Company Announcements

Condensed consolidated statement of comprehensive income

For the 26 weeks ended 2 October 2023

The total comprehensive income for the period and the prior period is wholly attributable to the equity holders of the parent company, Naked Wines plc.

The notes to the condensed consolidated interim financial statements following the primary statements are an integral part of these condensed consolidated interim financial statements.

Condensed consolidated statement of changes in equity

For the 26 weeks ended 2 October 2023

he notes to the condensed consolidated interim financial statements following the primary statements are an integral part of these condensed consolidated interim financial statements.

Condensed consolidated balance sheet

As at 2 October 2023

1.     The Directors have reviewed the disclosure of staged payments to winemakers in respect of inventory and have elected to disclose the amounts separately on the face of the balance sheet.  Comparatives have also been re-presented.  The amounts were previously aggregated within inventory.  There is no impact on net assets or equity.

The notes to the condensed consolidated interim financial statements following the primary statements are an integral part of these condensed consolidated interim financial statements.

The condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted for use in the UK.  

By order of the Board

James Crawford

Chief Financial Officer
14 December 2023

Condensed consolidated statement of cash flows

For the 26 weeks ended 2 October 2023

The notes to the condensed consolidated interim financial statements following the primary statements are an integral part of these condensed consolidated interim financial statements.                       

Notes to the condensed consolidated interim financial statements

1.      General information

Naked Wines plc, (the Company) is a public limited company and is limited by shares.  It is incorporated in the United Kingdom under the Companies Act 2006 and is registered in England and Wales. The Company is the ultimate controlling party of the Naked Group and its ordinary shares are traded on the Alternative Investment Market (AIM).

The Company's registered address and principal place of business is The Union Building, 51-59 Rose Lane, Norwich, NR1 1BY.  The Group's principal activity is the direct-to-consumer retailing of wine. The Company's principal activity is to act as a holding company for its subsidiaries.

2.      Basis of preparation

The annual financial statements of the Group are prepared in accordance with UK-adopted international accounting standards.

These condensed consolidated interim financial statements have been prepared applying the accounting policies set out in the Annual Report and Accounts for the 53 weeks ended 3 April 2023. 

The auditor's report on those accounts was not qualified and did not contain statements under section 498(2) or (3) of the Companies Act 2006.  However, it did include a reference to a material uncertainty related to going concern being a matter to which the auditor drew attention by way of emphasis without qualifying the auditor's report.

The condensed consolidated interim financial statements included in this report have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted for use in the UK.   The condensed consolidated interim financial statements are not statutory accounts.  The financial reporting period represents the 26 weeks ended 2 October 2023 and the prior period, 26 weeks ended 26 September 2022 and are presented in GBP which is the Group's functional currency, and all values are rounded to the nearest thousand (£'000), except when otherwise indicated.

 The new accounting standards that came into effect in the current accounting period beginning 4 April 2023, noted below, do not introduce any new disclosures that are explicitly required in the condensed consolidated interim financial statements.

● Amendments to IFRS 17

● Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)

● Definition of Accounting Estimates (Amendments to IAS 8)

● Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12)

● International Tax Reform - Pillar Two Model Rules (Amendments to IAS 12) - Application of the

exception and disclosure of that fact

● International Tax Reform - Pillar Two Model Rules (Amendments to IAS 12) - other disclosure

requirements

3.      Significant estimates

Goodwill and non-current asset carrying value

During the period, future trading expectations, in particular with respect to the Group's US trading segment, have been revised downwards to realign previously anticipated growth in key performance metrics with more recently observed stable period-on-period performance KPIs in the market, most relevantly revenue per Angel and the rate of Angel attrition.  Revision to future trading forecasts has resulted in a downward impact on the value in use calculation used to evaluate the carrying value of goodwill and other non-current assets in the Group's goodwill impairment assessment.

