SHOE ZONE PLC — Interim / Quarterly Report 2017

Jun 7, 2017

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RNS Number : 3385H

Shoe Zone PLC

07 June 2017

7 June 2017

Shoe Zone plc

Interim Results

Shoe Zone plc ("Shoe Zone", the "Company" or the "Group") the leading UK value footwear retailer, is pleased to announce its Interim Results for the six months to 1 April 2017.

Financial Highlights

·      Revenue of £72.9m (2016 H1: £74.6m) reflecting the continued rationalisation of the retail store estate

·      Product gross margin improved to 62.8% (2016 H1: 61.1%)

·      Underlying profit before tax of £1.3m (2016 H1: £1.7m)

·      Statutory Profit before tax of £0.3m (2016 H1: £1.9m)

·      Underlying Earnings per share of 2.16p (2016 H1: 2.79p)

·      Statutory Earnings per share of 0.50p (2016 H1: 3.05p)

·      Interim dividend raised to 3.4p per share (2016 H1: 3.3p per share)

Operational Highlights

·      Rent on renewals fell on average by 21.4%, equivalent to a full year saving of £176k

·      Rent as a % of turnover is steady at 14% (2016 H1: 14%)

·      Footwear orders placed directly with overseas factories increased to 83.4% (2016 H1: 72.2%)

·      Sales from non-footwear ranges increased by 24%

·      Shoe Zone products available across Europe via Amazon Marketplace

Nick Davis, Chief Executive of Shoe Zone plc, said:

"I am pleased with the Group's performance in the first half as we continued to actively manage the retail estate while driving profitable sales. The devaluation of sterling against the dollar has impacted the Group's statutory profits in the period however as we reach the annualised rebasing of this rate, we anticipate the ongoing impact will be significantly reduced."

"Our Big Box trial has continued to perform well and as such, we will accelerate roll out of the concept during the second half of 2017.  We aim to have 10 Big Box stores by the end of 2017 and will continue with the planned growth in subsequent years."

"The Group has traded broadly in line with management's expectations since the period end and the Board continues to look to the future with confidence."

There will be a presentation for analysts at the offices of FTI Consulting, 200 Aldersgate, London, EC1A 4HD, at 9:30am on 7 June 2017.

For further information, please call:

Shoe Zone plc Anthony Smith (Chairman) Nick Davis (CEO) Jonathan Fearn (CFO)	Tel: via FTI Consulting
Numis Securities Limited (Nominated Adviser & Broker) Oliver Cardigan Mark Lander	Tel: +44 (0)20 7260 1000
FTI Consulting (Financial PR) Jonathon Brill Alex Beagley Eleanor Purdon	Tel: +44 (0)20 3727 1000

Chief Executive's Statement

Introduction

Shoe Zone is the leading UK value footwear retailer, offering low price and high quality footwear for the whole family and in 2017 is celebrating its 100th Anniversary. The Group operates from a portfolio of 504 stores and employs approximately 3,500 employees across the UK and the Republic of Ireland. Shoe Zone's online offering (www.shoezone.com), combined with its extensive store portfolio, enables its customers to shop via multiple channels.  I will now provide an update on our core areas of progress in the first six months of our financial year.

Financial Summary

In the six months to 1 April 2017, the Company generated revenues of £72.9m (2016 H1: £74.6m) and underlying profit before tax of £1.3m (2016 H1: £1.7m).  This performance reflects continued management of the retail estate whilst driving profitable sales.  During the first six months the company continued to manage the impact of the devaluation of sterling and the impact of this is shown as an adjustment between underlying and statutory profit.  As we reach the annualised rebasing of the exchange rate we anticipate that the ongoing impact will be much lower.

Product gross margin performance remains strong at 62.8% (2016 H1: 61.1%) and cash generation continues to be a focus.  As at 1 April 2017, Shoe Zone had net cash of £4.6m (2016 H1: £8.1m) with no bank debt. This lower cash balance is partly explained by the higher dividend paid in the period and the slightly delayed timing of the roll out of the new Big Box concept; as stock has already been purchased and we anticipate this to be utilised as new Big Box stores are opened. 

The reported deficit in the pension fund has also fallen from £13.1m at 1 October 2016 to £7.9m at 1 April 2017.  This is compared to a deficit of £6.3m at 2 April 2016.

Management continues to monitor costs closely and these remain tightly controlled.

Dividend

The Board is declaring an interim dividend of 3.4 pence per share, (2016 H1: 3.3p per share). This will be paid on 16 August 2017 to shareholders on the register on 21 July 2017. The shares will go ex-dividend on 20 July 2017.

Product

We remain committed to offering our customers the best value possible and have continued to maintain key price points for our Core Value lines alongside our focus on multi-buy deals (e.g. '2 for £8').  We have continued to increase our direct sourcing and as a result, footwear orders placed directly with overseas factories increased to 83.4% (2016 FY: 72.2%) of total footwear orders. Working closely with manufacturers has helped maintain gross product margins as well as improving communication and control across the supply chain.

