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RNS
ScS Group PLC  -  SCS   

Preliminary Results

Released 07:00 02-Oct-2018

RNS Number : 5946C
ScS Group PLC
02 October 2018
 

For Immediate Release     

2 October 2018

 

 

 

 

ScS Group plc

 

("ScS" or the "Group")

 

Preliminary results for the 52 weeks ended 28 July 2018

 

A strong year of profitable growth and increased resilience

 

ScS, one of the UK's largest retailers of upholstered furniture and floorings, is pleased to announce its Preliminary Results for the 52 weeks ended 28 July 2018.

 

Financial highlights:

 

·      Gross sales improved £2.8m to £352.3m (2017: £349.5m)

·      Revenue improved £4.3m to £337.3m (2017: £333.0m)

·      Gross margin improved to 44.7% (2017: 44.0%)

·      EBITDA increased 8.1% to £18.8m (2017: £17.4m)

·      Operating profit increased 10.5% to £13.2m (2017: £12.0m)

·      Like-for-like orders increased 0.2%

·      Earnings per share of 26.8p (2017: 23.5p), an increase of 14.0%

·      Free cash flows in the year of £15.2m

·      Strong balance sheet with cash of £48.2m (2017: £40.1m) and no debt

·     Recommended final dividend of 10.90p per share, full year dividend of 16.20p per share (2017: 14.70p), an increase of 10.2%

 

Operational highlights:

 

·      Strategy reviewed, providing focus and priorities for the business for the next three years

·      Became the first UK furniture retailer to achieve 100,000 Trustpilot reviews, maintaining our 5-star "Excellent" rating

·      Online gross sales up 22.6% to £13.8m (2017: £11.3m)

·      New ScS store opened in Chelmsford - now trading from 101 stores

·      £12.0m committed revolving credit facility extended to November 2021

 

Current trading and outlook:

 

·      Sales order intake up 2.1% on a like-for-like basis for the 9 weeks to 29 September 2018

·      Group trading since the start of the year has been pleasing and in line with the Board's expectations

 

David Knight, Chief Executive Officer of ScS, commented:

 

"2018 has been another strong year. Despite a prolonged period of economic uncertainty and challenging trading conditions, we have continued to grow the business. I believe this is due to our continued focus on what we do best - ensuring that we offer an excellent customer experience with outstanding value, quality and choice. The downturn in sales in our House of Fraser concessions has been more than offset by growth in our core ScS business. This has been aided by record results from our online channel, which has seen a 22.6% increase in gross sales.

 

The Group saw a £4.3m (1.3%) increase in revenue in the year to £337.3m (2017: £333.0m). Gross profit increased to £157.3m (2017: £153.7m), with our gross margin percentage increasing 67bps to 44.7% (2017: 44.0%).  EBITDA increased 8.1% to £18.8m (2017: £17.4m) and profit before tax rose 10.5% to £13.2m (2017: £12.0m).

 

Since the start of the current financial year, the overall trading performance of the Group has been in line with our expectations. Due to the ongoing changes at House of Fraser, trading within our concessions, which represented 7.1% of FY18 gross sales, remains challenging and we are working with the new owners to address this as a priority.  Performance in our core ScS business has been encouraging.

 

We will continue to focus on our value offering and we believe the Group's increasing resilience and strong cash flow dynamics will enable us to manage the continued economic uncertainty and take advantage of opportunities as they arise, allowing us to continue to deliver value for our shareholders."

 

Enquiries:

 

ScS Group PLC

David Knight, Chief Executive Officer

Chris Muir, Chief Financial Officer

 

c/o Buchanan +44 (0)20 7466 5000

 

 

Buchanan

Richard Oldworth

Madeleine Seacombe

Tilly Abraham

 

Tel: +44 (0)20 7466 5000

scs@buchanan.uk.com

 

Investor and Analyst Meeting

A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on 2 October 2018 commencing at 9.30am. ScS Group plc's Preliminary Results 2018 are available at www.scsplc.co.uk.

 

An audio webcast will be available on:

http://webcasting.buchanan.uk.com/broadcast/5b6036dcd3653708d12fdd0b

 

Notes to Editors

ScS is one of the UK's largest retailers of upholstered furniture and floorings, promoting itself as the "Sofa Carpet Specialist", seeking to offer value and choice through a wide range of upholstered furniture and flooring products. The Group's product range is designed to appeal to a broad customer base with a mid-market priced offering and is currently traded from 101 stores.

 

The Company's upholstered furniture business specialises primarily in fabric and leather sofas and chairs. ScS sells a range of branded products which are not sold under registered trade marks and a range of branded products which are sold under registered trade marks owned by ScS (such as Endurance and SiSi Italia). The Group also offers a range of third party brands (which include La-Z-Boy, G Plan and Parker Knoll). The Company's flooring business includes carpets, as well as laminate and vinyl flooring.

