Finance Review

Introduction

It has been a successful year for the Group with significant increases in revenue, gross margins, and underlying operating profit, full details of which are shown in the KPI table.

This has been achieved in a year when the management team's primary focus was on the significant investments made to secure the Group's infrastructure and shape the business to support future growth. In total, £36.4m of investment spend was incurred against last year's £17.8m, delivering an increased rate of new space opening, the new consolidated distribution facility, the new merchandising system, and the acquisition of the seven stores operated by the German franchise partner. Full details of each of these investments are shown later in this report.

The Group has made a change to its financial reporting date, timed to coincide with the implementation of the merchandise management system. The final day has moved from the last Sunday in April to the last Saturday, effectively giving the Group a financial year of 51 weeks and 6 days (the "Period" or "FY14"). This change aligns the Group with most other retailers in operating reporting weeks on a Sunday to Saturday basis which will enable the Group to collate weekly sales performance on a Sunday and allow management to begin reviewing performance data first thing on a Monday morning, facilitating faster decision-making at the weekly trading meetings.

Key Performance Indicators

KPIUnits20142013Change
GROWTH
Group revenue£m430.9360.4+19.6%
Like-for-like sales%3.25.7-250 bps
Total Retail selling space (excluding concessions)000 sq.ft633536+18.1%
E-commerce – growth%26.327.8-150 bps
Visits (excluding eBay)m25.425.1+1.2%
Conversion (excluding eBay)%2.32.0+30 bps
OPERATIONAL
Gross margin%59.758.3+140 bps
Underlying operating profit margin%14.314.4-10 bps
FINANCIAL
Underlying profit before tax£m62.052.2+18.8%
Underlying basic EPSp58.047.8+21.3%
Cash flow from operations£m73.346.5+57.6%
Free cash flow£m32.523.5+38.3%

Definitions:

  • Group revenue represents amounts receivable for goods supplied, net of discounts, returns and value added taxes.
  • Like-for-like sales growth is defined as the year-on-year increase in revenue from stores and concessions open for more than one year, and allowing for store upsizing of no more than 100% in original trading space, and includes e-commerce revenues.
  • Total retail selling space is defined as the trading floor area of all standalone stores, excluding concessions, and does not include stockrooms, administration and other non-trading areas.
  • E-commerce growth is the percentage growth in online revenues, net of returns, year-on-year.
  • Visits is the number of times Superdry websites were visited during the year.
  • Conversion is the number of website transactions expressed as a percentage of those visitor numbers.
  • Gross margin percentage is gross profit expressed as a percentage of Group revenue.
  • Underlying operating profit margin is the ratio of underlying operating profit to external revenue. Underlying operating profit is external revenue less cost of sales, selling, general and administrative expenses, plus other gains and losses (net), and before charging re-measurements and exceptional items (note 13).
  • Underlying basic EPS is underlying profit after tax attributable to the owners of the Company divided by the weighted average number of shares.
  • Cash flow from operations represents the cash generated from the core operating activities of the Group, excluding capital expenditure, financing, taxation, and acquisitions.
  • Free cash flow is defined as net cash generated from operating activities before taking account of financing and after investing activities.

Group Profit and Loss

Group revenue for the period rose by 19.6% to £430.9m (2013: £360.4m). The Group gross margin rose 140 basis points to 59.7% (2013: 58.3%) reflecting lower clearance activity, the increasing mix of international business, and the benefits of increasing scale and purchasing power. Group underlying operating margins, however, declined by 10 basis points on last year to 14.3% (2013: 14.4%) reflecting the investment made in senior management and personnel, and the costs associated with laying the foundations for a European roll-out.