The Group annually tests whether goodwill has suffered any impairment or more frequently where indicators of impairment exist in between these annual tests.  At the half year such indications existed, and the Group undertook an impairment assessment as part of its half-year reporting procedures. Determining whether goodwill and other non-current assets are impaired requires an estimation of the recoverable amount of the asset derived from the cash generating unit (CGU) to which the goodwill and the non-current assets have been allocated, measured as the higher of value in use or fair value less cost of disposal. The value in use calculation requires an estimate of the present value of future cash flows expected to arise from the CGU, by applying an appropriate discount rate to the timing and amount of future cash flows.

Management is required to make judgements regarding the timing and amount of future cash flows applicable to the CGU based on current budgets and forecasts, and then into perpetuity, taking into account growth rates and expected changes to sales and operating costs.

Management estimates the appropriate discount rate using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the individual CGU.

The Group's impairment test at the balance sheet date results in a partial impairment of goodwill and other non-current assets, see note 7 Impairment of non-current assets for further details of results of this assessment. The Directors note the period-on-period decline in value in use, in particular in the US segment, and highlight the key assumptions driving the impairment assessment as set out above as a key source of estimate uncertainty with regard to the continuing carrying value of goodwill. The Directors also highlight that as a result of the decline in headroom above carrying value in the year resulting in the impairment charge reported, should the key assumptions used to calculate the value in use of goodwill move adversely in a future period, there is a risk that carrying value of goodwill may become further impaired, see note 7 Impairment of non-current assets for calculated sensitivity analysis.

Inventory valuation and impairment provision

An implication of the Group's pivot to profit strategy announced in the previous financial year and also as a result of ongoing trading pressure, in particular in the Group's US segment, is the reassessment by the Directors of required inventory holding levels and future buying commitments. As a result of this review, a number of winemakers, brands and products were delisted, and plans made to exit certain quantities of inventory at less than historic cost. On the basis of this evaluation, the Group holds a provision of £9.7 million in its US segment at the balance sheet date against delisted winemakers and for the disposal of bulk wine where anticipated proceeds are less than carrying value.  In addition, the Group also holds a further inventory provision of £0.9 million across its UK and Australian segments against specifically identified wines where net realisable value is estimated to be less than cost.  On the basis of the forecast prepared for the evaluation of going concern of the Group, the Directors anticipate that the remaining cost of inventory held at the balance sheet date will be profitably realised.

A number of critical judgements have been made in the calculation of the US segment inventory provision analysis including:

●     estimates of the likely use before expiry of wine approaching the end of its prime marketing life; 

●     planned evolution of range and winemaker portfolio;

●     cannibalisation and absorption of wine volumes across the Naked range; and

●     realisable value of bulk wine in the open market.

The Directors highlight that in the event that their estimates prove to be inaccurate, the magnitude of the inventory write off could change. A sensitivity assumption that is readily quantifiable is the average expiry life of wine. Management have prepared their estimated wine marketing expiry date from the experience of the life cycle of wine over time in the Naked US market and examination of customer feedback of wines as they age from first release. However, if every wine's expected expiry date was reduced by six months, the amount of wine expiring, and hence requiring write off, within the Group's forward review period would increase by £3 million. Reducing this assumption by a further six months to 12 months in total would increase the write-off by a further £3 million.

4.    Going concern

Position adopted at year end 3 April 2023

The Group's financial statements for the year ended 3 April 2023 were signed on 18 September 2023. Those financial statements were prepared on the basis that the Group was a going concern although there was a material uncertainty in respect of going concern. In arriving at this conclusion, the Directors had reviewed the Group's updated cash flow forecasts along with severe but plausible downsides and a reverse stress test. Having considered these forecasts, sensitivities and mitigating actions, and having regard to the risks, uncertainties and challenges in recent trading and the macroeconomic environment, the Directors concluded that a material uncertainty existed with regards to going concern. This material uncertainty related to the Group's ability to generate sufficient future cash flows while trading in a volatile environment, successful completion of planned actions and maintaining access to the forecast level of Asset Backed Lending (ABL) facility in order to meet its minimum cash covenant in the going concern period.

