24 August 2020
Studio Retail Group plc ("SRG" or "the Group")
Results for the 52 weeks ended 27 March 2020
A year of transition and further operational progress for the Group
SRG, the online value retail and Education business, today announces its full year results for the 52-week period ended 27 March 2020.
Group summary
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������ Total group revenue* of �514.8m, up 2.2% (FY19 restated**: �503.7m)
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������ Revenue from continuing operations of �434.9m, up 3.1% (FY19 restated**: �421.7m)
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������ Adjusted operating profit* for the total group measured on a constant-GAAP basis up by 3.9% to �39.9m
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������ Operating profit from continuing operations was down by 52.7% to �14.7m, largely as a result of the �20m estimated impact of COVID-19 on the bad debt charge and the adoption of IFRS 16
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������ Adjusted profit before tax* for the total group measured on a constant-GAAP basis up by 8.6% to �31.2m
������ Profit before tax from continuing operations of �6.8m (FY19 restated**: �26.2m)
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������ Core net debt* reduced by �5.6m to �51.8m
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Studio
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������ Studio, our online value retail business, reported revenue of �434.9m, up 3.1% (FY19 restated**: �421.7m)
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o� Product revenue of �311.7m (FY19 restated**: �304.2m), growth of 2.5%, with a strong performance during its peak trading period offset by a less consistent performance at other times.
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o� Competitive market conditions and a disappointing retail trading performance during Q4 resulted in product margins reducing slightly to 33.0% (FY19 restated**: 33.4%), although gross profit from retail increased by 1.0% to �102.8m (FY19 restated**: �101.7m).
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o� Financial services revenue increased by 4.9% to �123.2m.
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������ Adjusted operating profit* for the business of �39.0m (FY19 restated**: �39.4m) after investment in upgraded systems and processes.
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������ Individually significant items reported in respect of incremental PPI costs in August 2019 of �5.6m.
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������ Statutory divisional operating profit of �17.1m (FY19 restated**: �36.5m) largely as a result of �20m estimated impact of COVID-19 on the bad debt charge.
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Education
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������ Conditional sale to YPO agreed in December 2019 for headline consideration of �50m.� Awaiting clearance from the Competition & Markets Authority.
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COVID-19
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We would like to thank our colleagues for their continued support and understanding throughout the recent trading period. During this time, their health, safety, and wellbeing has remained our clear priority. In response to COVID-19, we have acted to further strengthen health and safety protocols across our sites, including enhanced cleaning protocols and clear social distancing measures. We have also encouraged colleagues to work from home wherever possible. We continue to regularly review and update the measures we have in place, in line with any changes in government guidance.
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Current trading
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Studio's trading performance in the first 20 weeks of the new financial year has been exceptional, with product sales up 42% on prior year and financial services revenue, which inherently lags behind product sales growth, up 6.4%.� The business passed the milestone of having over 2 million active customers in June, which positions the business ideally as it heads into its traditional peak trading period up to Christmas.� We expect that more competitive market conditions will return in the coming months, alongside additional costs associated with new working practices. Our planning assumes that sales growth for the remainder of FY21 will moderate to nearer the levels seen in recent years. Our intention would be to reinvest any benefits from exceptional growth into further growing the customer base and accelerating our digital transformation.� We are not yet in a position to provide a detailed assessment of how the rest of FY21 will develop and we will aim to provide greater clarity in due course.
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Outlook
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Whilst Covid-19 is likely to present material challenges for the UK economy and the broader retail landscape for several years, Studio is well positioned with its digital-first strategy focussed upon delivering great value to its customers. Our overall strategy to grow the Studio customer base and increase our customers' spend with us, supported by our flexible credit offer, is essentially unchanged by the pandemic. Whilst it is too early to restore detailed guidance for FY21, we continue to believe that Studio's recent performance provides the basis for sustainable medium-term profit growth.
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Phil Maudsley, Group Chief Executive, commented:
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"The year FY20 seems a world away now, but it was a year in which we made operational progress as a Group, ensuring we were ready to face COVID-19 from a position of strength.
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"Over the past five months I would like to thank each and every one of my colleagues for their commitment and hard work. It is down to them, our improved infrastructure, and our strengthened online customer offer that we have been able to meet the significant increase in customer demand.
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"As the public have remained at home, more and more customers have been attracted to, and become aware of, our phenomenal online value offer. It is now up to us to keep up the momentum and make sure our proposition continues to resonate at a time when shopping habits are moving online and consumers are valuing the pound in their pocket more than ever before.
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"While wider economic uncertainty exists, we are in a digital sweet spot. We are a business on a strong footing, with the correct strategy, and we are confident of the long-term opportunities open to us."
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Enquiries
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Studio Retail Group plc
Phil Maudsley, Group CEO
Stuart Caldwell, Group CFO
0161 303 3465
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Tulchan Communications
Will Smith
020 7353 4200
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*���������� this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below
**�������� balances have been restated as set out in note 1 to the Group Financial Information below.
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FINANCIAL highlights
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| | 2020 | 2019 | Change |
| Revenue from continuing operations | �434.9m | �421.7m | +3.1% |
| Revenue from total group* | �514.8m | �503.7m | +2.2% |
| Adjusted operating profit* from total group | �39.9m | �38.4m | +3.9% |
| Adjusted operating profit* from continuing operations | �36.6m | �35.2m | +4.1% |
| Adjusted operating profit margin%* from total group | 7.8% | 7.6% | +20bps |
| Operating profit from total group* | �17.2m | �34.3m | -49.8% |
| Operating profit margin from total group* | 3.3% | 6.8% | -350bps |
| Operating profit margin from continuing operations | 3.4% | 7.4% | -400bps |
| Adjusted profit before tax* from total group | �31.2m | �28.8m | +8.6% |
| Adjusted profit before tax* from continuing operations | �27.4m | �25.6m | +7.1% |
| Profit before tax from continuing operations | �6.8m | �26.2m | -74.0% |
| Profit for the year | �8.8m | �23.3m | -62.4% |
| Adjusted free cash flow generation* | �23.7m | �28.9m | -17.8% |
| Cash generated from operating activities before interest and tax paid | �16.5m | �22.4m | -26.1% |
| Core net debt* | �51.8m | �57.4m | -9.7% |
| Overall net debt* (including IFRS 16) | �292.9m | �233.4m | +25.5% |
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*���������� this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below
**�������� balances have been restated as set out in note 1 to the Group Financial Information below.
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Chairman's Statement
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FY20 was a year of transition and further operational progress for the Group. During the period, we continued to focus on strengthening our online value offer at our core Studio retail business, which continues to resonate with customers, while we also reached an agreement to dispose of our Education business.
Since our March year end, the impact of COVID-19 has continued to have a significant impact on people's everyday lives and on the way that the business operates. With this in mind, I would like to take this opportunity to thank each and every one of our colleagues for their hard work and dedication during this period. We have kept their health and safety as our clear priority throughout, and it is thanks to them that we have been able to continue to serve our customers and handle the disruption during lockdown.
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Change of name
The Group changed its name from Findel plc to Studio Retail Group plc at its AGM in July 2019 to strengthen the Group's identity and align it with our primary trading brand. This follows the change in the trading subsidiary name from Express Gifts to Studio Retail at the start of 2019, and a modernisation of the Studio brand designed to make it more appealing in an increasingly digital marketplace for our customers' shopping preferences.
Disposal of Findel Education
Our ambition to focus our resources around the Studio business was the primary reason behind our decision to sell Education in December 2019 to YPO for headline consideration of �50m. We are continuing to work with YPO to obtain clearance from the Competition and Markets Authority for the transaction, which we anticipate will be granted in December 2020. The results for Education are generally presented within our FY20 results as a discontinued operation, although as analysts and management incentive schemes for FY20 were focussed upon the results of the Group including Education, we have also presented an adjusted profit before tax on a like-for-like basis* for the year with Education's results included within it.
Financial performance
Total revenue from Studio increased by 3.1% to �434.9m (FY19 restated**: �421.7m), with a strong performance in the period leading up to Christmas but a more inconsistent retail performance during typically quieter periods given the challenging UK retail market and Brexit-related uncertainties. Adjusted profit before tax on a like-for-like basis* from the total group, which was the measure of profit most closely monitored by management during the year, increased by 8.6% from �28.8m to �31.2m. The statutory profit before tax from continuing operations was �6.8m (FY19 restated**: �26.2m).
The accounting standard for bad debt provisioning, IFRS 9, requires the business to use external economic forecasts to estimate the likely level of future credit losses, using only the information that was available at the balance sheet date. The UK lockdown, which was a consequence of Covid-19, came into force shortly before the year-end. The resulting deterioration in the economic outlook, particularly in relation to unemployment, increased the level of provision indicated by our modelling by approximately �20m.
The unprecedented level of uncertainty around the impact of Covid-19 on the UK economy as a whole, and subsequently on our customer base, continues to cause challenges in assessing bad debt on a forward-looking basis. It should therefore be noted that that �20m figure quoted represents our best estimate of the incremental impact of the Covid-19 on the bad debt provision based on the information available at the end of March. At the time of writing, we have not seen a significant increase in the level of customer arrears resulting from the pandemic, nor have we seen a material reduction in customer payment rates.
