Introduction

 

In the first half of the financial year further progress has been made in transforming Thorntons in line with our strategy by rebalancing our business, revitalising our brand and restoring profitability. This has resulted in an encouraging trading performance over the important Christmas period. Whilst the economy continues to have a real impact on our customers, our plans have been constructed accordingly, with a strong focus on innovation, value and service. We have been encouraged by the positive response to the actions that we have taken over the past 18 months and believe that these results illustrate the strength of our multi-channel model and endorse our Company strategy.

 

During the period under review profit before tax and exceptional items was £5.3 million (2012: £3.1 million). Having considered the current and future capital requirements of the business, the Board has decided not to recommend an interim dividend (2012: nil pence). The Board intends to adopt a progressive dividend policy as soon as the trading performance and prospects for the business allow.

 

Overall sales increased by 2.9% to £133.7 million (2012: £130.0 million) reflecting the continued strength of the Thorntons brand with our customers and the appropriateness of our strategy to make our products available where our customers want to buy them. In this respect, we were particularly pleased with the continued strong growth of the Thorntons brand in our Commercial channel where our share of the boxed chocolate and Christmas seasonal specialities markets grew significantly. Additionally, we saw strong growth in International and Private Label sales as we pursued the initiatives outlined earlier in the financial year albeit from a small base.

 

This positive growth supports our plan for our Commercial channel to become the largest channel over the next couple of years while significantly reducing our Own Stores estate to between 180 and 200 stores in the medium term, creating a profitable and sustainable retail presence where our brand can be brought to life for our customers.

 

We continue to make good progress with our store closure programme first outlined in June 2011 and are on track to close approximately 40 stores over the course of this financial year and a similar number the year after.

 

The period saw further successful product innovation as we continued to revitalise the Thorntons brand, encouraging brand reappraisal and repeat purchases. Amongst a large number of new lines, we launched a new range of boxed chocolates aimed at the everyday gifting market, created several new large-format boxes for gifting and sharing, and introduced two iconic Continental items; our first advent calendar for grown-ups and a wonderful table centrepiece, both of which sold out in our Own Stores. Our traditional and new seasonal specialities sold well across all channels, with advent calendars and our new and refreshed Santa and reindeer models delivering particularly strong sales.

 

Retail

Own Stores

 

During the period, Own Store sales reduced by 8.3% to £62.6 million (2012: £68.3 million), mainly as a result of store closures. Like for like sales decreased by 1.5% (2012: ‑5.5%), reflecting the continued challenges for the High Street and for our core customers.

 

Ahead of the peak selling season we further invested in new merchandising initiatives in more than 100 of our top stores, creating improved presentation of our key offers, investing in space to re-present our famous Continental range as well as improving focus on our "Finishing Touches" of new gift wrap, bows and tags, all of which were well received by our customers. Efforts to improve the customer experience were rewarded with good growth in customer ratings, advocacy and intention to revisit, particularly over our busiest trading period.

 

We closed 13 stores (2012: 20 stores) over the period at a cost of £0.4 million (2012: £0.7 million), mainly in line with lease expiry. We are on track with our programme to close approximately 40 stores during this financial year, the majority of which are back-weighted to the final quarter in order to take advantage of trading through Christmas and the key spring seasons. We ended the first half with 317 stores.

 

Franchise

 

Franchise sales declined by 25.4% to £5.0 million (2012: £6.7 million). Whilst our franchisees also suffered from the widespread pressure on consumers and general High Street weakness, the main reason for the decline was the loss of sales following the placing into administration of our major franchisee in May 2012.

 

Although our franchisees approached the key Christmas season with caution, we saw good sales of our seasonal ranges and have received a positive response to the new ranges for the Spring seasons.

 

Interest in our new "mini-franchise" format translated into ten new openings during the period. We opened a further six full-franchise stores, which demonstrates the continued attractiveness of Thorntons' proposition to the independent card and gift retailer.

 

During the period four franchises closed, resulting in 189 franchises at the end of the period.

 

Thorntons Direct

 

Thorntons Direct had a disappointing period in both the corporate and consumer parts of this channel. Sales declined 11.9% to £5.9 million (2012: £6.7 million).