Update to position

Subsequent to the issue of the FY23 financial statements and the update to guidance provided at that time on 19 September 2023, trading in the UK and Australian markets in the second quarter was broadly in line with the forecasts supporting the prior issued guidance, and at a Group level cash balances remain close to the forecasts, reflecting the Group's ability to continue to move inventory intake to reflect demand outlook. However, trading in the US during the second quarter and subsequently in October was weaker than anticipated. In particular, expectations of year-on-year revenue per Angel growth from repeat customers were not met, along with associated repeat contribution margins being below forecast. Despite this, the Group remained within the parameters of its previous severe but plausible downside scenario.

As disclosed as an event after the balance sheet date in the FY23 financial statements, on 22 August 2023 the Group also concluded a further amendment to its credit facility, moving the facility defined adjusted EBITDA covenant threshold from a trailing three-month basis to an ongoing trailing 12-month basis from the beginning of FY25. The first revised measurement period will be for the covenant reporting period ending June 2024. The amendment also increases the size and specificity of the non-recurring expense add-back in the calculation of the facility defined adjusted EBITDA measure.

Base case forecast

In response to the decline in trading performance of the US business since the last forecast, and in order to assess the appropriateness of the going concern assumption, the Directors reviewed, and revised downwards, their previously prepared baseline forecast to reflect and anticipate the emerging trading across the Group, in particular in the US. The Directors considered (i) the cash requirements of the business to pursue its intended strategy, (ii) the funding available to the Group from its existing cash reserves and the ABL facility and (iii) potential variations in cash requirements taking into account severe but plausible downside scenarios.

In particular, the Directors' revised baseline forecast reflected:

●     The latest number of repeat customers in all markets at the balance sheet date;

●     A conservatively higher customer acquisition cost in the outlook period based on recent trends;

●    A downward revised revenue per Angel outlook versus the previous forecast but in line with recent history; and

●    The impact of the testing at scale of the revised new customer recruitment model on revenue, gross margin, associated variable cost forecasts and customer deferred revenue balances.

This updated forecast formed the basis of the revised market guidance, issued on 7 November 2023.

Under this base case scenario, the Group has sufficient liquidity and profitability to meet its ABL credit facility covenant commitments for a period of more than 12 months from the date of signing these interim financial statements.

Severe but plausible downside forecast

The Directors note that in recent times the Group has revised its revenue and profit outlook downwards multiple times but as set out above, believe that their current baseline forecast now represents a conservative view of future trading prospects.

Nevertheless, the Directors have also considered several severe but plausible changes in assumptions and have combined them into a single severe but plausible downside scenario:

-   The observed value uplift seen in testing of the revised new customer recruitment model does not endure over time and in FY25 these customers are no more valuable than Angel customers;

-    Despite a mix towards more long-tenured Angels in the Angel base, FY25 repeat revenue per Angel remains flat year-on-year;

-     50% of the US and UK fulfilment cost savings contracted and forecast into the base case in FY24 and FY25 are not realised;

-     The automatic reduction to nil of variable compensation in FY25 in the downside scenario.

Together, these downside assumptions result in a 5% reduction in repeat sales and a 10% reduction in repeat contribution in FY25, allowing for a conservative FY24 sales and margin assumption. In this scenario, all banking covenants continue to be met. Facility defined adjusted EBITDA covenant compliance is at its narrowest across the second and third quarter of FY25 with the point of narrowest covenant compliance occurring in December 2024 with a credit facility defined EBITDA covenant figure of £5.2 million, after factoring in the elimination of variable compensation costs due to underperformance. This shows cover of 1.3x to the covenant before restoring to 1.6x by year end. Headroom above the credit facility minimum cash covenant is greater than £12 million across the forecast period to the end of FY25.