 

In 2014 ScS began to operate the furniture and carpet concession ranges for House of Fraser. ScS currently operates in 27 House of Fraser stores across the UK.

 

 

CHAIRMAN'S STATEMENT

 

I am pleased to report a third consecutive year of progress, with growth in sales and margins, coupled with increased resilience in the business. These results are particularly encouraging given the ongoing uncertainty in the UK retail sector.

 

In light of this challenging environment, a review of the Group's strategy was completed during the year. This has provided increased focus on the areas we feel will continue to deliver value to our customers, colleagues and shareholders.

 

Financial and strategic objectives

The strategy continues to pursue the same key objectives:

·      Deliver profitable and sustainable growth;

·      Improve the quality of earnings;

·      Improve business resilience through the economic cycle, and

·      Increase shareholder returns.

 

The business has continued to deliver against these objectives, further increasing revenue, gross profit, EBITDA and margins, whilst diligently controlling overheads. The continued strong cash flow generation has also strengthened our balance sheet and further enhanced the resilience of the Group.

 

Our relentless focus on the customer experience and our value offering is a key part of the current and future strategy. Reaching the milestone of 100,000 customer reviews on Trustpilot was a considerable achievement for the Group; maintaining our 5-star 'Excellent' rating provides further evidence that customers enjoy shopping with us.

 

Results and dividend

I am once again pleased to report that the Group has delivered results ahead of market expectations. This is particularly pleasing given the continued challenging trading environment, and demonstrates the resilience of the business and the success of our focus on offering an excellent customer experience with outstanding value, quality and choice.

 

The first half of the financial year saw the Group trade strongly, with overall like-for-like performance growth of 2.2%. However, the second half of the year brought more challenging conditions across the market.  Extreme bad weather at the end of February and exceptionally warm weather through June and July, coupled with the World Cup, resulted in like-for-like orders in the second half declining by 2.6%.  Given these headwinds, it is encouraging that we have delivered a full-year like-for-like order increase of 0.2%.

 

As part of our continued aim to improve profitability, we have continued to identify and implement various business efficiencies, both within gross margin and overhead costs, and these initiatives have helped to increase our EBITDA margin, resulting in a 14.0% increase in earnings per share (EPS) from 23.5p to 26.8p.

 

During the year we successfully opened one new ScS store in Chelmsford and this, along with the full year impact of new stores opened during the previous financial year, has helped to drive the increase in revenue in the year. As part of our ongoing reviews to ensure we have the best stores in the best locations we also took the decision to not renew the lease on one of our Edinburgh stores, which was not achieving the level of return the Group desires for the capital invested.

 

Our concession within House of Fraser, which represented 7.1% of gross sales, has had a particularly challenging year.  The ongoing uncertainty throughout the year as to the viability of the House of Fraser business culminated in their business going into administration shortly after our year end. The business and assets were subsequently bought by Sports Direct International plc and, whilst we continue to trade from all 27 concessions, order performance has continued to be disappointing.  We are currently in discussions with the new owners with a view to agreeing a mutually beneficial arrangement, which will allow us to continue trading in a profitable manner in as many of the current concessions as possible.

 

The Group continues to hold no debt, had cash reserves of £48.2m at 28 July 2018 (2017: £40.1m) and, after paying out a further £6.0m (2017: £5.9m) in dividends in the year, generated net cash flows in the year of £8.0m (2017: £17.7m).  The Group continues to maintain a £12.0m committed revolving credit facility, which was extended during the year to November 2021.  This provides further resilience, whilst also allowing the Group to take advantage of opportunities as they arise.

 

Whilst the continued uncertain economic environment means that we expect trading to continue to be challenging, the improved results year-on-year, coupled with the strength of the Group's balance sheet, has resulted in the Board proposing a final dividend of 10.90p.  If approved, this would give a full year dividend of 16.20p, an increase of 10.2% on the full-year dividend for 2017.

 

Conclusion

The continued strength and resilience of the Group is built on the hard work, dedication and expertise of all of the people who work for the business. On behalf of the Board, I would like to thank all of our 1,932 team members throughout the business, in particular for their determination and commitment in helping us to continue to grow despite the continued challenging trading conditions. This is a particularly difficult time for our 124 employees working across our House of Fraser concessions, and I would especially like to thank them for their professionalism and patience whilst we do our very best to agree a way forward with the new owners.

 

The Group has a clear strategy, underpinned by strong cash flows and the increasing resilience of the Group's balance sheet. The Group is positioned to take advantage of future opportunities and whilst there remains a level of uncertainty in the wider economy and within our House of Fraser concessions, the Board remains positive about the long-term prospects for the business.

 

CHIEF EXECUTIVE'S REPORT

 

Overview

2018 has been another strong year. Despite a prolonged period of economic uncertainty and challenging trading conditions, we have continued to grow the business. I believe this is due to our continued focus on what we do best - ensuring that we offer an excellent customer experience with outstanding value, quality and choice. The downturn in sales in our House of Fraser concessions has been more than offset by growth in our core ScS business. This has been aided by record results from our online channel, which has seen a 22.6% increase in gross sales.