2014
£m
Re-measurements
£m
Exceptional costs
£m
Reported
2014
£m
Revenue:
Retail285.5285.5
Wholesale145.4145.4
Group revenue430.9430.9
Gross profit257.3257.3
Operating profit:
Retail54.8(2.0)(3.6)49.2
Wholesale47.8(1.7)(5.1)41.0
Central costs(41.1)(4.0)(0.4)(45.5)
Total operating profit61.5(7.7)(9.1)44.7
Net finance income-central costs0.60.6
Share of loss of investment-central costs(0.1)(0.1)
Profit before income tax
Retail54.8(2.0)(3.6)49.2
Wholesale47.8(1.7)(5.1)41.0
Central costs(40.6)(4.0)(0.4)(45.0)
Total profit before income tax62.0(7.7)(9.1)45.2

Underlying and Reported Profit

A number of adjusting items have been identified in establishing the underlying performance of the Group, which are either exceptional items or re-measurements (and the related income tax where appropriate). Underlying is defined as reported results adjusted to reflect the impact of the gain/loss recognised on those items. The directors believe that the underlying results provide additional guidance to statutory measures to help understand the performance of the Group. Further details of the adjustments are included in note 13 and all references to underlying are after making these adjustments. For FY14 those items relate to the following:

  • the fair value re-measurement of deferred contingent share consideration (see note 13);
  • the loss/gain on financial derivatives (see note 8);
  • the set up and dual running costs of the retail distribution centre (see note 13);
  • the buy-out of the Spanish and UK agents (see note 13); and
  • the buy-out of the German agent and franchise partner, and business combination costs (see note 13).

Group Profit Before Income Tax

Underlying profit before income tax stands at £62.0m (2013: £52.2m), up 18.8% on the year, and compares to an overall growth in revenue of 19.6%. The Group's gross profit of £257.3m (2013: £210.0m) is up 22.5% and the Group's gross profit percentage has increased by 140 basis points to 59.7% (2013: 58.3%) as a result of favourable changes to sales mix and sourcing gains, partly offset by the impact of foreign exchange rate movements.

Despite the significant increase in gross profit, the underlying operating profit margin has declined by 10 basis points to 14.3% (2013: 14.4%), driven by the increased cost base. Underlying costs have increased by 22.8% to £200.5m (2013: £163.3m), driven predominantly by the costs associated with the ongoing growth of the store portfolio, and the investments made in infrastructure and the strengthening of the management team.

Store costs have increased by 24.6%, increasing as a percentage of retail sales by 160 basis points. The increase is predominantly due to a ramp-up in the store opening programme, resulting in higher pre-opening costs and costs associated with some store relocations.

Distribution costs have increased by 10.6%, decreasing as a percentage of sales by 50 basis points. The decrease is due to lower participation of e-commerce, particularly eBay which incurred significant costs relating to the 'mega-sale' events.

Head office costs (including marketing costs and depreciation) have increased by 20%, broadly in line with sales growth. FY14 has continued to be a year of investment with the establishment of local management teams in Germany and Spain, increased resources to support international expansion and new IT platforms and more vigorous activity to protect the Group's intellectual property.

Robust Financial Management

Management believe that having robust systems and business processes is as important as strong cost control and monitoring when it comes to running the business effectively and efficiently. Improvements to business processes and financial controls have been made during the year, aided by the new distribution centre and the MMS implementation, and these will be significantly enhanced by the replacement of the finance system in FY15.

Taxation in the Period

The Group's income tax expense on underlying profit of £14.9m (2013: £13.4m) represents an effective tax rate of 24.0% (2013: 25.7%). This is higher than the statutory rate of 22.8% (2013: 23.9%) primarily due to the depreciation and amortisation of non-qualifying assets and non-allowable expenses.

The UK corporation tax rate reduction from 23% to 21% with effect from 1 April 2014 and the further reduction to 20% with effect from 1 April 2015, are substantially enacted at the balance sheet date so the deferred tax balances at 26 April 2014 have been re-measured resulting in an exceptional deferred tax charge of £4.3m (2013: £1.5m).

During the year the Group paid more than £49m in UK taxes, which includes corporation tax, import duty, business rates, employer's national insurance and stamp duty.

In preparation for the listing of the business on the London Stock Exchange, a substantial reorganisation was undertaken with effect from 7 March 2010 and the Group's subsidiaries acquired net assets with a total fair value of £375m. Within this amount, £340m was identified as intangible assets and goodwill, of which the directors believe that at least £187m should be deductible against taxable profits over the useful economic lives of the respective assets. This gave rise to £52.4m of the exceptional deferred income tax credit booked in 2010. Based on this the directors consider that the Group's future cash tax expense should be reduced by approximately £2.8m per annum using the corporation tax rate of 20%.