 

Corporate sales suffered as our customers continued to tighten expenditure in light of economic pressures. However, it was our consumer online business that provided the greatest challenges. Our new website was delayed and was launched in Autumn 2012 without the planned full functionality and consumer offer. This was compounded by operational issues at our peak period during which we moderated marketing efforts in order to protect customer service.

 

These issues are being resolved and we anticipate returning to good growth during the Spring season. We remain confident of the significant potential to grow the consumer online element of this channel and will seek to invest further in developing this important contributor to our multi-channel offer.

 

 

Sales & Operations

UK Commercial

 

Sales of Thorntons branded product increased strongly by 16.1% to £51.8 million (2012: £44.6 million). The attractiveness of our quality and value was demonstrated by significant growth in market share in both the boxed chocolate and Christmas specialities markets building on previous gains.

 

Promotional activity continues to be prevalent in today's competitive retail environment and we worked closely with our Commercial customers to ensure attractive offers whilst protecting margin.

 

Sales were driven by further improvements in depth and breadth of distribution, a large number of Thorntons-branded bays and feature space across the major grocers and some effective off-shelf promotions. Additionally, we commenced the roll-out of our famous Continental brand into this channel with encouraging initial results. We approach the Spring seasons with confidence supported by a strong Easter order book.

 

International

 

International sales grew strongly by 57.7% to £4.1 million (2012: £2.6 million). Six months ago we outlined a new structured approach to developing our business outside of the UK. We have been particularly pleased with the reception towards Thorntons in our first target markets and have been rewarded with encouraging seasonal and year-round sales in South Africa and Australia alongside good growth in the UAE in both grocery and tax-free locations.

 

Whilst we remain focused on our strategy and efforts to revitalise our business at home, we will continue to take sensible steps to accelerate our growth internationally and consider the performance in this period as a positive start towards growth that should make a meaningful profit contribution in a three to five-year timeframe.

 

Private Label

 

Sales of Private Label grew to £3.9 million from £0.8 million in the same period last year. Early in 2012 we responded to interest from third parties wanting us to produce for them under their own label.  This had been an area from which we had hitherto withdrawn due to low profitability. We have been pleased that the interest in our quality, innovation and flexibility has been matched by efficiencies in our production ensuring that this has now become a profitable line of business.

 

Operations

 

It is important for our long-term rebalancing strategy to maintain production volumes, and in the period under review overall production volume grew. During our peak season we produced, packed and despatched a record number of items supported by our warehousing and distribution partner DHL. Again we demonstrated our agility and flexibility in being able to respond to fast-changing demands from our channels in addition to delivering new supply chain solutions for new domestic and international customers. Overall stock and customer service levels were managed closely and we ended the Christmas period with clean seasonal stocks. Stock levels at the end of the period were below forecast and last year's levels. 

 

In terms of input costs, despite some ingredient costs now being lower than the recent peaks, other costs continue to trade around their market highs. Our procurement extends on a global basis and we continue to take opportunities to buy forward in order to secure prices in core commodities, thereby enabling more robust planning.

 

Margin and operating expenses

 

Gross margins declined by 1.1 percentage points compared to the same period last year. This was primarily due to the increased mix of lower gross margin sales through our Commercial channels which accounted for a decline of 1.4 percentage points. A further 0.1 percentage point reduction was caused by lower overhead costs absorbed into balance sheet stock levels at the half-year end. Offsetting these was a positive variance of 0.4 percentage points due to, in aggregate, improved trading margins.

 

Operating expenses before exceptional items reduced by 4.3% to £49.7 million (2012: £52.0 million). This was primarily due to lower costs from our Own Stores as we continued with our closure programme as well as the continued benefits of our on-going procurement improvement programmes.

 

Other operating income reduced to £710,000 (2012: £838,000) due mainly to slightly lower sales through our product licensing partners.   

 

Financial position

 

The Company's strategy to rebalance sales across distribution channels has had the anticipated effect of restoring the profitability and cash generating potential of the business in the first half of the current financial year.