 

Results

The Group saw a £4.3m (1.3%) increase in revenue in the year to £337.3m (2017: £333.0m). Gross profit increased to £157.3m (2017: £153.7m), with the gross margin percentage increasing 67bps to 44.7% (2017: 44.0%).  EBITDA increased 8.1% to £18.8m (2017: £17.4m) and profit before tax rose 10.5% to £13.2m (2017: £12.0m).

 

Strategic priorities

In light of the challenging and changing retail environment, the Group reviewed its strategy during the year. This has allowed the business to reflect on its current focus, identify where opportunities exist and led to a refinement in priorities, mission statement and core values.  Eight priority areas were identified:

·      Building and inspiring an outstanding team;

·      Delivering an exceptional customer experience;

·      Optimising our product strategy;

·      Driving sales densities within our ScS network;

·      Creating a market-leading website and digital awareness; 

·      Maximising the opportunity with House of Fraser customers;

·      Accelerating our flooring growth, and

·      Improving our profitability.

 

Building and inspiring an outstanding team

The Group is fortunate to have very experienced and dedicated employees. However, if we are to continue to move the business forward, it is critical that we continue to improve our ability to attract, retain and recruit the right people.  Core to this was a review of the Group's culture and the launch of its new core values. Progress in this area has already occurred, with an increase in staff retention rates, coupled with increased staff engagement, alignment and communication as evidenced by the recently completed staff survey, which had an 81% response rate. Further progress is targeted in 2019, with the implementation of new recruitment strategies and technology and additional strengthening of the senior management team.

 

Delivering an exceptional customer experience

The Group has held a 5-star 'Excellent' Trustpilot rating for three years and this continues to be a key priority for us. The Group is one of a handful of businesses in the UK to have achieved over 100,000 reviews since we started using the independent review site, and whilst we are delighted to have achieved the maximum star rating, there are still areas we believe we can improve. This priority will include a review of the customer journey, from when customers start researching online or visiting a store, to the point of delivery and aftercare. The aim is to identify where we can further enhance the experience. This will include the use of mobile technology and the continued incentivisation of our teams to provide an excellent customer experience.

 

Optimising our product strategy

Key to the Group's mission is providing product that gives the customer outstanding value, quality and choice. We feel our wide range of price points, together with market leading brands, core ranges and credit options delivers a market leading offer. The Group's long term relationships with its supplier base means we can react quickly to emerging trends and can focus on product quality and service. The ongoing development and management of this supply chain will be a key competitive advantage in the future.

  

Driving sales densities in our ScS network

In-store sales remain the most significant element of the Group's business, making up 89.0% (2017: 88.9%) of the Group's turnover. Despite the significant pressure on consumer spending in the year, and the consequential impact on 'big-ticket' purchases, gross furniture sales were in-line with prior year, at £270.9m, and flooring sales in-store grew 7.1%, to £42.8m.

 

This increase was mainly driven by the increase in the store estate size, following the opening of four stores in the previous year, and a further store in Chelmsford in 2018. With regards to future plans, we continue to pursue a number of new locations across the UK, where we feel there are opportunities for expansion with the right level of return on investment. Conversely, there are a small number of our current stores where we would consider an exit should the opportunity arise. We review our store network on an ongoing basis in order to optimise the estate. As part of this ongoing process we may also look to take advantage of relocations within a town from one park to another.

 

The Group has continued to optimise our branded range of products, and this has helped maximise our average order value, with furniture order values rising 0.4% in the year to £1,582, and flooring order values rising 7.9% to £679. We continue to do this through our use of brand-focused advertising campaigns and the ongoing improvements we are making in store to showcase brand areas.

 

We continue to invest in our online capability, resulting in both the benefit of direct sales through the website noted separately below, but also the indirect benefit of improving the quality of footfall, with the majority of customers now entering our stores having already researched their choices. This has ensured that, despite continued decreases in footfall noted industry-wide, customers are more engaged and more likely to place an order. The Group continues to operate in an increasingly competitive and challenging marketplace. Driving customers to both our website and, ultimately, our stores via TV, press, radio and digital marketing remains a key strategic priority. In-store customer conversion remains a key measure for the Group, and in the current year this conversion rate increased by 4.8%.

 

Following the exercise to refresh aged display stock in FY17, stock sales were £2.2m lower in FY18, which is the main reason that the sales density per square foot at our ScS stores for the year ended 28 July 2018 decreased £2 or 0.9% per square foot to £224 (2017: £226). Excluding stock sales, the underlying sales per square foot has remained the same and whilst we are disappointed to see this, industry data indicates that we have outperformed the overall market.