Impact of Covid-19
The investments in modernising Studio's warehouse facilities and its supporting digital infrastructure enabled the business to react to the challenges of lockdown at the end of March 2020 from a position of strength. A significant number of colleagues were able to work effectively from home and Covid-19-safe processes and working conditions were implemented across our premises.� The business has therefore been able to operate effectively throughout the lockdown period.
The Group initially took a very cautious approach to liquidity management, reducing stock intake, deferring discretionary capital projects and marketing expenditure whilst the position became clearer. As people remained at home during lockdown, it quickly emerged that Studio was seeing particularly strong demand for ranges such as toys, games, electricals, fitness and garden as consumers moved the majority of their purchasing online. This improved the Group's liquidity position, and enabled the reversal of the precautionary measures put in place in response to the introduction of lockdown.
We continue to retain a cautious stance in respect of customer repayments as, despite a modest number of requests for forbearance caused by disruption to household incomes, we anticipate that the level of customer arrears may worsen later in the year if unemployment levels increase materially.
Education's business experienced a greater reduction in demand due to the closure of UK and international schools, although the position has started to return towards normal seasonal patterns.
Dividends
The Board continues to prioritise investment in improving digital capabilities and in strengthening its financial position in light of the broader economic environment.� In addition, the parent company has accumulated losses of �73.3m and, as such, the Company does not have plans to reinstate dividend payments at this stage.
Management and Board
Paul Kendrick, who has been Managing Director of Studio since April 2017, was appointed to the Board in December 2019. We subsequently announced that Paul would be appointed as Group CEO upon the retirement of Phil Maudsley in March 2021.
By then, Phil will have spent more than 33 years with the Group, overseeing the development of the Studio brand as Managing Director and, since 2017, driving the Group's significant progress as CEO. He will leave the Group with our thanks and best wishes for the future. I look forward to working more closely with Paul in his new role.
Colleagues
This has been an unprecedented period in which our colleagues' hard work and commitment has shone through.� As a token of the Board's appreciation and recognition of our front-line colleagues who came into work during the challenging early period of lockdown, we introduced a temporary scheme giving those colleagues shopping vouchers between April 2020 and June 2020.� On behalf of the Board, I would like to extend our thanks to them for their outstanding efforts.
Current trading
Studio's trading performance in the first 20 weeks of the year has been exceptional, with product sales up 42% on prior year and financial services revenue, which inherently lags behind product sales growth, up 6.4%.� The business passed the milestone of having over 2 million active customers in June, which positions the business ideally as it heads into its traditional peak trading period up to Christmas.� We expect that more competitive market conditions will return in the coming months, alongside additional costs associated with new working practices. Our planning assumes that sales growth for the remainder of FY21 will moderate to nearer the levels seen in recent years. Our intention would be to reinvest any benefits from exceptional growth into further growing the customer base and accelerating our digital transformation.� We are not yet in a position to provide a detailed assessment of how the rest of FY21 will develop and we will aim to provide greater clarity in due course.
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Outlook
Whilst Covid-19 is likely to present material challenges for the UK economy and the broader retail landscape for several years, Studio is well positioned with its digital-first strategy focussed upon delivering great value to its customers. Our overall strategy to grow the Studio customer base and increase our customers' spend with us, supported by our flexible credit offer, is essentially unchanged by the pandemic. Whilst it is too early to restore detailed guidance for FY21, we continue to believe that Studio's recent performance provides the basis for sustainable medium-term profit growth.
Ian Burke
Chairman
22 August 2020
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*���������� this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below
**�������� balances have been restated as set out in note 1 to the Group Financial Information below.
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Chief Executive's review
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The majority of the financial information within this annual report relates to the financial year ended 27 March 2020 - the end of the first week of the UK's general lockdown caused by Covid-19 and the start of an overnight transformation of what we see as "normality".� At the time of writing, without an effective vaccine, it looks like the necessary changes to our day-to-day lives caused by the virus will be with us for some time, and the longer-term impacts on how we shop, how we work and how prosperous we all are will be substantially different from anything we've seen before.
Back at the beginning of March before the start of lockdown, as I was looking back on my 33-year career with the Group, it was almost unbelievable to think that so many aspects of the Studio we know today didn't exist when I first joined back in 1987.� The internet hadn't been developed, the flexible credit account had yet to be introduced, our main warehouse in Accrington was still focussed on picking Christmas cards and wrapping, and the Group contained a very broad array of operational interests both in the UK and overseas including a range of physical shops for its greetings card operation.
Today's Group is tightly focused upon developing Studio as a substantial digital value retailer, building on the new opportunities in the marketplace.� Since becoming CEO in 2017, I have often commented that Studio is in a digital sweet-spot in the retail market.� Our medium-term ambition remains to increase Studio's customer base beyond 3 million customers and to see revenue in excess of �1bn.� In a post-Covid-19 world, that opportunity is greater than ever, but continued change and agility will be needed too.
Studio has thrived in the period since lockdown.� Its digital offering of great value products appeals to families who truly know the value of the pound in their pocket.� We have attracted more new customers, bringing our active customer base beyond 2 million.� We have also successfully adapted our warehousing and support facilities to ensure our colleagues can work in a Covid-19-secure environment, with many able to work from home.
However there are key parts of the business that will require investment over the next few years to realise the medium to long-term ambition for Studio. The ability to fully utilise the information available to join up our marketing, trading and financial services activities and optimise performance to offer customers an even better shopping experience.� We can improve our customer journey with improved stock availability and better integration where we ship products direct from third party suppliers giving even more opportunity for an enhanced range. And by improving the delivery options for our customers by updating our warehouse capabilities.
At the same time, the competitive landscape has undoubtedly changed in Studio's favour.� The traditional high-street shopping model was already under sustained pressure well before Covid-19 but, as others have commented, online shopping is now the default option for the majority of people.� Families often respond to periods of financial uncertainty by seeking great value and welcome the opportunity to spread the cost of their shopping over a number of months.� We have seen these advantages come to the fore during lockdown, with product sales in the first 20 weeks of the year up 42% on last year.� That has left us in a strong liquidity position to build on as we move into our peak trading period in the run up to Black Friday and Christmas.
This will be my last report as Group CEO and it has been a privilege to work with so many talented colleagues over the years.� Paul Kendrick joined the business in 2016 as my deputy in the Studio division, before taking charge of the division in April 2017.� He has shown his strengths over the last three years in delivering Studio's growth, building a largely new and very capable executive team around him.� I wish him every success as I hand over to him as CEO in the coming months.� I have thoroughly enjoyed my long career at Fine Art Developments, Findel and now Studio Retail Group and look forward to seeing it reach its medium-term ambitions as soon as possible.
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Phil Maudsley�����
Chief Executive Officer
22 August 2020
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DIVISIONAL OVERVIEW
Studio
Summary income statement
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| | 2020 | 2019 | Change |
| | �'000 | �'000 | |
| Product revenue | 311,697 | 304,176 | 2.5% |
| Other financial services revenue | 18,617 | 19,332 | |
| Credit account interest | 104,542 | 98,119 | |
| Financial services revenue | 123,159 | 117,451 | 4.9% |
| Sourcing revenue | 38 | 26 | |
| Reportable segment revenue | 434,894 | 421,653 | 3.1% |
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| Product cost of sales | (208,924) | (202,435) | -3.2% |
| Financial services cost of sales | (37,605) | (36,623) | -2.7% |
| Sourcing costs of sales | - | (18) | |
| Total cost of sales | (246,529) | (239,076) | -3.1% |
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| Gross profit | 188,365 | 182,577 | 3.2% |
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| Marketing costs | (31,661) | (31,693) | 0.1% |
| Distribution costs | (37,372) | (36,423) | -2.6% |
| Administrative costs | (71,361) | (66,533) | -7.3% |
| EBITDA | 47,971 | 47,928 | -0.1% |
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| Depreciation and amortisation | (8,975) | (8,480) | -5.8% |
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| Operating profit stated on a like-for-like basis | 38,996 | 39,448 | -1.1% |
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| Estimated COVID-19 bad debt impact | (20,000) | - | |
| Change in bad debt accounting estimate | 3,675 | - | |
| Impact of IFRS 16 | 55 | - | |
| Adjusted operating profit* | 22,726 | 39,448 | -42.4% |
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| Product margin % | 33.0% | 33.4% | -40bp |
| Underlying impairment charge as % of revenue | 8.6% | 8.7% | -10bp |
| Operating profit stated on a like-for-like basis % | 9.0% | 9.4% | -40bp |
| Adjusted operating profit % | 5.2% | 9.4% | -410bp |
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*���������� this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below
**�������� balances have been restated as set out in note 1 to the Group Financial Information below.
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Studio is becoming a leading digital value retailer with a broad product offer of clothing and footwear alongside home and electrical products plus the more seasonal ranges, many of which can be personalised for free.� Over 90% of sales are generated online and, although catalogues are still used, they are just a part of the wider marketing activity which includes growing investment into broadcast and digital media.� Underpinning all this, is the drive to hunt for the best value so our customers don't have to, whilst providing them with a range of payment options.