Non-footwear ranges including handbags, school bags, lunch boxes, purses and accessories continue to grow with sales from non-footwear up 24% on the previous period.

Property

We continue to make progress with the Company's strategy to increase the number of larger Grade 1 stores. Since the start of our financial year on 1 October 2016, we have five additional Grade 1 stores created via openings, refits and sales floor density enhancements. We have opened nine new stores, one of which was our Kirkstall Leeds Big Box store, completed three relocations and closed 12 stores. 

We have continued to enhance the store portfolio by refitting 13 stores and refreshing all in-store marketing and promotional materials.  This brings a much more modern feel to the in-store experience and uses the new Shoe Zone branding and colour schemes.  Changes to external fascias will continue through 2017/18.

Rents on renewal fell by 21.4%, equivalent to a full year saving of £176k.  Total rents remain tightly controlled at 14% of turnover.

	As at 1 April 2017	As at 2 April 2016	As at 1 October 2016
Big Box	3	-	2
Grade 1 (large - 400 styles) *	289	284	284
Grade 2 (medium - 350 styles)	106	112	110
Grade 3 (small - 300 styles)	106	122	114
TOTAL	504	518	510

* incl. 36 Grade 1+ (450 styles)

Multichannel

Multi-channel continues to show strong profitable growth, with year on year sales growth of 30% and represents a key component of the Shoe Zone customer experience.  During the first half of the year our customer offer has been widened through Amazon Marketplace so that customers can purchase Shoe Zone products from across Europe in addition to the UK and Ireland, where we have both bricks and mortar and online presence.

Email continues to be a strong source of online sales growth and our email club membership has grown by 18% over the first half.  We sent an additional 3.6m targeted emails during the period.  Customer returns are well managed at 12.0% of sales, albeit slightly up on 10.4% in 2016 due to short term factors during the implementation of Amazon Marketplace across Europe.

Mobile visits now account for 76% (2016 H1: 70%) of total visits and mobile revenue has grown to 66% (2016 H1: 57%). We continue to develop mobile technology as the primary focus of our digital strategy.

Current trading and outlook

The retail market remains uncertain given the political environment in the UK and across Europe in the coming months.

Trading continues to be broadly in line with expectations, with the cost base benefitting from the new rates regime, albeit this may be partially offset by the potential impact of increases in shipping costs. 

The Big Box trial has performed well and as such, we will accelerate roll out of the concept during the second half of 2017.  We aim to have 10 Big Box stores by the end of 2017 and will continue with the planned growth in subsequent years. 

The Board would like to thank all of our Shoe Zone teams and business partners for all their hard work in the first half of the financial year.

Unaudited consolidated income statement

			26 weeks ended 1 April 2017						26 weeks ended 2 April 2016						52 weeks ended 1 October 2016
			Underlying		Non-underlying		Statutory		Underlying		Non-underlying		Statutory		Total
			£'000		£'000		£'000		£'000		£'000		£'000		£'000
Revenue	3		72,862		-		72,862		74,593		-		74,593		159,834
Cost of sales			(62,532)		-		(62,532)		(64,699)		-		(64,699)		(132,022)
Gross profit			10,330		-		10,330		9,894		-		9,894		27,812
Administration expenses	4		(6,019)		(1,031)		(7,050)		(5,254)		168		(5,086)		(11,657)
Distribution costs			(2,827)		-		(2,827)		(2,850)		-		(2,850)		(5,769)
Profit from operations			1,484		(1,031)		453		1,790		168		1,958		10,386
Finance income			11		-		11		34		-		34		56
Finance expense			(155)		-		(155)		(83)		-		(83)		(190)
Profit before taxation			1,340		(1,031)		309		1,741		168		1,909		10,252
Taxation	6		(261)		201		(60)		(348)		(34)		(382)		(1,801)
Profit attributable to equity holders of the parent	7		1,079		(830)		249		1,393		134		1,527		8,451

Earnings per share - basic and diluted	7		2.16p				0.50p		2.79p				3.05p		16.90p

Unaudited consolidated statement of total comprehensive income

		26 weeks ended 1 April 2017		26 weeks ended 2  April 2016		52 weeks ended 1 October 2016
		£'000		£'000		£'000
Profit for the period		249		1,527		8,451
Items that will not be reclassified subsequently to the income statement
Remeasurement gains and losses on defined benefit pension scheme		5,064		(1,254)		(8,190)
Movement in deferred tax on pension schemes		(912)		226		1,474
Effect of change in deferred tax rate on opening liability		-		(103)		(362)
Cash flow hedges
Fair value movements in other comprehensive income		1,001		358		1,683
Cash flow hedges recognised in inventories		(1,140)		-		(1,667)
Tax on cash flow hedges		(24)		(64)		(3)
Effect of change in deferred tax rate on opening liability		-		6		6
Other comprehensive expense for the period		3,989		(831)		(7,059)
Total comprehensive income for the period attributable to equity holders of the parent		4,238		696		1,392