 

Creating a market leading website and digital awareness

An ever increasing proportion of our customers visit our website to research our products prior to visiting a store to make their final purchase.  Additionally, whilst, as a big ticket retailer, we believe that having a store network where customers can come in and see the products is essential, we also appreciate that an increasing number of customers are choosing to transact online. Continued website investment has therefore been a key part of the Group's strategy.  To this end, we have strengthened our E-commerce team and have continued our investment in website development and maintenance and increased digital marketing spend, which has successfully driven improvements in our website visitor count and conversion.

 

Online was a significant success for the business in the year, with gross sales increasing 22.6% to £13.8m (2017: £11.3m). We continue to see further potential and online growth will remain a key strategic priority. We also took the decision in the year to commit to a re-platforming of our website in 2019, with the expectation this will greatly improve our customer's experience through increased speed and functionality, and dramatically improve the look and feel, in particular on mobile devices.

 

Maximising the opportunity with House of Fraser customers

The Group operates 27 House of Fraser concessions, targeting those customers who prefer to shop in department stores and town centres, and enabling the Group to access a wider demographic.  On 10 August 2018, shortly after our year end, House of Fraser was placed into administration. Uncertainty as to the viability of House of Fraser's own business throughout the year meant that trading conditions were very difficult, and this resulted in gross sales decreasing by 9.4% to £24.8m (2017: £27.4m). This decline in gross sales has resulted in a reduction in the contribution of the concessions to the overall Group EBITDA.

 

As noted in the Chairman's statement, the House of Fraser business and assets were bought out of administration by Sports Direct International plc and we are currently still trading from all 27 concessions.  We remain in discussions with the new owners in an attempt to agree new terms of trade, mindful of the 124 employees who work in these concessions, but also of the need to protect and enhance shareholder value.

 

Accelerating our flooring growth

Since adding flooring as a sales channel in 2012, it has continually helped drive increased turnover and profitability. We are very proud to have recently been awarded the coveted "Best Flooring Retailer 2018" from Interiors Monthly, a leading industry magazine. Customers increasingly see ScS as a destination for their flooring needs, with flooring sales in-store increasing 7.1% to £42.8m (2017: £39.9m). Flooring still remains a key growth area and the Group is committed to continuing to invest in its success. During the year ended 28 July 2018, we also ran our first flooring specific advertising campaign, as we continue to look to increase customer awareness and highlight the product offering. We also continue to improve and invest in the space allocated to our flooring offer across our network of stores, and look forward to this helping to further grow our market share.

 

Improving our profitability

Delivering profitable growth and increasing our quality of earnings are two of our four financial objectives. With the Group's high level of operational gearing, modest changes in revenue and gross profit margins can have a significant impact on earnings. The Group saw its gross profit margin increase to 44.7% (2017: 44.0%) and the EBITDA margin increased to 5.3% (2017: 5.0%). This is covered in more detail in the Financial Review.

 

Current trading and outlook

Since the start of the current financial year, the overall trading performance of the Group has been in line with our expectations. Due to the ongoing changes at House of Fraser, trading within our concessions, which represented 7.1% of FY18 gross sales, remains challenging and we are working with the new owners to address this as a priority.  Performance in our core ScS business has been encouraging.

 

We will continue to focus on our value offering and we believe the Group's increasing resilience and strong cash flow dynamics will enable us to manage the continued economic uncertainty and take advantage of opportunities as they arise, allowing us to continue to deliver value for our shareholders.

 

 

David Knight

Chief Executive Officer

 

FINANCIAL REVIEW

  

Year ended    

28 July 2018

Year ended    

29 July 2017  

 

£m

£m

Gross sales

352.3

349.5

Revenue

337.3

333.0

Gross profit

157.3

153.7

Distribution costs

(17.9)

(16.5)

Administration expenses

(126.2)

(125.2)

Total operating expenses

(144.1)

(141.7)

Operating profit

13.2 

12.0 

Net finance costs

-

-

Profit before tax

13.2

12.0

Tax

(2.5)

(2.6)

Profit after tax

10.7

9.4

Earnings per share

26.8p

23.5p

 

 

 

EBITDA

18.8

17.4

 

 

 

 

Gross sales and revenue

Gross sales increased by £2.8m (0.8%) to £352.3m (2017: £349.5m) and is attributable to:

·      Furniture sales in ScS stores in-line with prior year at £270.9m;

·      An increase in flooring sales in ScS stores of 7.1% to £42.8m;

·      An increase in online sales of 22.6% to £13.8m; and

·      A decrease in sales from the House of Fraser concession of 9.4% to £24.8m.

 

The four new stores opened in the prior year, plus the new store in Chelmsford in the current year, contributed an additional £6.0m to gross sales year on year. The decrease in gross sales for existing ScS stores was due to a reduction in the opening order book, following the downturn in trading experienced towards the end of the prior year, and a reduction in the number of lower margin stock sales of £2.2m following the display refresh in the prior year. Gross sales in the House of Fraser concessions reduced due to the combination of a lower opening order book and the trading difficulties experienced by House of Fraser as a whole during the financial year.