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Following the start of the lockdown in March 2020, Studio has seen very rapid sales growth as customers browse online, including using our new app, to find products that help make family life that bit easier.� New customers have found the combination of a broad, value driven product range and financial services creates a point of difference to other retailers.� With no physical stores to service and virtually all orders now coming online (a small minority still being phone and postal orders), it is now striving to utilise data and technology across all aspects of the business to improve decision making, becoming a truly digital retailer.� With the Customer at the Heart of the business, ongoing improvements to customer experience and service means our 2 million customers love the Studio offer and continue to shop with us more frequently.
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Our medium-term ambition is to increase the customer base to over 3 million and achieve over �1 billion of revenue.� By continuing to increase our market share whilst also increasing the annual spend per customer to peer-equivalent levels, we believe this is an achievable ambition and so continue with a strategy built around three key pillars:
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-������ Improve Retail Profitability
-������ Maximise Financial Services Opportunity
-������ Build Strong Foundations
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We will be reviewing these pillars in the coming months to ensure that they continue to be focussed on our customers' needs.�The plans and priorities underpinning them have been sharpened over two years with many initiatives delivered or in flight and serving us well during the pandemic, combined with our clearly defined values to our customers and colleagues to deliver on our brand line We Do WoW:
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These values came through customer research and by involving 700 colleagues across the business:
v Inclusive (We) - the broad product range has wide customer appeal, and the flexible payment option opens up our retail offer to customers who may prefer to spread the cost of purchases.� To deliver this we act as one team, with no departmental silos.
v Trusted (Do) - customers have to be able to trust us to deliver the value and quality they expect, to deliver for those important family moments, like Christmas, and also that we make responsible decisions when we lend money.� We do this by being positive and delivering against our promises.
v Amazing (Wow) - we amaze customers with our value and product range, along with targeted offers and service.� To do this we are innovative, think big and are creative.
v Savvy (Wow) - for customers, shopping with Studio is clever - with its great range and value, there is no reason to buy elsewhere.� For colleagues it means we are commercial, we hunt for great value and use the tools available to be even better at our jobs and deliver for our customers.
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The strategic pillars frame the business plans and a transformation programme to invest in new technology, process change and enhancing the capabilities of our people to enable Studio to continue to grow into the future.
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Retail Profitability
Increasing retail profitability will be achieved by growing sales through having more customers, who shop more frequently, and by improving how we plan and source our ranges to improve product margins.
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The actions we are taking to deliver this are:
������ Build the Studio brand as the online destination for value and raise its profile within our target audience of value-conscious families.
������ Focus on Customer Experience with a single view of the customer to improve how we target and service them, alongside a programme to continually make Studio easier, faster and more trusted to shop with.
������ Product development -changing our buying processes to improve product planning and sourcing to in turn improve margins, with particular focus on attracting customers with great value own-brand clothing and household products, our Wow ranges (larger volume lines, offering exceptional value) and gift offer - especially where we can add value through free personalisation.
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During FY20 1.8 million customers shopped with Studio. That base has since grown beyond 2.0 million during lockdown and builds upon the success in recent years where new customers have been recruited through increased use of TV advertising and digital marketing, with customers then being retained through data-driven CRM programmes utilising catalogue mailings and targeted digital activity.� Over the last two years, we have updated the creative look and feel of Studio for customers with a revamped website, new advertising creative and a new Studio App featuring "shop the look" ideas.
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Our business model is built around customer lifetime value, with initial acquisition costs taking time to pay back.� The credit account acts as a loyalty mechanic, even for customers who pay in full when they get a statement and retention is further enabled by range development, targeted marketing and improving service levels to deliver a better overall experience.� Our net promoter score (NPS) reduced at the start of lockdown as processes were adapted to new ways of working.� Our customer experience colleagues and partners in the Philippines and in South Africa saw significantly tighter lockdown restrictions than we saw in the UK, which took longer to overcome.� Restoring the NPS to pre-Covid-19 levels will be an important objective for the coming months.�
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Some recruitment channels have become less profitable in recent years, with the use of targeted marketing lists in particular becoming less prominent following the introduction of GDPR in 2018.� The decision to move away from unprofitable routes, combined with lower level of credit account applicants discussed below, was the key driver behind product sales during H1 being 2.1% below the first half of FY19.� Within that, sales from online channels in the Studio brand increased strongly, up by 12.8%, with average spend per customer - particularly from the app channel - up by 3.1% which reflects the changing customer base and targeting. Orders from legacy channels (phone and written) declined in the period, whilst orders from the secondary Ace brand were also weaker, down 23%, representing around 8% of total sales. Within both groups, there are a high number of non-credit taking customers who have tended to shop for highly-promotional items with lower levels of loyalty.
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As we moved into the peak trading season of Black Friday and Christmas, the digital performance of Studio was particularly strong, with an improved performance from the legacy channels.� This contributed to record levels of online orders and dispatches during the key Q3 period.� However, retail market conditions particularly for high-street stores were very competitive during the second half of December.� As a result, the margins achieved at the very end of Q3 were disappointing.� Conditions in the final quarter of the year remained challenging and so product sales growth of just 2.5% for the year as a whole was considered to be disappointing.
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In sharp contrast, the retail performance of Studio since the start of lockdown has been exceptional and was enabled by much of the strategic investment that has been made to date both in our digital transformation and market positioning as a leading online value retailer. For a period, we operated as a pureplay digital retailer.� The challenge to the business remains to harness the positive trends seen during lockdown and to ensure that we use these as a base to drive growth in future years.
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Financial Services
The second of our strategic pillars is maximising the financial services opportunity, whilst ensuring the credit offered is relevant, appropriate and affordable for our customers, and meets regulatory guidelines.� The majority of Studio customers have a revolving credit account that allows them to either pay for their purchases within a month when their statement arrives, or to roll their balance and spread payments to help with their household budgeting.�
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The benefit to Studio of the credit proposition is not just an additional revenue stream through financial income when customers choose to roll a balance, but also in that the account facility drives higher loyalty for the retail part of the business and a regular prompt for the customer to revisit the website and app to service their accounts.� As we move forward, we will continue to deliver actions to underpin:
������ Payment proposition - provide a range of repayment options to make shopping with Studio easy, and to enhance the benefits of the credit account to be an ideal option for all customers
������ Lending approach - ensure that when we lend money to our customers it is done in a responsible way, with appropriate credit limits and that customers are treated fairly should they subsequently find they have repayment issues
������ Operational efficiency - to utilise new technologies to improve efficiency and how we service customer accounts
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Studio's consumer credit activity is regulated by the Financial Conduct Authority (FCA), and there are a number of guidelines which they have issued to ensure firms treat customers fairly, and that lenders take responsible steps to ensure loans are affordable and avoid any customer harm.� Studio constantly reviews its processes to ensure it remains aligned with the FCA guidelines and is utilising new robust systems, datasets and risk management tools to help in this area.� Credit limit strategies are regularly reviewed and more detailed information is now captured where relevant on income to assess whether our customer can afford to take on new or additional credit from us.�
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Some of these processes have led to a higher level of both declined and withdrawn applications over the last couple of years, in part due to some elements of the process being seen as excessive to some applicants.� The new application and decision platform that we introduced in November 2019 is more bespoke to customers' circumstances and has led to a good recovery in applications being accepted in recent months.� We have also tightened our acceptance criteria to riskier applicants, leading to a reduction in the overall average interest rate applied but a consequential improvement in the overall level of arrears and bad debt, producing a better outcome for customers and improved profitability for the business.� Several further phases of system enhancement are due to be implemented later this year, including the introduction of open banking data into our decisioning.
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Customer balances typically move in line with the seasonal patterns of product purchases.� It is normal for balances to peak at Christmas before gradually reducing from then until the following summer.� Customers receive a monthly statement and can then choose whether to repay their balance in full each month, in which case they do not incur any interest charges, or whether to pay an amount they choose between a minimum level and the outstanding balance.�
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Financial income in the year was up by 4.9%, below the 9.9% growth in live customer balances due to the reduction in average interest rate charged and also the more pronounced peak in product sales during the year compared to FY19.� Improvements in the quality of the receivables book and continued strong recoveries from the sale of defaulted receivables led to underlying bad debt charges only increasing by 2.7%, slower than the level of income and balance growth.� This underlying position retained a cautious level of judgement on future recovery rates, even before the onset of the pandemic.
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IFRS 9 requires the bad debt provision to incorporate future macroeconomic conditions using a variety of possible scenarios, based on information that is available at the balance sheet date.� The deterioration in the economic outlook caused by Covid-19, particularly in relation to unemployment, increased the level of provision indicated by our modelling by approximately �20m. The unprecedented level of uncertainty around the impact of Covid-19 on the UK economy as a whole, and subsequently on our customer base, continues to cause challenges in assessing bad debt on a forward-looking basis. It should therefore be noted that that �20m figure quoted represents our best estimate of the incremental impact of the Covid-19 on the bad debt provision based on the information available at the end of March.