Earnings Per Share

Underlying basic earnings per share is 58.0p (2013: 47.8p). Basic earnings per share is 34.0p (2013: 44.7p) based on a basic weighted average of 80,580,959 shares (2013: 80,280,115 shares). The increase in the basic weighted average number of shares is predominately due to 441,917 5p ordinary shares being issued during February 2014 in accordance with the deferred contingent share consideration agreement following the acquisition of SuperGroup Europe BVBA in 2011. The transaction resulted in an increase of £7.1m in share premium. There was also an increase in share premium of £0.1m in respect of 16,500 5p ordinary shares issued in relation to the buy-out of the Spanish distributor. In total share premium increased in the year by £7.2m.

Underlying diluted earnings per share is 57.2p (2013: 47.4p). Diluted earnings per share is 33.6p (2013: 44.3p) based on a diluted weighted average of 81,653,319 (2013: 81,049,304) shares.

Dividends

The Board recognises the level of cash building on the balance sheet but, at this stage, has decided not to return excess cash to shareholders. There are a number of opportunities over and above the organic roll-out covered in the Strategic Report which, when and if they materialise, will require meaningful capital investment and the Board does not wish to restrict the Group's ability to take advantage of these opportunities.

Consequently, the Board remains of the view that the business is best served by retaining current cash reserves to support growth, as illustrated with the deals in Germany, Spain, and the recently announced deal in Scandinavia. A recommendation will be made at the Annual General Meeting that no dividend is payable in relation to FY14 (2013: £nil).

The Board will keep the dividend policy under review by considering the Group's profitability, underlying growth, availability of cash and distributable reserves and the investment opportunities open to the business.

Despite the higher level of investment during the year, management is satisfied that the Group has delivered another period of strong returns. In FY14, SuperGroup generated a return on capital employed of 29.8% (2013: 25.7%). This supports the Board view that excess cash is best utilised executing the Group's global growth aspirations.

Cash Flow and Balance Sheet

The Group had net cash balances of £86.2m (2013: £54.5m) as at the end of the year. The business remains highly cash generative and operations delivered an inflow of £73.3m (2013: £46.5m). This year-on-year increase is largely due to the significant increase in revenues and underlying profit supported by an improvement in working capital management as aged stock has been cleared from the business. There has been a significant increase in investing activities to £36.4m (2013: £17.8m) driven by the capital expenditure incurred in opening the near 100,000 square feet of new retail space, the opening of the new distribution centre, and the information technology investments. It is anticipated that the Group will continue to enjoy a strong balance sheet that will enable it to continue to invest in new business opportunities and infrastructure to support future growth.

The net book value of property, plant and equipment is £70.3m (2013: £63.7m). During the year, £26.9m (2013: £15.0m) of capital additions were made, of which £21.8m (2013: £10.0m) relates to leasehold improvements across the Group. The balance is made up of furniture, fixtures and fittings (£2.7m) and computer equipment (£2.4m). Furniture and fittings with a value of £1.2m were acquired as part of the business combination in Germany.

Landlord contributions of £4.6m (2013: £3.0m) were received during the year and will be amortised over the length of the respective leases.

Intangible assets comprise goodwill, lease premiums, distribution agreements, trademarks, the website and computer software, stood at £46.7m at the year end (2013: £41.5m). Acquisitions in the year resulted in £0.7m being added to goodwill and £1.2m to intangibles.

Investment in inventories, trade receivables and trade payables decreased by 0.7% during the year to £67.9m (2013: £68.4m) and as a proportion of Group revenue was 15.8% (2013: 19.0%). Group inventory increased to £77.8m (2013: £72.5m), up 7.3%. The increase in inventory is a result of the increase in both retail space and sales, offset by a reduction in aged stock. Trade receivables (excluding prepayments and provisions) increased by 14.8% to £32.5m (2013: £28.3m) and were 7.5% (2013: 7.8%) of Group revenue. This is broadly in line year-on-year.

Trade payables were £42.4m (2013: £32.4m), an increase of 30.9% on the prior year and represented 9.8% (2013: 9.0%) of Group revenue.