 

Revenue, which represents gross sales less charges relating to interest-free credit sales (see note 3 - Segment information), increased by 1.3% to £337.3m (2017: £333.0m). This was driven mainly by increased volume, but also benefitted from work undertaken to reduce the cost of interest free credit provided by the Group's finance houses.

 

Gross profit

Gross margin (gross profit as a percentage of gross sales) increased to 44.7% (2017: 44.0%). The increase of 67bps is attributable to a number of actions including reducing the cost of interest free credit we pay to finance houses, a reduction in the volume of lower margin stock sales following the display refresh in the prior year, and an increased focus and insight on made to order sales.

 

The increase in gross margin, coupled with the higher volume year on year, resulted in an increase in gross profit of £3.6m or 2.3%.

 

Distribution costs

Distribution costs comprise the total cost of the in-house distribution function and includes employment costs, the cost of leasing vehicles and related running costs and property costs (principally rent, rates and utilities) for the nine distribution centres, as well as costs of third party delivery services contracted to support peak delivery periods.

 

Distribution costs expressed as a percentage of revenue for the year were 5.3%, 0.3% higher than the prior year. The higher costs in the year reflect cost pressure experienced in remuneration for drivers and increased expenditure surrounding the opening of the Group's new distribution centre in Basildon.

 

Administrative expenses

Administrative expenses comprise:

·    Store operating costs, principally employment costs, property related costs (rent and rates, utilities, store repairs and depreciation) and costs associated with the concession agreement with House of Fraser;

·      Marketing expenditure; and

·     General administrative expenditure, which includes the employment costs for the directors, senior management and all head office-based support functions and other central costs.

 

Administration costs for the year totalled £126.2m, compared to £125.2m in the prior year. Administrative costs as a percentage of revenue were 37.4%, compared to 37.6% in the prior year.

 

The year saw an increase in administrative costs of £1.0m, with the increase being driven by the following:

·     £2.2m increase in payroll costs largely driven by a £2.0m increase in performance related bonuses following the Group's improved EBITDA;

·      £0.8m decrease to marketing investment, and

·     £0.4m decrease in website development and maintenance costs following a strengthening of the on-line team who have been able to add in-house development.

 

Marketing costs decreased to £23.9m in the year (2017: £24.7m) as, following the decision to re-phase some of our half-one spend into half-two in order to enhance returns, we then decided to reduce the overall level of spend in light of the benign market conditions.  The control of costs remains a key focus area as does increasing the level of flexibility in our cost base.

 

Flexible costs

The nature of the Group's business model, where almost all sales are made to order, results in the majority of costs being proportional to sales. This provides the Group with the ability to flex its cost base as revenue changes, protecting the business should there be wider economic pressures. As shown below, the proportion of cost variability remained consistent year-on-year.

 

Total costs before interest, tax, depreciation and amortisation across for the year were £333.5m (2017: £332.1m).

 

Of this total, 75% (2017: 75%), or £251.5m (2017: £249.7m), are variable or discretionary, and are made up of:

·      £195.0m cost of goods sold, including finance and warranty costs (2017: £195.8m);

·      £17.9m distribution costs (2017: £16.5m);

·      £23.9m marketing costs (2017: £24.7m), and

·      £14.7m performance related payroll costs (2017: £12.7m).

 

Semi-variable costs total £45.5m, or 14% of total costs, for the year (2017: £46.3m; 14%) and are predominately other non-performance related payroll costs and store costs. Rent, rates, heating, and lighting then make up the remaining £36.5m (11%) of total costs (2017: £36.1m; 11%).

 

The Group has reduced the average remaining lease tenure of our store portfolio. This has been achieved by targeting lower tenures on existing lease renewals and on new stores. This provides the Group with increased flexibility to exit or relocate stores where required. The majority of recent leases entered into are 10 years in length. Average remaining tenure length for the Group has dropped from 8.4 years at the end of FY16 to 6.8 years at the end of FY18 (FY17: 7.6 years).

  

Operating profit 

Operating profit for the year increased by 10.5% to £13.2m (2017: £12.0m).

 

EBITDA

An analysis of EBITDA is as follows:

 

 

Year ended    

28 July 2018

Year ended    

29 July 2017  

 

 

£m

£m

Operating profit

 

13.2

12.0

Depreciation

 

5.1

4.8

Amortisation  

 

0.5

0.6

EBITDA

 

18.8

17.4

 

 

 

 

 

Taxation

The tax charge for the financial year is higher (2017: higher) than if the standard rate of corporation tax had been applied, mainly due to charges not deductible for tax purposes, principally depreciation on capital expenditure that does not qualify for capital allowances, offset by a benefit on the exercise of share options by management awarded upon listing.

 

Earnings per share (EPS)

EPS for the year ended 28 July 2018 was 26.8p compared to earnings per share of 23.5p in the previous year, an increase of 14.0%.