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Whilst we have not yet� seen a significant increase in the level of customer arrears resulting from the pandemic, nor have we seen a material reduction in customer payment rates, we expect that the Coronavirus Job Retention Scheme and other support from government have delayed any deterioration in performance. We anticipate that arrears will increase when these schemes are phased out in the coming months.
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During the period, the Group refined its impairment models to make use of more up to date customer data that is more reflective of current credit policies and operational processes. The availability of this more granular and up to date information has enabled management to refine its estimate in respect of the level of impairment provision required and has resulted in reduction in the provision required by �3.8m.
�
The FCA set a deadline of 29 August 2019 for customers to lodge enquiries and complaints about historic sales of PPI. �In common with other institutions, Studio experienced a large and sudden inflow of enquiries in the weeks leading up to that deadline, having only received a nominal stream of new enquiries in the previous months.� We have now substantially completed our evaluation of those enquiries, which required an incremental charge of �5.6m to be recorded during FY20, a reduction of �2.3m vs. the �7.9m estimated cost included in our half-year results. This charge was recorded as an individually significant item.
�
Strong Foundations�
The third strategic pillar is Strong Foundations, where we are investing in the infrastructure to support our future growth, improve processes and how we manage the business and develop our people and culture for the future. Key action areas here are:
������ Warehouse development - ensure our current operations are robust and create a clear plan to improve service and scale to manage our sales ambitions
������ Data and technology - data is one of our most valuable assets and we will ensure it is kept safe and secure as well as building new capabilities to drive greater business intelligence.� We will also modernise our technology architecture to be agile and scalable
������ Cost efficiency - continually look at ways to be more efficient and keep costs down so we can deliver on our value promise
������ People and culture - we need to have people with the right skills to deliver our plans and a culture that makes Studio a great place to work.
�
Studio has made progress over the last few years in gradually replacing its legacy mainframe systems and IT architecture through the development of a clear IT strategy around data, application and infrastructure architectures.� This is aligned to the projects we are delivering, and new ways of working have been introduced,
�
Our governance structures were enhanced during FY20 as we completed the work to introduce the Senior Manager & Certification Regime from the FCA in December 2019, designed to improve individual accountability in key areas to protect against customer harm.
�
Since the start of 2020, we have appointed a new Trading Director to improve the consistency of our retail performance, a new Director of HR, and a Transformation Director to drive through our investment plans.� We have also expanded our procurement function and appointed specialist advisors to review our overhead base and identify opportunities for future efficiency.
�
Brexit
The Group has continued to prepare for the end of the Brexit transition period at the end of 2020.� The majority of Studio's supplies are sourced, either directly or indirectly, from outside the European Union.� All of Studio's customers are based in the UK and therefore, any imposition of customs tariffs or import duties is not anticipated to have a material impact on our operations.� There is a broader risk that consumer confidence suffers if there continues to be a lack of clarity over Brexit, but we believe that more customers will seek Studio's value offer if economic conditions weaken further from these grounds. Our foreign exchange hedging policy has locked in the buying price of our US$ imports for the next 12 months, which should allow time for market conditions to stabilise.
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Performance and Progress
As noted above, product sales were strong in the weeks leading up to Black Friday and Christmas 2019, but disappointed at other times of the year.� In part this was due to tough market conditions for retailers.� However, there were also aspects of the pricing and marketing strategies that were less successful than we anticipated and response levels from some of our older customers fell as we migrated activity from paper to digital channels and shifted our target customer younger.� We have introduced strategies to better balance these for FY21.� Product margins at the end of the Christmas season and then into the final quarter were particularly disappointing.� As a result, product revenue for the full year of �311.7m was only 2.5% ahead of the prior year, compared to growth rates of 8-9% in the two previous years. Gross profit from product sales increased by 1.0% to �102.8m (FY19 restated**: �101.7m).
�
Adjusted financial services gross profit increased by 5.8%, leading to the total adjusted gross profit for the business increasing by 3.2% to �188.4m (FY19 restated**: �182.6m).
�
Continued marketing efficiencies, as we moved investment from print/paper into TV and Digital advertising meant that marketing costs for the year were unchanged at �31.7m.� Distribution costs moved in line with product sales.� We have continued to invest resource particularly within our IT functions to modernise the business, resulting in administrative costs increasing at a faster rate than activity.�
�
Adjusted operating profit on like-for-like basis* for the year was �39.0m, down from �39.4m in FY19.� Individually significant costs totalling �5.6m related to the increase to the provision for PPI redress as noted above (FY19: �2.9m). Operating profit was �17.1m (FY19: �36.5m)
FINANCE REVIEW
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Adjusted profit before tax on a like-for-like basis
The Group has been focussed throughout the year upon delivering an adjusted profit before tax for the total group* including Education.� This is because the decision to sell Education was only made partway through the year, and then with an expectation that completion would take place after the year-end.� In addition, IFRS 16 has been applied for the first time this year using the modified retrospective transition approach that makes comparability with prior year figures challenging.�
The decision to sell Education in December 2019 means that its results for the year are presented as a discontinued operation.� Having also presented the operation in this way with our interim results, IFRS 5 requires that the fixed assets of the discontinued operation are not subjected to depreciation or amortisation beyond the end of H1.� However, for internal purposes and in the interests of consistency, we continued to accrue such charges during H2 in the adjusted profit figures.
The adjusted profit before tax on a like-for-like basis for the total group* was �31.2m, up from �28.8m in FY19 as set out in the table below.� Full reconciliations between the adjusted figures presented below and their statutory equivalents are shown in the Alternative Performance Measures section below.�
�
| | 2020 | 2019 (Restated**) | Change |
| | �000 | �000 | �000 |
| Adjusted operating profit on a like-for-like basis*: | | | |
| Studio | 38,996 | 39,448 | (452) |
| Central | (2,370) | (4,248) | 1,878 |
| Total continuing operations | 36,626 | 35,200 | 1,426 |
| Education (discontinued operation) | 3,287 | 3,217 | 70 |
| Adjusted operating profit* from total group | 39,913 | 38,417 | 1,496 |
| Net finance costs* | (8,679) | (9,656) | 977 |
| Adjusted profit before tax* from total group | 31,234 | 28,761 | 2,473 |
| Impact of adopting IFRS16 | (1,759) | - | (1,759) |
| Impact of discontinued operation on depreciation in H2 | 1,393 | - | 1,393 |
| Individually significant costs | (8,342) | (4,158) | (4,184) |
| Exclude estimated COVID-19 bad debt impact | (20,000) | - | (20,000) |
| Exclude change in bad debt estimate | 3,675 | - | 3,675 |
| Fair value movement on derivative financial instruments | 2,608 | 4,750 | (2,142) |
| Profit before tax | 8,809 | 29,353 | (20,544) |
*���������� this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below
**�������� balances have been restated as set out in note 1 to the Group Financial Information below.
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The key elements of this improved performance are discussed above.
Individually significant items totalling �8.3m (FY19: �4.2m) were incurred, as discussed in more detail below and set out in note 3 to the Group Financial Information below.� The fair value movement on derivative financial instruments was a credit of �2.6m (FY19: �4.8m).� This is presented below the adjusted profit before tax* on the income statement as it relates to the reversal of prior year fair value movements net of the revaluation of hedging contracts that will unwind during FY21.
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Individually significant items
During the year, Studio saw a large and unexpected increase in the level of PPI claims and enquiries in the days leading up to the FCA's deadline for claims of 29 August 2019. This included a large block of previously unseen claims from the Official Receiver acting on behalf of bankrupt customers.� A provision of �7.9m was recognised in H1 as an individually significant item in respect of these cases with the majority of the provision relating to Plevin refunds, rather than mis-sold policies, and included the cost of reviewing and administering the claims.� Although the exercise was not fully completed at the balance sheet date, it has now been substantially completed and the additional charge required in FY20 has reduced to �5.6m.
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Covid-19
The impact of Covid-19 upon the Group's operations was relatively limited until the start of lockdown, as noted in the Strategic Report. The exception to this was the bad debt charge which, under IFRS 9 requires the bad debt provision to incorporate future macroeconomic conditions using a variety of possible scenarios, based on information that is available at the balance sheet date.� The deterioration in the economic outlook caused by Covid-19, particularly in relation to unemployment, increased the level of provision indicated by our modelling by approximately �20m. The unprecedented level of uncertainty around the impact of Covid-19 on the UK economy as a whole, and subsequently on our customer base, continues to cause challenges in assessing bad debt on a forward-looking basis.
It should therefore be noted that the �20m figure quoted represents our best estimate of the incremental impact of the Covid-19 on the bad debt provision based on the information available at the end of March and, as noted in the strategic report, the business is yet to see any material indications of this increased provision being converted into cash loss. The �20m estimated impact of Covid-19 has been excluded when arriving at adjusted operating profit for Studio on a like-for-like basis* to enable comparability with the results of prior periods and to allow a fair (although estimated) assessment of the business' underlying trading performance prior to Covid-19.