Unaudited consolidated statement of financial position

	Notes	26 weeks        ended 1 April 2017		26 weeks   ended 2 April 2016		52 weeks    ended 1 October 2016
		£'000		£'000		£'000
Assets
Non-current assets
Property, plant and equipment		18,667		18,260		18,661
Deferred tax asset		540		-		1,441
Total non-current assets		19,207		18,260		20,102
Current assets
Inventories		27,294		25,485		30,075
Trade and other receivables		5,638		7,038		7,204
Derivative financial assets	5	225		672		651
Corporation tax asset		273		-		-
Cash and cash equivalents		4,613		8,140		15,046
Total current assets		38,043		41,335		52,976
Total assets		57,250		59,595		73,078
Current liabilities
Trade and other payables		(18,928)		(17,970)		(25,348)
Provisions for liabilities and charges		(751)		(991)		(922)
Corporation tax liability		-		(702)		(1,583)
Total current liabilities		(19,679)		(19,663)		(27,853)
Non-current liabilities
Trade and other payables		(3,002)		(2,664)		(2,316)
Provisions for liabilities and charges		(104)		(130)		(75)
Employee benefit liability		(7,851)		(6,336)		(13,058)
Deferred tax liability		-		(72)		-
Total non-current liabilities		(10,957)		(9,202)		(15,449)
Total liabilities		(30,636)		(28,865)		(43,302)
Net assets		26,614		30,730		29,776
Equity attributable to equity holders of the company
Called up share capital		500		500		500
Share premium reserve		2,662		2,662		2,662
Cash flow hedge reserve		107		551		270
Retained earnings		23,345		27,017		26,344
Total equity and reserves		26,614		30,730		29,776

Unaudited consolidated statement of changes in equity

	Share capital		Share premium		Cash flow hedge reserve		Retained earnings		Total
	£'000		£'000		£'000		£'000		£'000
At 3 October 2015	500		2,662		251		32,871		36,284
Profit for the period	-		-		-		1,527		1,527
Other comprehensive income/(expense)	-		-		300		(1,131)		(831)
Total comprehensive income for the period	-		-		300		396		696
Dividends paid during the year	-		-		-		(6,250)		(6,250)
Total contributions by and distributions to owners	-		-		-		(6,250)		(6,250)
At 2 April 2016	500		2,662		551		27,017		30,730
At 3 October 2015	500		2,662		251		32,871		36,284
Profit for the period	-		-		-		8,451		8,451
Other comprehensive income/(expense)	-		-		19		(7,078)		(7,059)
Total comprehensive income for the period	-		-		19		1,373		1,392
Dividends paid during the year	-		-		-		(7,900)		(7,900)
Total contributions by and distributions to owners	-		-		-		(7,900)		(7,900)
At 1 October 2016	500		2,662		270		26,344		29,776
Profit for the period	-		-		-		249		249
Other comprehensive income/(expense)	-		-		(163)		4,152		3,989
Total comprehensive income for the period	-		-		(163)		4,401		4,238
Dividends paid during the year	-		-		-		(7,400)		(7,400)
Total contributions by and distributions to owners	-		-		-		(7,400)		(7,400)
At 1 April 2017	500		2,662		107		23,345		26,614

Unaudited consolidated statement of cash flows

		26 weeks ended 1 April 2017		26 weeks  ended 2 April 2016		52 weeks ended 1 October 2016
		£'000		£'000		£'000
Operating activities
Profit after taxation		249		1,526		8,451
Corporation tax		60		382		1,801
Finance income		(11)		(34)		(56)
Finance expense		155		83		190
Pension contributions paid		(298)		(150)		(472)
Depreciation of property, plant and equipment		1,535		1,596		3,153
Loss on disposal of property, plant and equipment		88		56		309
		1,778		3,459		13,376
Decrease in trade and other receivables		1,553		1,030		861
Decrease in foreign exchange contract		-		239		239
Decrease/ (increase) in inventories		3,007		3,687		(1,224)
(Decrease)/ increase in trade and other payables		(5,773)		(5,956)		821
Decrease in provisions		(142)		(44)		(168)
		(1,355)		(1,044)		529
Cash generated from operations		423		2,415		13,905
Income taxes paid		(1,889)		(1,040)		(2,041)
Net cash flows from operating activities		(1,466)		1,375		11,864
Investing activities
Purchase of property, plant and equipment		(1,578)		(1,356)		(3,195)
Sale of property, plant and equipment		-		116		-
Interest received		11		34		56
Net cash used in investing activities		(1,567)		(1,206)		(3,139)
Financing activities
Dividends paid during the year		(7,400)		(6,250)		(7,900)
Net cash used in financing activities		(7,400)		(6,250)		(7,900)
Net (decrease)/increase in cash and cash equivalents		(10,433)		(6,081)		825
Cash and cash equivalents at beginning of period		15,046		14,221		14,221
Cash and cash equivalents at end of period		4,613		8,140		15,046