 

Cash and cash equivalents

A strong cash flow has been generated from operations reflecting the negative working capital business model whereby:

·      For cash/card sales, customers pay deposits at the point of order and settle outstanding balances before delivery;

·      For consumer credit sales, the loan provider pays ScS two working days after delivery, and

·     The majority of product suppliers are paid at the end of the month following the month of delivery into the distribution centres.

 

A summary of the Group's cash flows is shown below:

 

 

 

Year ended    

28 July 2018

Year ended    

29 July 2017

 

 

£m

£m

Cash generated from operating activities

 

21.0

30.1

Net capital expenditure

 

(2.9)

(5.2)

Net taxation and interest payments

 

(2.9)

(1.3)

Free cash flow

 

15.2

23.6

Dividends  

 

(6.0)

(5.9)

Purchase of own shares

 

(1.2)

-

Net cash generated

 

8.0

17.7

 

 

 

 

 

Cash generated from operating activities in the previous year benefited by £10.6m from the timing of the July 2017 supplier payment run when compared to the year ended 30 July 2016.

 

Net capital expenditure in the year includes £0.8m on the new Chelmsford store and new Basildon distribution centre following the consolidation of the Thetford and West Thurrock distribution centres (2017: £3.1m on four new stores).

 

 

Dividend

The Board recognise the importance of a dividend to investors and has set a progressive policy, with the intention to:

·      Keep earnings cover in the range of 1.25x to 2.00x;

·      Ensure cash cover remains in the range of 1.75x to 2.25x through the economic cycle, and

·      Pay an interim dividend that will be approximately one third of the total dividend.

 

The Board considers this policy appropriate given the strength of the balance sheet, whilst ensuring the Group has sufficient resources to pursue potential future opportunities to deliver growth.

 

An interim dividend of 5.30p per ordinary share was paid in May 2018. The Group has continued to strengthen and deliver positive results, with very strong cash generation and a balance sheet that is growing in resilience.  Additionally, the Group continues to maintain a £12.0m committed revolving credit facility, which was extended during the year to November 2021.

 

Therefore, despite the continued uncertain economic environment, the Board is confident in the outlook for the Group and proposes a full-year dividend of 16.20p, a 10.2% increase on the full-year dividend for 2017. If approved, this would result in a final dividend of 10.90p. The divided, if approved, will be paid on 26 November 2018 to shareholders on the register on 2 November 2018. The ex-dividend date in 1 November 2018.

 

The total dividend paid is in line with target earnings per share cover, and cash cover through the economic cycle.

 

 

Consolidated statement of comprehensive income for the year ended 28 July 2018

 

 

 

Note

                2018

                £'000

                2017

                £'000

Gross sales

3

352,317

349,502

Revenue

3

337,313

332,965

Cost of sales

 

(179,975)

(179,224)

Gross profit

 

157,338

153,741

Distribution costs

 

(17,873)

(16,503)

Administrative expenses

 

(126,223)

(125,249)

Operating profit

 

13,242

11,989

 

 

 

 

Finance costs

4

(228)

(96)

Finance income

5

205

70

Net finance costs

 

(23)

(26)

Profit before taxation

 

 

13,219

11,963

Taxation

6

(2,541)

(2,561)

Profit and total comprehensive income for the year attributable to owners of the parent

 

10,678

9,402

Earnings per share (expressed in pence per share):

 

 

 

Basic

7

26.8p

23.5p

Diluted

 

 

 

 

7

26.0p

22.9p

All results arise from continuing operations. There are no other sources of comprehensive income.

 

 

 

Consolidated statement of changes in equity for the year ended 28 July 2018

 

 

Share

capital

Share
premium

Capital Redemption
reserve

Merger reserve

Treasury shares

Retained
earnings

 

Total equity

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

At 31 July 2016

40

16

13

25,511

-

4,036

29,616

Total comprehensive income

-

-

-

-

-

9,402

9,402

Share-based payments

-

-

-

-

-

154

154

Dividend paid

-

-

-

-

-

(5,893)

(5,893)

At 29 July 2017

40

16

13

25,511

-

7,699

33,279

 

 

 

 

 

 

 

 

At 30 July 2017

40

16

13

25,511

7,699

33,279

Total comprehensive income

-

-

-

-

-

10,678

10,678

Share-based payments

-

-

-

-

-

542

542

Purchase of own shares (note 10)

-

-

-

-

(268)

(897)

(1,165)

Dividend paid

-

-

-

-

-

(6,032)

(6,032)

At 28 July 2018

40

16

13

25,511

(268)

11,990

37,302

 

Consolidated statement of financial position as at 28 July 2018

 

  

Note

2018

£'000

2017

£'000

Non-current assets

 

 

 

Intangible assets

 

1,151

1,077

Property, plant and equipment

 

21,450

23,878

Total non-current assets

 

22,601

24,955

 

 

 

 

Current assets

 

 

 

Inventories

 

21,865

22,084

Trade and other receivables

 

8,536

9,699

Cash and cash equivalents

 