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It is also important to note that the increase to the bad debt provision does not represent the full impact of Covid-19 on the Group as we saw an increase in product sales in Studio in the aftermath of the lockdown announcement, but lost revenue in Education. Incremental costs were also incurred in both businesses as we moved to implement social distancing measures. It is not possible to quantify the net effect of these impacts reliably in accordance with IFRS and so separate presentation has not been made.
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Change in accounting estimate
During the period, the Group refined its impairment models to make use of more up to date customer data that is more reflective of current credit policies and operational processes. The availability of this more granular and up to date information has enabled management to refine its estimate in respect of the level of impairment provision required and has resulted in a reduction in the provision required by �3.8m. Since this change is not reflective of the underlying performance of the receivables portfolio, it has been excluded when arriving at adjusted operating profit for Studio on a like-for-like basis* to enable a fair and balanced assessment of the business' underlying trading performance in FY20.
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Discontinued operation - Education
Education reported an adjusted operating profit on a like-for-like basis* for the year of �3.3m, up slightly on the equivalent result of �3.2m from FY19.� Revenue for the year fell by 2.6% to �79.9m, due primarily to the gradual closure of international schools from the second half of February and the closure of UK schools in mid-March.� The business continued to see encouraging progress in delivering on its strategic objectives to increase online sales and improve its sourcing processes.
As noted above, the decision to sell the business during the year means that its segmental profit for the year is increased by the cancellation of depreciation and amortisation totalling �1.4m during the second half of the year. This has been added back in arriving at adjusted operating profit on a like-for-like basis* in order to enable comparability with the results of prior periods and to allow a fair assessment of the business' underlying trading performance.� Individually significant costs relating to the planned disposal of �1.5m were incurred and recorded against the discontinued operation.� It therefore reported a statutory operating profit of �2.5m for the year.�
�
Pensions
The net valuation of the Group's legacy defined benefit scheme at the end of FY20, measured in accordance with IAS19, increased significantly from a small deficit of �0.1m at March 2019 to a surplus of �31.7m.� The use of hedging within the asset portfolio alongside a decision by the trustees to de-risk the investment strategy by reducing the holding of equities in February 2020, before lockdown, was a key cause of the improved position.� There were also favourable improvements to the liability profile and the demographic profile of scheme members.�
The IAS19 valuation has no bearing on the contributions made by the Group to the scheme, which is instead derived from the triennial valuation of the scheme.� The most recent valuation measured as at April 2019 is currently in progress.� In the meantime, as previously agreed with the scheme's trustees, the Group made contributions totalling �5.0m in respect of FY20 (FY19: �2.5m) and will continue at this level for the time being.
As part of the agreement to sell Education, the Group has agreed an alternative level of contributions that will apply once the sale has completed.� The Group will pay �13m into the scheme shortly after completion, with the rate of annual contributions falling from �5.0m to �3.75m backdated to the start of FY21.
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Taxation
The Group posted a credit of �0.2m in the year in respect of taxation for continuing operations, compared to a �5.7m charge (restated**) seen in FY19. The decrease was the result of the revaluation of the group's deferred tax assets (principally relating to capital allowances) from 17% to 19%, and the valuation of the deferred tax liability on the surplus in the group section of the pension scheme at the prevailing corporation tax rate of 19%, rather than the 35% rate used in FY19.
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Earnings per share
The adjusted earnings per share* for the year from continuing operations was 12.10p (FY19 restated**: 23.20p). The basic earnings per share from continuing operations was 8.16p per share (FY19 restated**: 23.70p).
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Impact of new accounting standards
IFRS 16 "Leases"
The Group adopted IFRS 16 for FY20 and has decided to adopt the modified retrospective transition approach. As such the standard's requirements have been applied only from 30 March 2019, so there has been no adjustment to opening reserves and the comparative figures for FY19 have not been restated.
Following the adoption of IFRS 16, lease agreements now give rise to both a right of use asset and a lease liability for future lease payables. Whilst the new standard has no effect on the cash payable or on the total cost recognised over the course of a lease, under IFRS 16 the lease cost will be higher in the in the early years of the lease. The lease cost is also now split between depreciation of the right of use asset and interest on the lease liability in the income statement, rather than being presented within trading costs as was the case in previous years. The new standard does not impact on the Group's cash flows under lease arrangements but there have been some changes to presentation in the cash flow statement.
The impacts of adopting IFRS 16 on the consolidated financial statements are set out in note 1 to the Group Financial Information. The adoption of IFRS 16 has reduced profit before tax for the total group* by �1.8m.
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Summary balance sheet
| | 2020 | 2019 | Change |
| | �000 | �000 | �000 |
| Intangible fixed assets | 9 | 24,952 | (24,943) |
| Tangible fixed assets | 80,007 | 45,511 | 34,496 |
| Net working capital^ | 215,811 | 201,010 | 14,801 |
| Net debt* | (292,924) | (233,440) | (59,484) |
| Assets held for sale | 35,886 | - | 35,886 |
| Other net assets | 36,592 | 5,487 | 31,105 |
| Net assets | 75,381 | 43,520 | 31,861 |
^��� Net working capital comprises of inventories, trade receivables and other receivables, trade and other payables and provisions.
* this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below �
�
Consolidated net assets amounted to �75.4m at the period end (FY19: �43.5m), reflecting the net profit reported and the actuarial remeasurements in respect of the pension surplus. The net assets are equivalent to 87p per ordinary share (FY19: 50p per ordinary share).
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Cash flow and borrowings
A part of management's variable incentive plans for FY20 related to the generation of free cashflow, as defined in the table below.� Free cashflow generation was �23.7m (FY19: �28.9m).� After taking account of interest and the net impact of lease liabilities, including the adoption of IFRS 16, the Group's core net debt reduced by �5.6m to �51.8m (FY19: �57.4m), as summarised below.
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| | 2020 | 2019 | Change |
| | �000 | �000 | �000 |
| Total group EBITDA^^ | 41,097 | 50,022 | (8,925) |
| Decrease/(increase) in Studio's receivables net of securitisation inflows | 13,610 | (6,926) | 20,536 |
| (Increase)/decrease in other working capital | (6,615) | 10,799 | (17,414) |
| Capital expenditure | (14,822) | (11,545) | (3,277) |
| Cash flows in respect of individually significant items | (5,390) | (11,983) | 6,593 |
| Pension scheme contributions | (4,792) | (2,500) | (2,292) |
| Other | 650 | 1,011 | (361) |
| Adjusted free cashflow* | 23,738 | 28,878 | (5,140) |
| Income tax | (3,717) | (1,931) | (1,786) |
| Net interest payable | (8,495) | (10,017) | 1,522 |
| Repayment of lease liabilities | (5,966) | (571) | (5,395) |
| Movement in core net debt | 5,560 | 16,359 | (10,799) |
| Opening core net debt* | (57,397) | (73,756) | 16,359 |
| Closing core net debt* | (51,837) | (57,397) | 5,560 |
*���������� this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below
^^ ������� for further details on the calculation of total group EBITDA please refer to note 2 to the Group Financial Information.
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Total net debt* at the year-end was as follows:
| | 2020 | 2019 | Change |
| | �000 | �000 | �000 |
| External bank borrowings (excluding securitisation facility) | 85,000 | 95,000 | (10,000) |
| Less total cash | (33,163) | (37,603) | 4,440 |
| Core net debt* | 51,837 | 57,397 | (5,560) |
| Securitisation drawings | 197,591 | 175,545 | 22,046 |
| Lease liabilities | 43,496 | 498 | 42,998 |
| Net debt* | 292,924 | 233,440 | 59,484 |
*���������� this is an Alternative Performance Measure, for which the reconciliation to the equivalent GAAP measure can be found below
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The Group's revolving credit facility was amended during the year with the available level of facilities now scheduled to be �85m until the end of December 2020, before reducing to �70m until its new maturity date of 31 December 2021.� The securitisation facility was restructured during the year with its maximum available amount increasing from �185m to �200m to cater for the continued growth in Studio's trade receivables.� Its maturity date was also extended to 31 December 2022.
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Dividends and capital structure
The Group restructured its Asian sourcing operations during 2018, moving away from its Hong Kong based subsidiary to a new Shanghai based entity.� The affairs of the Hong Kong entity are in the process of being wound up and the Company received a first and final dividend of �15.0m (HKD150.5m) during the period (FY19: �nil).
No other dividends were received by the Company from its subsidiaries during the period and its balance sheet as at 27 March 2020 shows a deficiency of �73.3m on its retained reserves (FY19: deficiency of �99.9m).
Studio Retail Group plc is therefore not yet in a position to declare a dividend and does not have plans to reinstate dividend payments in the near future since it continues to prioritise investment in growing its customer base, improving digital capabilities, and in strengthening its financial position in light of the broader economic environment. The Directors have determined that no interim dividend will be paid (FY19: �nil) and are not recommending the payment of a final dividend (FY19: �nil).