However, the Directors acknowledge that during the course of the first half of FY24, performance was adverse to forecast on some but not all trading metrics. Factoring in the potential recurrence of this variance into the severe but plausible scenario outlined above would result in a covenant breach. The Directors note in particular the limited facility defined adjusted EBITDA covenant headroom in the second and third quarter of FY25, and that a decline in the severe but plausible downside scenario contribution in the first half of FY25 of approximately 7%results in a breach of the facility defined adjusted EBITDA covenant in September 2024. The Group continues to remain compliant with its minimum cash covenant requirement across this period in this scenario.

Reverse stress test

An additional reverse stress test was also performed, being a downside scenario deliberately engineered to identify the point at which a covenant breaks, based on a total sales decline rather than a contribution decline in the scenario above. This reverse stress test assumes an additional reduction in repeat customer purchase frequency versus the severe but plausible downside scenario, resulting in a total sales decline in FY25 of 2% below the severe but plausible downside scenario, highlighting further the narrow headroom between a severe but plausible downside scenario and a reverse stress test covenant breach.  In this reverse stress test scenario, the Group is not able to meet its facility defined adjusted EBITDA covenant in December 2024.

Recognising these risks, the Directors have commenced mitigating cost saving actions, most significantly including an initiative targeting general and administrative (G&A) cost savings well in excess of those included in the forecasts. The Directors have indicated an intent to run the business with G&A costs below 11% of revenue, which would indicate an additional year-on-year cost reduction of around £5 million and which would support increased EBITDA. The Directors also note that the level of new customer investment in FY25 in all scenarios remains broadly flat and which is, at constant currency, £2 million above the FY24 anticipated level of new customer investment and a total of £5 million higher than the FY23 achieved level of new customer investment.  As such, they would expect to be able to reduce lower-returning investments in the case of a worst-case scenario, whilst minimising the on-going impact on future investment return.

Other material assumptions reflected in the above scenarios

In addition to the trading downside risk set out above, the Directors draw attention to projects currently in progress to maintain future working capital requirements and the ongoing requirement for cooperation from external stakeholders. This includes, most significantly, the work the Group is currently undertaking with its winemakers to realign future inventory intake commitments and inbound destinations to accelerate the Group's destocking process. At the time of writing, these initiatives are ongoing, so management has incorporated these uncertainties into the medium-term forecast.

Access to the Group's Asset Backed Lending Facility

The Directors also draw attention to their ongoing need to continue to access the anticipated level of the Group's ABL facility to the end of the third quarter of FY25, in order to support the Group's forecast available credit. This is determined by the level and carrying value of the Group's US inventory, in turn determined by (amongst other factors) the US secondary market prices for bulk and bottled wine, as well as maintenance of the existing level of supplier waivers (to include wine held at their facilities within the facility borrowing base calculation).

The Directors highlight that by the end of the third quarter of FY25, their base case and severe but plausible downside forecasts show the Group holding the facility required minimum cash and usual operating cash requirements with no drawdown on the facility and, as such, the uncertainty around the anticipated level of the Group's ABL facility falls away at this point. The Directors also note that, at this point, the ABL facility then provides the Group with an additional source of working capital in excess of daily and facility covenant needs.

Notwithstanding the potential for medium-term improvements in the Group's cash position, delivery of required plans and the several factors influencing the level of availability of the Group's ABL facility give rise to additional uncertainties which might impact on the Group's forecast cash flows over the forecast period.

Summary

After considering the forecasts, sensitivities and mitigating actions available, and having regard to the risks, uncertainties and challenges in recent trading, and the macroeconomic environment, the Directors note the continued existence of a material uncertainty over the assumption of going concern, which may cast doubt over the Group's ability to continue as a going concern, and therefore its ability to realise its assets and discharge its liabilities in the normal course of business.