48,162

40,126

Total current assets

 

78,563

71,909

Total assets

 

101,164

96,864

 

 

 

 

Current liabilities

 

 

 

Current income tax liabilities

 

1,650

2,121

Trade and other payables

8

54,566

53,794

Total current liabilities

 

56,216

55,915

 

 

 

 

Non-current liabilities

 

 

 

Trade and other payables

 

7,001

7,140

Deferred tax liability

 

645

530

Total non-current liabilities

 

7,646

7,670

Total liabilities

 

63,862

63,585

 

 

 

 

Capital and reserves attributable to the owners of the parent

 

 

 

Share capital

 

40

40

Share premium

 

16

16

Capital redemption reserve

 

13

13

Treasury reserve

 

(268)

-

Merger reserve

 

25,511

25,511

Retained earnings

 

11,990

7,699

Equity attributable to the owners of the parent

 

37,302

33,279

Total equity

 

37,302

33,279

Total equity and liabilities

 

101,164

96,864

 

 

Consolidated statement of cash flows for the year ended 28 July 2018

 

 

2018

£'000 

2017

£'000 

Cash flows from operating activities

 

 

Profit before taxation

13,219

11,963

Adjustments for:

 

 

Depreciation of property plant and equipment

5,035

4,806

Amortisation of intangible assets

518

599

Share-based payments

542

154

Finance costs

228

96

Finance income

(205)

(70)

 

19,337

17,548

Changes in working capital:

 

 

Decrease in inventories

219

1,104

Decrease / (increase) in trade and other receivables

1,163

(685)

Increase in trade and other payables

314

12,123

Cash generated from operating activities

21,033

30,090

Interest paid

(228)

(96)

Income taxes paid

(2,896)

(1,220)

Net cash flow generated from operating activities

17,909

28,774

 

 

 

Cash flows used in investing activities

 

 

Purchase of property, plant and equipment

(2,306)

(4,728)

Payments to acquire intangible assets

(575)

(476)

Interest received

205

70

Net cash flow used in investing activities

(2,676)

(5,134)

 

 

 

Cash flows used in financing activities

 

 

Dividends paid

(6,032)

(5,893)

Purchase of own shares (note 10)

(1,165)

-

Net cash flow used in financing activities

(7,197)

(5,893)

 

 

 

Net increase in cash and cash equivalents

8,036

17,747

 

 

 

Cash and cash equivalents at beginning of year

40,126

22,379

 

 

 

Cash and cash equivalents at end of year

48,162

40,126

 

Notes to the audited consolidated financial statements

1.             General information

ScS Group plc (the "Company") is a company limited by shares incorporated and domiciled in England, within the UK (Company registration number 03263435). The Company's principal activity is to act as a holding company for its subsidiaries. The Company and its subsidiaries' (the 'Group') principal activity is the provision of furniture and flooring, trading under the names ScS, Sofa Carpet Specialist, and "House of Fraser Made to Order Sofas, Furniture and Flooring".

2.             Accounting Policies

Basis of preparation

The Board approved the preliminary announcement on 1 October 2018.

 

The results for the year ended 28 July 2018, including comparative financial information, have been prepared in accordance with EU endorsed International Financial Standards ("IFRS"), IFRIC interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

 

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement of IFRS, this announcement does not itself contain sufficient information to comply with IFRS. ScS Group plc will publish full financial statements that comply with IFRS in October 2018.

 

The financial information does not constitute the Company's statutory accounts for the years ended 2017 or 2018, but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) of the Companies Act 2006.

 

The financial information presented in respect of the year ended 28 July 2018 has been prepared on a basis consistent with that presented in the annual report for the year ended 29 July 2017.

 

Going concern

The Group generates strong cash flows, reflecting the negative working capital requirements of the business model. In addition, the Group has a committed £12.0m revolving credit facility in place. The Group's forecasts and projections show that the Group has adequate resources to continue in operational existence for the foreseeable future.

Having considered the Group's current trading and cash flow generation including severe but plausible stress testing scenarios, the Directors have concluded that it is appropriate to prepare the Group Financial statements on a going concern basis.

New standards, amendments and interpretations

A number of new standards and interpretations and amendments to existing standards have been issued but not are yet effective nor adopted by the EU, including IFRS 15 'Revenue from Contracts with Customers', IFRS 9 'Financial Instruments' and IFRS 16 'Leases', and have not been applied in preparing these consolidated financial statements. Management have completed a full assessment of the impact of each of these standards, and of these, only IFRS 16 is expected to have a material impact to the Group.