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Treasury and risk management
The Group's central treasury function seeks to reduce or eliminate exposure to foreign exchange, interest rate and other financial risks, to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. It does not engage in speculative transactions and transacts only in relation to underlying business requirements in accordance with approved policies.
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Interest rate risk management
The Group's interest rate exposure is managed by the use of derivative arrangements as appropriate. The Group has purchased interest rate caps covering the period to July 2021 to protect against the risk of unforeseen increases to LIBOR rates.
Finance costs for the year for the total group were �11.0m*, of which �2.3m related to the introduction of IFRS 16 (split �1.8m within continuing operations and �0.5m in discontinued operations).� Net finance costs* of �8.7m are down slightly from the �9.7m seen in FY19 due primarily to a refund of �0.6m in respect of historic overpaid interest from one of the group's bankers, together with a reduction in the borrowing margin and lower pension scheme interest. This underlying charge was covered 4.6 times by adjusted operating profit on a like for like basis* (FY19: 4.0 times).
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Currency risk management
A significant proportion of the products sold, principally through Studio, are procured through the Group's Far-East buying operations and beyond. The currency of purchase for these goods is principally the US dollar.�
The Group's hedging policy aims to cover anticipated future exposures on a rolling 12-month basis.� As at the balance sheet date, the Group had forward contracts with an outstanding principal of $91m (FY19: $93m) and an average rate of �1/$1.286 (FY19: $1.326).� The market value and unrealised loss on those contracts as at the balance sheet date, less the reversal of the equivalent valuation as at the end of March 2019, was a gain of �2.6m (FY19: �4.8m). This is presented separately on the Income Statement as it represents an element of product costs to be realised in FY21 as the contracts unwind.� The Group currently has forward contracts in place with an outstanding principal of $82.5m covering the period to July 2021.
In addition to this direct exposure, the divisions face a significant level of indirect exposure from supplies made by UK suppliers who in turn source goods from overseas.� That risk is normally mitigated through a combination of supplier agreements and fixed term pricing, although from time to time there may be a requirement to increase prices to customers to maintain margins.
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Borrowing and counterparty risk
The Group's exposure to borrowing and cash investment risk is managed by dealing only with banks and financial institutions with strong credit ratings.
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Alternative Performance Measures
The Directors use several Alternative Performance Measures ("APMs") that are considered to provide useful information about the performance and underlying trends facing the Group.� As these APMs are not defined by IFRS, they may not be comparable with APMs shown in other companies' accounts.� They are not intended to be a replacement for, or be superior to, IFRS measures.
The principal APMs used in this Annual Report are set out below.
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Adjusted operating profit and adjusted profit before tax on a like-for-like basis
These measures are used by management to assess the underlying trading performance of the Group from period to period.
In both the current and prior period, the following items have been excluded in arriving at these measures:
������ Individually significant items are, due to their nature or scale, not reflective of the underlying performance of the Group. The Directors believe that presenting these items separately aids year on year comparability of performance.
������ The Group's foreign exchange hedging policy means that there will be unrealised fair value gains or losses at the period end relating to contracts intended for future periods.� Those fair value movements are therefore excluded from the underlying performance of the Group until realised.
In the current period, owing to the impact of Covid-19, the ongoing disposal process in respect of Education and the adoption of IFRS 16 Leases ("IFRS 16), further items have been adjusted for to ensure the figures are presented on a consistent basis:
������ The �20m estimated impact of Covid-19 on the impairment charge in Studio has been excluded in reaching like-for-like adjusted operating profit and profit before tax to enable comparability with the results of prior periods and to allow a fair (although estimated) assessment of the business' underlying trading performance prior to Covid-19. Further details can be found in the Finance Review.
������ During the period, the group refined its impairment models to make use of more up to date customer data that is more reflective of current credit policies and operational processes. The availability of this more granular and up to date information has enabled management to refine its estimate in respect of the level of impairment provision required and has resulted in reduction in the provision required by �3.8m.Since this change is not reflective of the underlying performance of the receivables portfolio, it has been excluded when arriving at like-for-like adjusted operating profit and profit before tax to enable to allow a fair and balanced assessment of the business' underlying trading performance in FY20.
������ IFRS 16 was adopted for the first time in FY20 using the modified retrospective adoption approach. In effect, this means that the FY20 income statement is presented on an IFRS 16 basis, whilst the FY19 comparative is still stated based on the requirements of IAS 17 Leases ("IAS 17"). In order to allow for a like-for-like comparison, and to present results on a consistent basis with that used to formulate market consensus, the impact of IFRS 16 has been excluded in reaching like-for-like adjusted operating profit and profit before tax.
������ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations ("IFRS 5"). Since the group was engaged in an active sale process at 27 September 2019, Education met the criteria to classified as held for sale from half-year onwards. As a result, Education's FY20 results are presented separately in a single, post-tax "result from discontinued operation" line in the income statement. In addition, the amortisation of intangible assets relating to Education, which arise upon consolidation, and are normally disclosed within Central costs, are included within the result from discontinued operation. IFRS 5 also requires that no depreciation or amortisation be recorded against Education once it is classified as held for sale. As such, depreciation and amortisation charged in H2 for comparability, has been reversed.� In order to make the presentation of results fair, balanced and understandable, and since Education has been run as an active part of the group throughout FY20, all IFRS 5 adjustments have been reversed when arriving at the like-for-like adjusted operating profit and profit before tax.� These figures therefore present the Group's results as they would have been presented had the Group not been engaged in a sale process (i.e. a whole-group measure).
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The adjusted and like-for-like figures are derived as follows:
| | 2020 | 2019 | ||||||
| | As reported | Exclude IFRS 16 | Exclude IFRS 5 reallocation | Reinstate H2 Depn (IFRS 5) | Exclude estimated COVID-19 bad debt impact | Exclude change in bad debt estimate | Like-for-like basis | Reported figures |
| Studio | 22,726 | (55) | - | - | 20,000 | (3,675) | 38,996 | 39,448 |
| Central | (1,235) | (15) | (1,120) | - | - | - | (2,370) | (4,248) |
| Adjusted operating profit from continuing operations | 21,491 | (70) | (1,120) | - | 20,000 | (3,675) | 36,626 | 35,200 |
| Education | 4,050 | (490) | 1,120 | (1,393) | - | - | 3,287 | 3,217 |
| Adjusted operating profit from total Group | 25,541 | (560) | - | (1,393) | 20,000 | (3,675) | 39,913 | 38,417 |
| Net finance costs from total group^ | (10,998) | 2,319 | - | - | - | - | (8,679) | (9,656) |
| Adjusted profit before tax | 14,543 | 1,759 | - | (1,393) | 20,000 | (3,675) | 31,234 | 28,761 |
| MTM on derivatives | 2,608 | - | - | - | - | - | 2,608 | 4,750 |
| Individually significant items | (8,342) | - | - | - | - | - | (8,342) | (4,158) |
| Profit before tax | 8,809 | 1,759 | - | (1,393) | 20,000 | (3,675) | 25,500 | 29,353 |
| Tax | (54) | | | | | | | (6,064) |
| Profit after tax | 8,755 | | | | | | | 23,289 |
^Like-for-like net finance costs for the total group excludes the net impact of IFRS 16. �
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Adjusted profit before tax on a like-for-like basis from continuing operations
| � � | 2020 | 2019 � |
| | �000 | �000 |
| Continuing operations | | |
| Adjusted profit before tax on a like-for-like basis | 27,395 | 25,582 |
| Individually significant items | (6,807) | (4,158) |
| MTM on derivatives | 2,608 | 4,750 |
| Impact of IFRS 16 adoption | (70) | - |
| Estimated impact of COVID-19 on impairment charge | (20,000) | - |
| Change in accounting estimate | 3,675 | - |
| Profit before tax | 6,801 | 26,174 |
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Revenue, EBITDA before individually significant items, adjusted operating profit, finance costs, and adjusted profit before tax from total group
The calculation of revenue, EBITDA before individually significant items, adjusted operating profit, finance costs, and adjusted profit before tax from total group includes continuing and discontinued operations and is set out in note 2 to the Group Financial Information.�
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Adjusted operating profit margin %
This is used a measure of the adjusted operating profit made by the Group as a whole. It is derived as follows:
| | 2020 | 2019 (Restated*) |
| | �000 | �000 |
| Total group revenue including discontinued operation | 514,834 | 503,734 |
| Adjusted operating profit on like-for-like basis | 39,913 | 38,417 |
| Adjusted operating profit margin on a like-for-like basis | 7.8% | 7.6% |
*balances have been restated as set out in note 1 to the Group Financial Information below.
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Studio Product Gross Margin %
This is used a measure of the gross profit made by Studio on the sale of products only, which shows progress against one of Studio's strategic pillars. It is derived as follows:
| | 2020 | 2019 (Restated*) |
| | �000 | �000 |
| Product revenue | 311,697 | 304,176 |
| Less product cost of sales | (208,924) | (202,435) |
| Gross product margin | 102,773 | 101,741 |
| Gross product gross margin % | 33.0% | 33.4% |
*balances have been restated as set out in note 1 to the Group Financial Information below.
