Principal Risks and Uncertainties

In accordance with the UK Corporate Governance Code (the "Code"), the Board understands the need for a robust system of internal control and risk management. Following a review of risks to the Group, further assessments of the key risks and uncertainties facing the Group have been undertaken, which are reviewed by the Executive Committee and Board twice each year.

The directors consider the following matters to be the principal risks and uncertainties affecting the Group. These are not exhaustive and there might be additional unknown risks that could have an adverse effect on the Group.

Risk

Potential impact

Mitigation

Change

Fashion and design trends may not be responded to. This will become more significant for the Group as the mix of women's wear sales increases.

The Group may experience inventory shortages or excesses that could result in reduced margins, or lost revenue or customer goodwill.

The Group will continue to design new and innovative products and will ensure a high level of market awareness and understanding of fashion and consumer trends by carrying out market research, brand tracking, visits to trade fairs and product research.


The Group is constantly refreshing and updating its product range. This assists in differentiating the product to meet evolving customer needs.


As the owner of the Superdry brand, the Group is less sensitive to fashion trends than many other clothing retailers.
The appointment of a Head of Women's Wear enables greater focus on women's wear trends.

Failure to achieve long-term business growth as a result of either the lack of an effective strategy or the failure to implement successfully the strategy.

Failure to achieve planned growth targets could significantly impact on investor appeal.

A five year plan is in place which sets out the key strategic initiatives required to support the planned growth of the Group. These initiatives are owned by the management team and progress is reported regularly to the Board.


The ongoing recruitment of experienced members of the management team is helping to drive the successful implementation of these initiatives as well as underpinning ongoing operations.


International development, which is a key component of the five year plan, is led by the Managing Director of International and Wholesale. Good progress has been made in the past 12 months with the implementation of the international strategy, notably with the integration of the German and Spanish businesses and the development of new franchisee partnerships.

Failure to deliver business critical projects.

Failure to deliver key projects could impact on the effectiveness and efficiency of business operations or delay growth opportunities.

 

Whilst there are still key projects to be delivered, a number of business critical projects have been successfully completed in the past 12 months. Highlights include migration to the new distribution centre in Burton upon Trent and the new IT systems supporting merchandising and HR.


Robust Board level project approval processes are in place to ensure that appropriate due diligence is carried out before a project is undertaken.

 

Improvements continue to be made to the project governance framework. Regular reviews of key projects are carried out by each of the Executive Committee, Audit Committee and the Board. Additionally, KPMG in its role as internal auditor has undertaken specific project reviews at the management team's and the Audit Committee's request.

Loss of key individuals or the inability to attract and retain talent.

Lack of appropriately skilled and experienced resource could result in a delay in achieving the Group's strategic goals.

The management team has been further strengthened over the past 12 months, with the appointment of a Group General Counsel and new Heads of Merchandising, Finance and e-Commerce. The Design team also continues to be expanded and strengthened.


Recruitment and retention practices have been reviewed and are continuously being developed to improve selection, performance and retention outcomes.


A comprehensive talent review has been carried out, enabling a clear vision of the talent needs of the Group (including succession planning). Action planning is now being implemented to ensure that the needs of the business both today and in the future will be met.

Economic and financial conditions result in challenging trading conditions or economic instability.

The Group's results can be affected by the impact of economic conditions on consumer confidence and buying habits.

Regular reviews and forecasting processes are in place to assess current market conditions and to ensure that any issues are dealt with in a timely manner.


The Group continues to implement its strategies to develop and strengthen the Superdry brand globally thereby reducing its dependency on specific markets.


The Wholesale team closely manages credit terms with its trading partners to balance their ability to purchase goods with managing the risk of bad debts.


The treasury function monitors the stability of financial institutions that hold Group deposits. Investments are spread over a number of institutions to manage risk and ensure competitive terms.

Failure to ensure that working conditions in the supply base are in line with the Group's ethical trading policy.

There is potential for the Group to suffer negative customer and stakeholder sentiment with associated impact on customer and investor appeal.

Ethical Trading matters are led by the COO to whom a dedicated sustainability team reports. SuperGroup is an active member of the Ethical Trading Initiative (ETI).


The Group actively engages with its supply base and expects to operate in accordance with its ethical trading code of practice. The Group assesses the status of operating practices through a schedule of focused audits and company visits, where necessary, working with suppliers on improvement plans.

Key infrastructure or IT systems may be unavailable due to operational problems or a major incident.

Should any of these facilities be unavailable for an extended time period, the Group's ability to trade will be impaired. If a major incident impacts the peak trading period from November to January then the consequences to the Group's results would be more severe.

The IT replacement programme is progressing to plan, delivering systems with improved reliability and availability. HR and merchandising systems have now been replaced. During FY15, it is planned to replace the store POS and finance systems. The payroll system was replaced in FY14. The overall IT programme will continue through until 2016.


The completion of the migration of the Group's warehousing operations to the distribution centre in Burton upon Trent has delivered a more reliable, efficient and scalable logistics capability.


The Group's business continuity planning procedures have been further developed during the Period and continue to be strengthened.

Brand damage may occur due to over-exposure of the Superdry brand or the existence of counterfeit product.

The strength of the Superdry brand is fundamental to the business. There is a risk that the brand may: (i) become over-exposed; or (ii) be damaged by the existence of counterfeit products with inferior quality and/or design.

Ongoing brand tracking and sales analysis occurs to ensure that the brand does not become over exposed in any of its markets. Growth in more mature markets is carefully planned to avoid over-saturation.


The Group's in-house brand protection team works closely with third party advisers and customs authorities throughout the world to monitor the production and sale of counterfeit product and, where identified, remove it (whether it be online or in the marketplace) using all tools available including take down procedures and issuing proceedings. The Group also monitors its supply chain to limit the risk of any supplier selling unauthorised product directly into the market.

Failure to comply with legal and regulatory frameworks.

Failure to comply with legal obligations or regulatory frameworks in the diverse markets in which the Group operates could result in financial penalties, the inability to enforce contracts and/or reputational damage.

The Group's tax and in-house legal functions work closely with the business to identify and mitigate legal and regulatory risk using both internal resources and external advisers where either specialist or local advice is needed.

The Group increasingly transmits data electronically, creating a growing security risk. There is also a risk of the loss of controlled data by authorised users.

A failure to adequately protect data could lead to prosecution and reputational damage to the brand.

The Group is investing significantly in new IT systems and infrastructure that will enhance its security profile.


Good progress is being made on the Payment Card Industry (PCI) programme. The Company expects to be compliant by the end of 2014.


The Group has recently reviewed and strengthened its data protection training programme. An improved training programme is currently being rolled out.

Risk of significant changes in currency exchange rates.

The Group's financial results become unpredictable due to changes in exchange rates.

The Group has recently upgraded its treasury policy to reflect the growing international dimension of the business.


The Group maintains constant management oversight, including Board review, of foreign exchange exposure and opportunities.


The Group's policy is to hedge these risks by using forward foreign exchange contracts. This policy is set out in Note 13 of this report.