Notes to the financial statements for the 26 weeks ended 1 April 2017

1.    Basis of preparation

The consolidated interim financial statements of the Group for the 26 weeks ended 1 April 2017, which are unaudited, have been prepared in accordance with the same accounting policies, presentation and methods of computation  followed in the condensed set of financial statements as applied in the group's latest annual audited financial statements. A copy of those accounts has been delivered to the Registrar of Companies.

The financial information for the 26 weeks ended 1 April 2017, contained in this interim report, does not constitute the full statutory accounts for that period. The Independent Auditors' Report on the Annual Report and Financial Statements for 2016 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

The consolidated interim financial statements have neither been audited nor reviewed pursuant to guidance issued by the Auditing Practices Board.

The condensed consolidated interim financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of derivative financial instruments to fair value.

The condensed consolidated interim financial statements are presented in sterling and have been rounded to the nearest thousand (£'000).

The preparation of financial information in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual events ultimately may differ from those estimates.

2.    Accounting policies

In preparing these interim financial statements, the significant judgements made by management in applying the group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements reported in the latest annual audited financial statements for the 52 weeks ended 1 October 2016.

3.    Segmental information

The group complies with IFRS 8 'Operating Segments', which determines and presents operating segments based on information provided to the chief operating decision-maker. The chief operating decision maker has been identified as the management team including the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. The Board considers that each store is an operating segment but there is only one reporting segment as the stores qualify for aggregation, as defined under IFRS 8.

	1 April 2017		2 April 2016		1 October 2016
	£'000		£'000		£'000
External revenue by location of customers:
United Kingdom	70,404		72,225		154,463
Republic of Ireland	2,458		2,368		5,371
	72,862		74,593		159,834

There are no customers with turnover in excess of 10% of total turnover

	1 April 2017		2 April 2016		1 October 2016
	£'000		£'000		£'000
Non-current assets by location:
United Kingdom	18,667		18,260		18,661

Non-current assets held in the Republic of Ireland are not disclosed on the grounds of materiality.

4.    Non-underlying items

The adjustments made to the reported profit before tax to arrive at underlying profit are:

		26 weeks ended
		1 April 2017		2 April 2016
		£'000		£'000
Impact of Foreign Exchange		893		122
Lease Exit Costs /  (Income)		138		(290)
Adjustments to profit before tax		1,031		(168)

In order to provide shareholders with a measure of the true underlying performance of the business the Group has made certain adjustments to the reported profit before tax for the interim reporting statement. These adjustments are made in accordance with the Groups accounting policies and are one off in nature or are considered to be materially distortive of the true underlying trading performance of the business for this reporting period.

1.     Impact of Foreign Exchange:  Following the Brexit decision last June the Group had an unhedged committed stock order programme which has resulted in significant currency losses in the period compared with the prior period. The Group has increased its hedge coverage against forecast purchases of stock and so this is considered to be a one off event.

2.     Lease Exit Costs:   The Group has continued to exit certain leases as it follows its stores reorganisation as previously reported. In the prior period these were achieved at a premium, whilst in the current period this has been at a net cost. The net movement on a comparative basis is considered to be of a one off nature and material to the understanding of the performance of the business.

5.    Derivative financial instruments  

At the balance sheet date, details of the forward foreign exchange contracts that the group has committed to are as follows:

	1 April 2017		2 April 2016		1 October 2016
	£'000		£'000		£'000
Derivative financial assets
Derivatives not designated as hedging instruments	95		-		321
Derivatives designated as hedging instruments	130		672		330
	225		672		651

6.    Taxation

The taxation charge for the 26 weeks ended 1 April 2017 is based on the estimated effective tax rate for the full year of 19.5% (2016:20%).

Further changes to the UK Corporation tax rates were substantively enacted as part of the Finance Bill 2015-16 on 26 October 2015. These include a reduction to the main rate to 19% from 1 April 2017 and to 17% from 1 April 2020. Deferred tax has been calculated at 18% being the rate at which the timing differences are expected to reverse.

7.    Earnings per share

	1 April 2017		2 April 2016		1 October 2016
	£'000		£'000		£'000
Profit for the period and earnings used in basic and diluted earnings per share	249		1,527		8,451
Earnings per share - basic and diluted	0.50p		3.05p		16.90p

This information is provided by RNS

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