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Studio underlying impairment loss as a % of revenue
This is an assessment of the underlying impairment loss incurred in respect of Studio's trade receivables, which enables management to assess the quality and performance of its trade receivables from period to period. The estimated impact of COVID-19 and the change in accounting estimate (detailed above) are excluded from the reported impairment loss when calculating this measure, as they are not reflective of the underlying performance of the receivables portfolio.
�
| | 2020 | 2019 (Restated*) |
| | �000 | �000 |
| Reported impairment loss | 53,930 | 36,623 |
| Exclude estimated impact of COVID-19 | (20,000) | - |
| Exclude change in accounting estimate | 3,675 | - |
| Underlying impairment loss | 37,605 | 36,623 |
| Studio total revenue | 434,894 | 421,653 |
| Studio underlying impairment loss as a % of revenue | 8.6% | 8.7% |
*balances have been restated as set out in note 1 to the Group Financial Information below.
�
Studio marketing costs to sales ratio
This measure allows management to assess the efficiency of our marketing spend as we pursue our stated strategy of increasing the profile of the Studio brand. It is calculated by dividing marketing costs by product revenue.
| | 2020 | 2019 (Restated*) |
| | �000 | �000 |
| Marketing costs | 31,661 | 31,693 |
| Product revenue | 311,697 | 304,176 |
| Marketing costs to sales ratio | 10.2% | 10.4% |
*balances have been restated as set out in note 1 to the Group Financial Information below.
�
Overall net debt
This measure takes account of total borrowings less cash held by the Group and represents our total indebtedness. Management use this measure for assessing overall gearing.
It is calculated as follows:��
| | 2020 | 2019 |
| | �000 | �000 |
| Total bank loans | 282,591 | 270,545 |
| Lease liabilities** | 43,496 | 498 |
| Less cash and cash equivalents | (33,163) | (37,603) |
| Overall net debt* | 292,924 | 233,440 |
| Exclude impact of IFRS 16 adoption | (42,902) | - |
| Overall net debt on a like-for-like basis | 250,022 | 233,440 |
** 2020 figures reflect the requirements of IFRS 16.
�
Core net debt
This measure excludes lease liabilities and securitisation borrowings from net debt to show borrowings under the revolving credit facility net of cash held by the Group. This is our preferred measure of the indebtedness of the Group and is relevant for covenant purposes.
It is calculated as follows:��
| | 2020 | 2019 |
| | �000 | �000 |
| Net Debt | 292,924 | 233,440 |
| Lease liabilities** | (43,496) | (498) |
| Less securitisation borrowings*** | (197,591) | (175,545) |
| Core net debt* | 51,837 | 57,397 |
**2020 figures reflect the requirements of IFRS 16.
*** Disclosed within bank loans.
�
Debt funding consumer receivables
The majority of the trade receivables of Studio are eligible to be funded in part from the securitisation facility, with the remainder being funded from core net debt.� This measure indicates the face value of those trade receivables (before any impairment provision) capable of being funded from the securitisation facility. It is useful to management as it demonstrates the proportion of net debt that is supported by paying customer receivables.
It is calculated as follows:��
| | 2020 | 2019 |
| | �000 | �000 |
| Funded from securitisation loans | 197,591 | 175,545 |
| Funded from cash and bank | 65,864 | 64,075 |
| Eligible receivables | 263,455 | 239,620 |
| Securitisation % | 75% | 73% |
�
�
Adjusted free cash flow generation
Free cash flow generation is a key operational metric and is of interest to investors. Consequently, it formed part of the remuneration targets for the Executive Directors.
Adjusted free cash flow is reconciled to cash generated by operations as follows:
| | 2020 | 2019 |
| | �000 | �000 |
| Adjusted free cash flow generation | 23,738 | 28,878 |
| Securitisation loans drawn | (22,046) | (18,041) |
| Purchases of property plant and equipment and software | 14,822 | 11,545 |
| Other | - | (26) |
| Cash generated from operating activities before interest and tax paid | 16,514 | 22,356 |
�
Adjusted earnings per share
This measure shows the earnings per share given when individually significant items and fair value movements on derivative financial instruments are excluded from the profit after tax figure. Details of how the adjusted earnings per share are calculated can be found in note 6 to the Group Financial Information.
�
�
Underlying effective tax rate
This measure shows the Group's effective tax rate when the tax impact of individually significant items and other non-recurring items are adjusted for. This measure allows management to assess underlying trends in the Group's tax rate. It is calculated as follows:
�
| | 2020 | 2019 |
| | �000 | �000 |
| Tax credit/(charge) | 241 | (5,715) |
| Exclude tax impact of individually significant items | (1,293) | (741) |
| Exclude impact of change in corporation tax rate on deferred tax assets & liabilities | (1,427) | - |
| Adjusted tax charge | (2,479) | (6,456) |
| Profit before tax and individually significant items | 13,608 | 30,332 |
| Underlying effective tax rate | 18.2% | 21.3% |
�
Principal risks and uncertainties
�
| Risk | Root cause | Key mitigating controls |
| � Pressures on the levels of disposable income available to lower socio-economic groups, who form a core part of Studio's customer base. | � The economic outlook is uncertain, particularly in relation to the impact of Covid-19, Brexit and more broadly changes in unemployment, interest rates and inflation and wage restraint. | � The expansion of our digital activity and a shift in customer acquisition strategy has broadened the overall customer footprint and reduced our dependency on older, lower socio-economic customer segments. � Successful implementation of our strategies to recruit and retain customers, thereby increasing our customer base, will dilute this impact. � Management information tools, alongside Studio's governance framework, identify trends within the receivables portfolio enabling strategic changes to be proposed and implemented promptly. � |
| � Growth in credit income could slow within the financial services business of Studio. | � Regulatory changes impacting customer acquisition and credit limit management; and our strategy to put the customer at the heart of the business by balancing financial performance and customer conduct risks. | � Studio has reviewed its integrated model of retail and financial services in terms of both customer conduct risk and financial performance and developed a business plan on this basis.� The review included stress testing various scenarios. These factors will require an evolutionary change in our business model placing a greater requirement on the profitability arising from the retail side of Studio. The plans set out in this Strategic Report reflect this. |
| � Potential disruption to our business support systems and the storage and protection of our customers' data. | � The business remains highly dependent upon legacy systems both in the support of running the business on a daily basis and the storage and protection of customer data. � The combination of increasing cyber activity, fraud rings and the level of change being deployed in the business makes this an area of higher potential risk. � � | � Resilience testing and recovery plans are in place. � The business has continued to invest to update its technology solutions as it seeks to lower its dependency on legacy systems. Notable examples include the enhancement in website capabilities at Education and the development of the Financier platform at Studio.� � In addition, an enhanced fraud solution accompanied by improved operational practices within Studio's customer and financial services departments are being deployed. � |
| � Execution and liquidity risks from a substantial multi-year plan of transformation and growth at Studio. � � � | � Funding growth within our integrated retail and credit business model is dependent on the continued availability of debt facilities. � � � � � Any weakness in project and change management in the delivery of key priorities. � � High level of demand on planning and resource management to ensure timely and on budget delivery. | � Appropriate facilities are in place for the medium term and regular and rigorous viability exercises are undertaken. � Fiscal controls, including business forecasting in support of stock and cash flow management. � A Change Board has been established to scrutinise, prioritise and oversee resourcing and delivery of transformation projects. � We are adopting an enhanced process of integrated cash management to meet the demands of (i) change and capital deployment within the business; alongside (ii) daily operational requirements. � |
| � Attracting and retaining the right talent in the business, particularly in the highly competitive areas of digital marketing, IT development and cyber security, to support the deployment of our high growth digital strategy. � | � Limited available experienced staff in key business and technical areas and high demand for those people, | � Significant progress has been made in attracting new talent to the business resulting in the renewal of the senior management teams throughout the Group. � Developing the business as a regional employer of choice is a key objective and as such, enhanced personnel frameworks and reward strategies are being developed. � |
| � A material interruption to the product supply chain could reduce the level of retail trading � | � Brexit could lead to new barriers to trade with some overseas countries. � In particular, Studio imports a relatively high proportion of its retail products from China, either sourced directly or indirectly.� A further rise in geopolitical tensions with China could lead to legislative or economic barriers to trade being introduced. � � |
|
| � Any inability to operate from one of our key warehouse facilities centres� � | � While Studio has a number of warehouse facilities, there is a high dependency on its main facility in Accrington. � The consolidation of Education's warehousing into its facility at Nottingham has concentrated its fulfilment activities into a single location that could also potentially become a point of failure risk.� � | � Appropriate disaster recovery plans have been developed and are periodically reviewed and upgraded. |
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Studio Retail Group plc
Group Financial Information
52-week period ended 27 March 2020
| | | Before | Individually significant items | |
| | | individually significant items | Total | |
| | | �000 | �000 | �000 |
| Continuing operations | | | | |
| Revenue | | 330,352 | - | 330,352 |
| Credit account interest | | 104,542 | - | 104,542 |
| Total revenue (including credit interest) | | 434,894 | - | 434,894 |
| Cost of sales | | (208,924) | - | (208,924) |
| Impairment losses on customer receivables | | (53,930) | - | (53,930) |
| Gross profit | | 172,040 | - | 172,040 |
| Trading costs | | (150,549) | (6,807) | (157,356) |
| Analysis of operating profit: | | | | |
| - EBITDA* | | 35,037 | (5,648) | 29,389 |
| - Depreciation, amortisation and impairment | | (13,546) | (1,159) | (14,705) |
| Operating profit | | 21,491 | (6,807) | 14,684 |
| Finance costs | | (10,491) | - | (10,491) |
| Profit before tax and fair value movements on derivative financial instruments | | 11,000 | (6,807) | 4,193 |
| Fair value movements on derivative financial instruments | | 2,608 | - | 2,608 |
| Profit before tax | | 13,608 | (6,807) | 6,801 |
| Tax (expense)/income | | (1,052) | 1,293 | 241 |
| Profit from continuing operations | | 12,556 | (5,514) | 7,042 |
| | | | | |
| Discontinued operation | | | | |
| Profit from discontinued operation, net of tax | | 2,956 | (1,243) | 1,713 |
| Profit for the period | | 15,512 | (6,757) | 8,755 |
| | | | | |
| Earnings per ordinary share | | | | |
| from continuing operations | | | | |
| Basic | | | | 8.16 |
| Diluted | | | | 8.12 |
| from discontinued operation | | | | |
| Basic | | | | 1.98 |
| Diluted | | | | 1.97 |
| total attributable to ordinary shareholders | | | | |
| Basic | | | | 10.14 |
| Diluted | | | | 10.09 |
�
�
The accompanying notes are an integral part of this consolidated income statement.