The material uncertainty continues to reflect the factors disclosed in the FY23 going concern assessment. These factors are the Group's ability to generate sufficient future cash flows while trading in a volatile environment, successful completion of planned initiatives to optimise working capital requirements and the continued reliance on external stakeholders in order to achieve these objectives, and maintaining access to the forecast level of credit in the ABL facility. These factors together are necessary for the Group to meet its credit facility covenant requirements in the going concern period, of more than 12 months from the date of the signing of these condensed consolidated interim financial statements.

These condensed consolidated interim financial statements have been prepared on a going concern basis, whilst noting the material uncertainty above.

5.    Segmental reporting

IFRS 8 Operating segments requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker (CODM).  The Board has determined that the Executive Directors of the Company are the CODM of the business. This is on the basis that they have primary responsibility for the allocation of resources between segments and the assessment of performance of the segments.  In line with the information presented to the Executive Directors of the Company, the Group presents its segmental analysis based on the three geographic locations in which the Group operates.

Performance of these operating segments is assessed on revenue and adjusted EBIT (being operating profit excluding any adjusted items), as well as analysing the business between new customer and repeat customer lines of business.

These are the financial performance measures that are reported to the CODM, along with other operational performance measures, and are considered to be useful measures of the underlying trading performance of the segments.  Adjusted items are allocated in accordance with how they are reported to the CODM.

The table below sets out the basis on which the performance of the business is presented to the CODM. The CODM considers that, as a single route to market and solely consumer-facing business in three geographically and economically diverse locations, the business comprises three operating segments.  The Group reports revenue from external customers as a single product group, this being principally wine and some spirits.

Costs relating to global Group functions are not allocated to the operating segments for the purposes of assessing segmental performance and consequently global costs are presented separately.  This is consistent with the presentation of those functions to the CODM.

Revenues are attributed to the countries from which they are earned. The Group is not reliant on a major customer or group of customers.

All revenue is recognised at a single point in time when it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.  Specific to the Group, the performance obligations of the Group are deemed to be fulfilled when the product is delivered to our customer or Angel, typically within one to three days following dispatch, which is when the customer obtains control of their purchase and there is reasonable certainty regarding the recovery of the consideration.

Included within Angel funds and other deferred income is deferred income of £6.3 million (3 April 2023: £3.5 million).  These balances represent value of funds received in advance, but the order is yet to be fulfilled or delivered.  This will be recognised as revenue when the order is fulfilled or delivered, which is expected to occur over the next six months.

The Group is subject to seasonal fluctuations resulting in varying profits over the full year period.  The Group experiences increased sales in the third quarter which covers the holiday period, accounting for around 40% of total revenue compared to around 20% in each of the other quarters.

1.     Total adjusted sales are calculated as revenue excluding revenue associated with the right-sizing of US inventory as analysed in note 6 Adjusted items.

2.     Contribution after advertising costs is calculated as gross profit (£28,963k) less advertising costs (£7,440k), excluding transactions associated with the right-sizing of US inventory included in contribution (£774k) (details in note 6 Adjusted items).

3.     Refer to the table in the APM section at the end of this announcement for a reconciliation of G&A costs to those reported in the income statement.

1.     Total adjusted sales are calculated as revenue excluding revenue associated with the right-sizing of US inventory as analysed in note 6 Adjusted items.

2.     Contribution after advertising costs is calculated as gross profit (£32,206k) less advertising costs (£10,036k), excluding transactions associated with the right-sizing of US inventory included in contribution (£7,908k) (details in note 6 Adjusted items).

3.     Refer to the table in the APM section at the end of this announcement for a reconciliation of G&A costs to those reported in the income statement.

6.    Adjusted items

The Directors believe that the adjusted EBIT measure provides additional useful information for shareholders on trends and performance.  Adjusted EBIT is not defined by IFRS and therefore may not be directly comparable with other companies' adjusted profit measures. It is not intended to be a substitute for, or superior to, IFRS measurements of profit.