 

IFRS 16 'Leases' will be effective for the year ending 25 July 2020 onwards and the impact on the financial statements will be significant. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a right-of-use asset for all lease contracts. Therefore, the substantial majority of the Group's operating lease commitments (£166,540,000 on an undiscounted basis) would be brought on to the balance sheet. Depreciation of the right of use asset will be recognised in the income statement on a straight-line basis, with interest recognised on the lease liability. This will result in a change to the profile of the net charge taken to the income statement over the life of the lease. Depreciation and interest charges will replace the lease costs currently charged to the income statement and consequently there will be a significant adjustment to the quoted unadjusted Group EBITDA. There will be no impact on cash flows, although the presentation of the cash flow statement will change significantly. Management has begun to model and quantify the expected impact using the current lease portfolio and presented initial thoughts on the expected impact to the Board, however the impact will greatly depend on the facts and circumstances at the time of adoption and upon transition choices adopted. It is therefore not yet practicable to provide a reliable estimate of the financial impact on the Group's consolidated results.

 

Critical accounting judgements and estimates

The preparation of the financial statements under IFRS requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Relevant accounting judgement and estimates which relate to volume rebates, stock provisions and loss making stores and onerous leases will be disclosed in full in the 2018 annual financial statements.

3.             Segment information

The Directors have determined the operating segments based on the operating reports reviewed by the senior management team (the Executive Directors and the other Directors of the trading subsidiary, A. Share & Sons Limited) that are used to assess both performance and strategic decisions. The Directors have identified that the senior management team are the chief operating decision makers in accordance with the requirements of IFRS 8 'Segmental reporting'.

The Directors consider the Group operates one type of business generating gross sales and revenue from the retail of furniture and flooring. All gross sales and revenue, profit before taxation, assets and liabilities are attributable to the principal activity of the Group and other related services. All gross sales and revenues are generated in the United Kingdom.

An analysis of gross sales and revenue is as follows:

 

 

 

 

Year ended

28 July 2018

                £'000

Year ended

29 July 2017

£'000

 

 

 

 

 

 

Sale of goods

 

 

 

329,571

326,534

Associated sale of warranties

 

 

 

22,746

22,968

Gross sales

 

 

 

352,317

349,502

Less: costs of interest free credit

 

 

 

(15,004)

(16,537)

Revenue

 

 

 

337,313

332,965

 

4.             Finance costs                       

 

 

Year ended

28 July 2018

                £'000

Year ended

29 July 2017

£'000

 

 

                                

 

Bank facility renewal fees

 

132

-

Bank facility non-utilisation fees

 

96

96

 

 

228

96

 

5.             Finance income                               

 

 

Year ended

28 July 2018

                £'000

Year ended

29 July 2017

£'000

 

 

                                

 

Bank interest received

 

205

70

 

6.             Taxation

The total tax charge for the financial year of £2.5m (2017: £2.6m) comprises a corporation tax charge of £2.4m (2017: £3.2m) and a deferred tax charge of £0.1m (2017: credit £0.6m). The tax charge is an effective rate of 19.2%, which is higher (2017: 21.4% - higher) than if the standard rate of corporation tax had been applied mainly due to charges not deductible for tax purposes, principally depreciation on capital expenditure that does not qualify for capital allowances, offset by a benefit on the exercise of share options by management awarded upon listing.

 

7.             Earnings per share

 

 

Year ended

28 July 2018

                £'000

Year ended

29 July 2017

£'000

Profit attributable to owners of the Company

 

10,678

9,402

Weighted average number of shares in issue for the purposes of basic earnings per share

 

39,804,480

40,009,109

 

 

 

 

Effect of dilutive potential Ordinary shares:

 

 

 

-       share options

 

1,220,656

1,085,096

Weighted average number of Ordinary shares for the purpose of diluted earnings per share

 

41,025,136

41,094,205

Basic earnings per share

 

26.8p

23.5p

Diluted earnings per share

 

26.0p

22.9p

             

 

8.             Trade and other payables                 

               

Year ended

28 July 2018

                £'000

Year ended

29 July 2017

£'000

 

                                

 

Trade payables

26,294

29,142

Payments received on account

12,232

11,506

Other taxation and social security payable

4,492

4,775

Accruals

11,548

8,371

 

54,566

53,794

 

The fair value of financial liabilities approximates their carrying value due to short maturities. Financial liabilities are denominated in pounds sterling.

 

9.             Dividends

A final dividend for year ended 29 July 2017 of 9.80p was paid on 27 November 2017. It has been recognised in shareholders' equity in the year ended 28 July 2018.

 

An interim dividend of 5.30p per ordinary share was declared by the Board of Directors on 21 March 2018 and paid on 10 May 2018. It has been recognised in shareholders' equity in the year ended 28 July 2018.

 

A final dividend for the year ended 28 July 2018 of 10.90p per ordinary share was proposed by the Board of Directors.

At 28 July 2018 the retained earnings of the Company amounted to £64.3m.

 

10.          Treasury shares

 

During the year the Group's Employee Benefit Trust purchased 544,154 ordinary shares of 0.1 pence each in the Group at an average price of 214.2 pence per Ordinary Share for the purposes of satisfying management share incentive awards. As at 28 July 2018, 418,581 of these shares had been used to satisfy awards, with the remainder held as treasury shares.


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