs.  Due to lower exceptional costs and an improvement in unrealised FX, statutory profit before tax was £35.7m, representing a £93.2m improvement on last year.

Taxation

The effective underlying rate of corporation tax (the tax rate excluding exceptional items) is 21.5% (FY19: 26.9%) and the year-on-year difference is largely due to smaller prior year adjustments being made in FY20. The overall tax charge after exceptional items is £8.3m (FY19: £0.8m).

Earnings per share

Adjusted earnings per share was 16.37p (FY19: 21.38p). Statutory earnings per share was 9.63p (FY19: ((20.50)p).

Dividend

The Board declared an interim dividend of 2.83 pence per share in respect of the first half of the financial year.  Following the outbreak of Covid-19 and the subsequent impact on the business and the wider economy, the Board announced on 23^rd March 2020 that it would not be recommending a final dividend for this financial year.  Following the year end, the Group secured amendments to its financing facilities which included accessing the Government's Coronavirus Large Business Interruption Loan Scheme ("CLBILS").  For as long as any amount of the £50 million CLBILS facilities is drawn, the Group will be restricted from paying dividends.  The Board does not anticipate declaring cash dividends in respect of the 2021 financial year.

Financial services

Compared to the same period last year the expected credit loss provision rate decreased by 330bps due to an underlying improvement in the quality of the loan book and the disposal of some high-risk payment debt which was sold at a better rate than the impaired book value.   As a result of sustained significant reductions in observed default rates since 2017 in particular, the probability of default parameter in the expected credit loss ('ECL') model has been appropriately updated during the year to reflect observed rates over a two year-period, rather than historic rates observed prior to 2017 which were increasingly not reflective of current book composition and performance.  This methodology change to appropriately reflect the sustained and observed improvements in default rates resulted in a reduction in the IFRS 9 bad debt provision.

Balance Sheet and Cash Flow

Although the global spread of Covid-19 began before the 29 February 2020, the WHO declaration of a global pandemic and escalation of the virus within the UK took place in on 11 March 2020 and were not, therefore predictable as at the balance sheet date. For this reason, the significant effects of Covid-19 are non-adjusting events as at the balance sheet date. Management have considered the potential impact of Covid-19 on the post balance sheet event period, specifically in regard to the recoverability of its tangible, intangible assets and inventory, the impairment of the trade receivables and fair value of the Group's pension surplus. This is further highlighted in a detailed post-balance sheet events disclosure note 16.

Capital expenditure was £39.7m (FY19: £36.3m).  Inventory levels at the period end were down 15.5%, to £94.9m (Restated FY19: £112.3m)

Gross trade receivables decreased by 3.7% to £656.9m (FY19: £682.2m) driven by a combination of reduced financial services income and product sales and sales of customer receivables on payment arrangements to a regulated third party purchaser.

Net cash generated from operations (excluding taxation) was £47.6m compared to a £35.0m outflow last year, principally driven by a reduction in exceptional cash outflows from £84.6m in FY19 to £40.5m in FY20 and improvements in working capital. After funding capital expenditure, finance costs, taxation and dividends, net debt increased from £467.9m to £497.2m.  The £585.2m net customer loan book significantly exceeds this net debt figure.

The Group's balance sheet is underpinned by its customer loan book, which at 29 February 2020 was £656.9m on a gross basis and £585.2m on a net basis, calculated under IFRS9.

Core debt, which is defined as the amount drawn on the Group's RCF less cash was £77.5m, which means the Group's leverage is 0.7x on an unsecured net debt/EBITDA basis for the last 12 months EBITDA.  For FY20 the Group had financing facilities in place, comprising:

·    An up to £500 million securitisation facility, maturing in December 2021, secured by a charge over eligible customer receivables without recourse to the Group's other assets, drawings on which are linked to prevailing levels of eligible receivables;

·    A Revolving Credit Facility ("RCF"), maturing in September 2021, of £125 million; and

·    An overdraft facility of £27.5 million.

On 18 May 2020, the Group agreed new financing arrangements:

·    A new up to £50 million 3-year Term Loan facility, provided by our lenders under the Government's Coronavirus Large Business Interruption Loan Scheme ("CLBILS");

·    Amendment of certain terms and covenants of the securitisation facility, to mitigate a significant amount of the impact that Covid-19 may have in 2020 on the facility. This is to address variations in collection rates and customer behaviour, and to enable the Group to continue to offer its customers enhanced flexibility. The amendments to the facility are in place until late December 2020 and are intended to fully cover the impact of the current period of the FCA's Covid-19 forbearance; and

·    The widening of certain covenants at the August 2020 half-year test date in its existing unsecured £125 million RCF and the introduction of quarterly covenant tests.

The Group's defined benefit pension scheme has a surplus of £26.3m (FY19: £23.9m surplus).  The small increase in the surplus is as a result of general market changes in asset returns during the financial year.

FX sensitivity

As at the end of FY20 we had hedged 88% of our net purchases for FY21 at a blended rate of $/£1.32.  At a rate of $/£1.28, which was the spot rate at year end, and before any mitigating actions or changes in annual requirements, this would result in a c.£2.8m gain in FY21 PBT.

As at the end of FY20 we had hedged 39% of our anticipated net purchases for FY22 at a blended rate of $/£1.32.  At a rate of $/£1.28 which was the spot rate at year end, and before any mitigating actions or changes in annual requirements, this would result in a c.£1.0m gain in FY22 PBT.  Every five cents move from this rate in our unhedged position would result in a PBT sensitivity of c.£2.3m.

Consolidated income statement

for the 52 weeks ended 29 February 2020

Consolidated statement of comprehensive income

for the 52 weeks ended 29 February 2020

Consolidated balance sheet

As at 29 February 2020

*prior year restatement is explained in note 17