The adjustments made to reported operating profit are:

Amortisation of acquired intangibles

These items reflect costs of customer acquisition from prior to the purchase of the Naked Wines business. To reflect the cost of current new customer acquisition in its adjusted EBIT, the Group includes the expenses of all ongoing customer acquisitions in its adjusted profit measures but removes the amortisation cost of those customers acquired before acquisition by Naked Wines plc.  These acquired assets were fully amortised as at the end of FY23 and do not appear in the income statement for the period 26 weeks ended 2 October 2023.

Right-sizing of US inventory

As a result of management's US inventory right-sizing exercise strategy commencing in the prior financial year,  the Group recorded a net credit of £0.8 million in the 26 weeks ended 2 October 2023 (£7.9 million charge in the 26 weeks ended 26 September 2022), reflecting the release and utilisation of the inventory provision created in the prior financial year and a contribution loss where inventory that was provided against that has been sold on the secondary market as part this right-sizing exercise for less than historic cost of goods.

In FY23 management considered these provisions and charges to be one-off in nature as amounts relate to purchases made on the basis of continued expected growth following the COVID-19 pandemic and based on the Group's previous strategy of customer acquisition. As a result of the strategic shift from customer acquisition to short-term profitability and cash generation, this charge forms part of the one-off exercise undertaken in the year to better align purchasing and inventory management going forwards, whilst still ensuring the Group holds sufficient inventory to meet customer demand. 

Right-sizing of US inventory (continued)

Management concluded it is appropriate to include the inventory provisions and charges created in the prior period within adjusted items to provide a more consistent basis with the comparative adjusted EBIT alternative performance measure.

In the 26 weeks ended 2 October 2023, any further inventory provisions made are reported as part of trading performance.

Impairment of non-current assets

Please refer to note 7 Impairment of non-current assets for details.

Profit on disposal of asset classified as held for sale

In May 2022, the sale of the asset classified as held for sale was completed.  The profit arising on the sale is the difference between the proceeds of £5.85 million less commissions and costs of £0.2 million and the carrying value of the asset of £0.8 million and as such is reported in the prior year comparative figures only. 

Restructuring costs

In the previous financial year, the Group undertook a restructuring program seeking to generate improved efficiency and reduce costs. Following this review, one-off termination payments and associated costs were incurred in the US and the UK. 

Software as a Service cost

During the previous financial year and the 26 weeks ended 2 October 2023, the Group incurred upfront configuration and implementation costs relating to the development of a new ERP system.  Under the change of accounting policy, these costs are reported as incurred in the income statement.  As material non-recurring expenditure, the costs relating to the configuration of the ERP platform have been disclosed as an adjusted item.

Fair value movement on foreign exchange contracts and associated unrealised foreign currency inventory

The Group commits in advance to buying foreign currency to purchase wine to mitigate exchange rate fluctuations. UK-adopted international accounting standards require us to mark the value of these contracts to market at each balance sheet date. As this may materially fluctuate, we adjust this, and associated foreign currency inventory revaluation, as to better reflect our trading profitability.

Foreign exchange movements on plc company bank accounts

In the 26 weeks ended 26 September 2022, the parent company held foreign currency cash balances, which it used to fund its US and Australian businesses. The revaluation of the foreign currency balances held were reported as adjusted items so as not to distort the picture of the underlying business cost base.  No material foreign currency balances were held at the balance sheet date and as such no similar adjustment is reported as an adjusted item in the current year.

7.    Impairment of non-current assets

a)     Management have determined that indicators of impairment existed at the balance sheet date and as such an impairment review has been performed. As a result of this review, the carrying value of assets held in Naked Wines US and Naked Wines Australia have been reduced to their recoverable amount through recognition of an impairment charge of £11.5 million against goodwill, other intangibles, property, plant and equipment and right-of-use assets. This charge is recognised within adjusted items in the income statement and is analysed by segment and asset type as set out below:

* The value in use of each CGU is calculated after a full allocation of corporate costs necessarily incurred to generate the cash inflows of the operating business units and in accordance with IAS36 Impairment of assets.