 

Reported pre-exceptional PBT in the first half was £5.3 million (2012: £3.1million).  Pre-exceptional EBITDA also increased year on year to £10.6 million (2012: £9.0 million).

 

The lower level of stock held at the half end is a good indicator of our continued tight control over cash which, when combined with increased profitability and working capital management, contributed to improved cash generation of £15.0 million (2012: £11.6 million).

 

The Company has committed unsecured bank facilities of £57.5 million which expire in October 2015. The committed borrowing facilities have financial covenants attached which are tested half yearly.  At the 12 January 2013 testing date all of the covenant tests were passed.

 

We expect that the Company will operate within the terms of its borrowing facilities and covenants for the foreseeable future. Accordingly, after making appropriate enquiries, the Directors believe that the Company has adequate resources to continue as a going concern.

 

Exceptional costs

 

In the first half year under review, the Company has incurred gross impairment and onerous lease charges of £0.7 million (2012: £2.4 million). Further details of exceptional items are contained in note 6.

 

Taxation

 

The total tax charge after exceptional items for the period under review was £1.3 million (2012: £nil) with the underlying tax rate amounting to 27.8% (2012: 29.1%) of profit before tax. This is higher than the statutory rate of 23.75% (2012: 25.75%) mainly due to the effect of permanently disallowable items and depreciation on assets for which the Group receives no tax allowances.

 

Pension Scheme

 

The valuation of the Thorntons' Pension Scheme as at 30 June 2012 has been updated on an actuarial basis, applying current discount and inflation rate assumptions and incorporating the valuation of the plan assets as at 12 January 2013. The deficit is now £30.9 million (2012: £29.1 million).  The scheme will close to future benefit accrual for employee members on 5 April 2013.

 

Board changes

 

Martin George joined the Board on 1 November 2012 as an independent Non-Executive Director, bringing extensive experience in consumer brand development as well as commercial and general management.

 

Paul Wilkinson, formerly our Senior Independent Director, succeeded John von Spreckelsen as Chairman upon his retirement from the Board on 1 February 2013. Keith Edelman, Non-Executive Director, succeeded Paul Wilkinson as Senior Independent Director on the same date.

 

On behalf of the Board, the Executive team and everyone at Thorntons, I would like to thank John for his contribution, support and passionate commitment to the Company over the past six years. He has steered Thorntons through an unprecedented period of economic difficulty and was instrumental in the decision to de-risk a retail-centric business by creating the multi-channel model that serves our business and our customers well today. 

 

Principal risks and uncertainties

 

Key risks are regularly reviewed by the Executive Directors and Senior Management. The key risks and uncertainties facing the business are detailed in note 18.

 

Outlook

 

Despite an encouraging performance during the first half of the financial year, we recognise this as a single and important step in a journey that will still take several years. The broader economic environment has remained challenging and we anticipate that 2013 will present more of the same in terms of weak consumer sentiment and activity. Since our statement on 16 January 2013, trading across our sales channels has been in line with our expectations.

 

We have strong plans for our key Spring trading seasons of Mothers' Day and Easter with further innovation in exciting new products, packaging and merchandising. As last year, we have planned cautiously for our Own Store and Franchise channels but anticipate further growth in sales and market share this Easter in our UK Commercial channel. We have a strong order book to support this. As ever, the performance of the Company over these important seasons will define the outcome for the year as a whole.

 

There is still much to do in delivering our vision for the future of Thorntons. We are confident in our strategy and in the actions we have taken.

 

Rebalancing should see good growth in Commercial sales and a return to growth in Thorntons Direct with further Own Store closures in line with our lease expiry profile.

 

Revitalising should see further exploitation of the inherent strengths of our brand, delivering more product innovation. We will also make further progress towards a comprehensive refresh of our range and packaging in line with our new brand look and feel, which will start to become available to our customers in the second half of 2013.

 

Restoring profitability is our core commitment. Margin improvement and cost control remain our key priorities. We are confident that we have the right plans and have taken the appropriate actions to deliver this.

 

As ever, the Board is sincerely grateful for the continued support from all of our customers and would like to express our appreciation to our loyal staff and franchisees.

 

On behalf of the Board

 

Jonathan Hart

Chief Executive

22 February 2013