Current assets2014
£m
2013
£m
Change
%
Inventories77.872.5+7.3%
Trade and other receivablesTrade receivables32.528.3+14.8%
Other receivables/derivatives21.819.0+14.7%
Sub total receivables54.347.3+14.8%
Cash and cash equivalents86.254.5+58.2%
Total current assets218.3174.3+25.2%
Trade and other payablesTrade payables(42.4)(32.4)+30.9%
Other payables/derivatives/borrowings(30.7)(25.0)+22.8%
Total current liabilities(73.1)(57.4)+27.4%
Net current assets145.2116.9+24.2%
Working capitalInventories77.872.5+7.3%
Trade receivables32.528.3+14.8%
Trade payables(42.4)(32.4)+30.9%
Total67.968.4-0.7%

The Group continues to review its supplier base in order to manage risk and meet growth expectations. During the year, the number of suppliers decreased to 66 (2013: 79) although several of these operate from multiple locations. Changes to sourcing in recent years have resulted in the supply base being focused in three principal territories: Turkey, China and India. The flexible sourcing model that the Group has adopted, both in terms of suppliers and territories, enables the Group to generate competitive tension between suppliers and de-risk its sources of supply.

The directors report that, having reviewed the current performance forecasts, they have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for the foreseeable future. For this reason they have continued to adopt the 'going concern' basis in preparing the financial information.

Divisional Performance

Retail

The Retail division delivered revenue of £285.5m (2013: £242.5m), up 17.7% on the year and represents 66% of total Group revenue (2013: 67%). Like-for-like sales for the year, including the European owned stores and e-commerce revenues, were +3.2% (2013: +5.7%). During the year, management took the decision to cease the eBay 'mega sales' that had been previously used to clear excess aged stock. These had been successful in generating revenue but had almost no impact on profit. Stripping out the effect of these sales from last year would adjust the total sales growth to +20.5% and like-for-like sales up to 4.4%.

The Retail division's operating profit was £49.2m (2013: £46.8m). Underlying operating profit in the year was £54.8m (2013: £46.2m), up 18.6% on the year, and underlying operating profit margin was 19.2% (2013: 19.1%).

The operating margin improvement reflects gains from sourcing, coupled with changes to the trading mix. Clearance sales have switched away from eBay and into owned outlet space, delivering a better margin. There has also been an increase in participation from the international business, which carries a 20-25% price premium over the UK. This has been partly offset by the higher cost of running the international stores, relative to the UK.

Retail division2014
£m
2013
£m
Growth
External revenues285.5242.5+17.7%
Underlying operating profit54.846.2+18.6%
Underlying operating margin (%)19.2%19.1%+10bps
Re-measurements(2.0)1.1
Exceptional items(3.6)(0.5)
Retail operating profit49.246.8+5.1%

Wholesale

The Wholesale division delivered revenue of £145.4m, up 23.3% (2013: £117.9m), representing 34% of total Group revenue (2013: 33%).

Operating profit in the year was £41.0m (2013: £37.1m), whilst underlying operating profit was £47.8m (2013: £35.6m). Underlying operating margin was 32.9% (2013: 30.2%). The improvement in operating margin of 270 basis points was predominantly delivered through the gross profit margin, reflecting gains from sourcing and the sales growth in Europe where better margins are achieved due to the pricing premium.

Wholesale revenue by territory:2014
£m
2013
£m
Change
%
UK and Republic of Ireland31.928.0+13.9%
Europe86.567.4+28.3%
Rest of World20.615.5+32.9%
Clearance & other6.47.0-8.6%
Total Wholesale revenue145.4117.9+23.3%

Revenue growth in Wholesale was achieved mainly through Europe and rest of world territories. The European growth was from independent accounts and new franchise store openings whilst the rest of the world has seen an increase in orders through the existing franchise partnership base opening new stores and the addition of new partnership deals. The UK territory has improved significantly following last year's decline, mainly driven by increased orders from UK key accounts.

There are 208 (2013: 162) Superdry branded franchise and license stores worldwide, including 23 (2013: 20) license stores, operating in 46 countries.

Wholesale division2014
£m
2013
£m
Change
%
External revenues145.4117.9+23.3%
Underlying operating profit47.835.6+34.3%
Underlying operating profit margin %32.9%30.2%+270bps
Re-measurements(1.7)1.5
Exceptional items(5.1)
Wholesale operating profit41.037.1+10.5%

Shaun WillsChief Financial Officer
9 July 2014