Key assumptions

Cash flow assumptions

The primary determinants of cash flow are expected sales and the cost of sales of those goods, the level of expenditure on the acquisition of new customers and other associated costs which relate to the cash flows of the operating business units.

During the 26 weeks ended 2 October 2023 future trading expectations, in particular with respect to the Company's US trading segment, have been revised downwards to realign previously anticipated growth in key performance metrics with more recently observed stable KPI performance metrics in the market, most notably revenue per Angel and the rate of Angel attrition. 

The impact of the changes in future trading expectations versus previous forecast estimates, along with adverse movement in the discount rate driven by the external interest rate environment, has given rise to a reduction in value in use in the US, resulting in the reported additional impairment charge. The value in use in Australia has improved since the year end, however, is still insufficient to support the carrying value of non-current assets and an additional impairment charge has been recorded at the half year due to an increase in the carrying value, principally due to the extension of an IFRS16 lease, leading to an increased ROU asset carrying value.

The cash flows used in the value in use calculation are pre-tax cash flows based on the latest management forecasts in respect of the following five years, the first 12 months of which being the latest Board approved forecasts and which aligns with the forecast used in the preparation of the going concern analysis, as set out in accounting policy note 4 Going concern, amended only to align with the requirements of IAS 36 Impairment of Assets. An estimate of capital expenditure required to maintain these cash flows is also made.

Discount rate and long-term growth rate assumptions

The pre-tax discount rate and terminal growth rates used are as set out below:

The long-term growth rate assumptions used are not considered to be higher than the long-term industry average. These rates have been reviewed in the 26 weeks ended 2 October 2023 and have been revised for the UK segment to more accurately reflect current business performance expectations, market assumed long-term inflation and industry growth assumptions. Management recognise that a long-term growth rate of 1% is below that which a stable business would expect however, the Directors believe that this is an appropriate level for the US and Australian businesses at the present time. The Directors will reassess the long-term growth rate applied in each market in future periods as the actions currently being undertaken translate into a more stable trading performance.

The discount rate applied to the cash flows of each market is calculated using a pre-tax rate based on the weighted average cost of capital (WACC) which would be anticipated for a market participant investing in each of the Group's markets. Management believe it is appropriate to use a country specific pre-tax WACC for the testing of the Naked Wines goodwill and intangible assets based on the difference in the observed risk-free rate between the US and other industrialised economies and their different headline corporate income tax rates. The Group has considered the impact of the current economic climate in determining the appropriate discount rate to use in impairment testing.

Sensitivity to further impairment charges

The key assumptions used in the recoverable amount estimates are the discount rates applied and the forecast cash flows.

The Group has performed a sensitivity analysis for the UK segment and the table below sets out the level at which, independently, fluctuations in the key assumptions result in the carrying value of these assets being equal to the segment recoverable amount, defined as its value in use:

The Directors believe that the carrying value of the US segment's remaining right-of-use assets and property, plant and equipment represent their expected recoverable amount as they have an intrinsic value as part of the core trading business.  As such, any plausible adverse movement in key assumptions would not be expected to result in further impairments.

No sensitivities have been performed for the Australia segment as the goodwill allocated to this CGU, as well as the carrying value of property, plant and equipment and right-of-use assets, has been fully impaired.

See also note 3 Significant estimates, drawing attention to the assessment of the valuation of goodwill and other non-current assets as a key source of estimation uncertainty.

Note also that consistent with the operating segments of the business, being the three geographical markets in which the Group operates, the Directors recognise these operating segments as the cash generating units of the business.

b)    Reconciliation of the carrying amount of goodwill, other intangibles, property, plant and equipment and right-of-use assets