*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments.
�
52-week period ended 29 March 2019 (restated - refer to note 1)
| | | Before | Individually significant items | |
| | | individually significant items | Total | |
| | | �000 | �000 | �000 |
| Continuing operations | | | | |
| Revenue | | 323,534 | - | 323,534 |
| Credit account interest | | 98,119 | - | 98,119 |
| Total revenue (including credit interest) | | 421,653 | - | 421,653 |
| Cost of sales | | (202,453) | - | (202,453) |
| Impairment losses on customer receivables | | (36,623) | - | (36,623) |
| Gross profit | | 182,577 | - | 182,577 |
| Trading costs | | (147,377) | (4,158) | (151,535) |
| Analysis of operating profit: | | | | |
| - EBITDA* | | 45,147 | (4,158) | 40,989 |
| - Depreciation, amortisation and impairment | | (9,947) | - | (9,947) |
| Operating profit | | 35,200 | (4,158) | 31,042 |
| Finance costs | | (9,618) | - | (9,618) |
| Profit before tax and fair value movements on derivative financial instruments | | 25,582 | (4,158) | 21,424 |
| Fair value movements on derivative financial instruments | | 4,750 | - | 4,750 |
| Profit before tax | | 30,332 | (4,158) | 26,174 |
| Tax (expense)/income | | (6,456) | 741 | (5,715) |
| Profit from continuing operations | | 23,876 | (3,417) | 20,459 |
| | | | | |
| Discontinued operation | | | | |
| Profit from discontinued operation, net of tax | | 2,830 | - | 2,830 |
| Profit for the period | | 26,706 | (3,417) | 23,289 |
| | | | | |
| Earnings per ordinary share | | | | |
| from continuing operations | | | | |
| Basic | | | | 23.70 |
| Diluted | | | | 23.70 |
| from discontinued operation | | | | |
| Basic | | | | 3.28 |
| Diluted | | | | 3.28 |
| total attributable to ordinary shareholders | | | | |
| Basic | | | | 26.98 |
| Diluted | | | | 26.98 |
�
�
�
�
The accompanying notes are an integral part of this consolidated income statement.
*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments�
52-week period ended 27 March 2020
| | 2020 | 2019 |
| | �000 � | �000 |
| Profit for the period | 8,755 | 23,289 |
| Other Comprehensive Income | | |
| Items that may be reclassified to profit or loss | | |
| Cash flow hedges | 28 | (19) |
| Currency translation loss arising on consolidation | (443) | (353) |
| | (415) | (372) |
| Items that will not subsequently be reclassified to profit or loss | | |
| Remeasurements of defined benefit pension scheme | 26,915 | (2,374) |
| Tax relating to components of other comprehensive income | (4,043) | 643 |
| | 22,872 | (1,731) |
| Total comprehensive income for period | 31,212 | 21,186 |
�
The total comprehensive income for the period is attributable to the equity shareholders of the parent company Studio Retail Group plc.
�
The accompanying notes are an integral part of this consolidated statement of comprehensive income.
�
at 27 March 2020
| | | | 2020 | 2019 |
| | | | �000 | �000 |
| Non-current assets | | | | |
| Other intangible assets | | | 9 | 24,952 |
| Property, plant and equipment | | | 80,007 | 45,511 |
| Derivative financial instruments | | | 2 | 6 |
| Retirement benefit surplus | | | 31,695 | - |
| Deferred tax assets | | | - | 10,556 |
| | | | 111,713 | 81,025 |
| Current assets | | | | |
| Inventories | | | 42,827 | 48,757 |
| Trade and other receivables | | | 235,227 | 235,923 |
| Derivative financial instruments | | | 3,250 | 604 |
| Cash and cash equivalents | | | 33,163 | 37,603 |
| Current tax assets | | | 1,718 | - |
| Current assets excluding assets held for sale | | | 316,185 | 322,887 |
| Assets held for sale | | | 60,570 | - |
| Total current assets | | | 376,755 | 322,887 |
| Total assets | | | 488,468 | 403,912 |
| Current liabilities | | | | |
| Trade and other payables | | | (57,908) | (72,592) |
| Lease liabilities | | | (6,035) | (498) |
| Derivative financial instruments | | | (36) | - |
| Provisions | | | (4,335) | (3,325) |
| Current tax liabilities | | | - | (1,762) |
| Current liabilities excluding liabilities held for sale | | | (68,314) | (78,177) |
| Liabilities held for sale | | | (24,684) | - |
| Total current liabilities | | | (92,998) | (78,177) |
| Non-current liabilities | | | | |
| Bank loans | | | (282,591) | (270,545) |
| Lease liabilities | | | (37,461) | - |
| Provisions | | | - | (7,753) |
| Retirement benefit obligation | | | - | (68) |
| Deferred tax liabilities | | | (37) | (3,849) |
| | | | (320,089) | (282,215) |
| Total liabilities | | | (413,087) | (360,392) |
| Net assets | | | 75,381 | 43,520 |
| Equity | | | | |
| Share capital | | | 48,644 | 48,644 |
| Translation reserve | | | 321 | 764 |
| Hedging reserve | | | (26) | (54) |
| Retained earnings/(accumulated losses) | | | 26,442 | (5,834) |
| Total equity | | | 75,381 | 43,520 |
�
The accompanying notes are an integral part of this consolidated balance sheet.
52-week period ended 27 March 2020
| | | 2020 | 2019 |
| | | �000 | �000 |
| Profit for the period | | 8,755 | 23,289 |
| Adjustments for: | | | |
| Income tax credit | | 54 | 6,064 |
| Finance costs | | 10,998 | 9,656 |
| Depreciation of property, plant and equipment | | 14,393 | 9,438 |
| Impairment of property, plant and equipment | | 1,300 | - |
| Amortisation of intangible assets | | 1,163 | 2,167 |
| Share-based payment expense | | 649 | 926 |
| Fair value movements on financial instruments net of premiums paid | | (2,621) | (4,784) |
| Pension contributions less income statement charge | | (4,792) | (40) |
| Operating cash flows before movements in working capital | | 29,899 | 46,716 |
| (Increase)/decrease in inventories | | (10,068) | 5,618 |
| Increase in receivables | | (9,317) | (26,549) |
| Increase in payables | | 4,442 | 5,522 |
| Increase/(decrease) in provisions | | 1,558 | (8,951) |
| Cash generated from operations before interest and tax paid | | 16,514 | 22,356 |
| Income taxes paid | | (3,717) | (1,931) |
| Interest paid | | (8,495) | (10,017) |
| Net cash from operating activities | | 4,302 | 10,408 |
| Investing activities | | | |
| Purchases of property, plant and equipment, software and IT development costs and intangible assets | | (14,822) | (11,545) |
| Net cash used in investing activities | | (14,822) | (11,545) |
| Financing activities | | | |
| Payments of lease liabilities (2019: Repayments of obligations under finance leases) | | (5,966) | (571) |
| Bank loans repaid | | (10,000) | (5,000) |
| Securitisation loan drawn | | 22,046 | 18,041 |
| Net cash from financing activities | | 6,080 | 12,470 |
| Net (decrease)/increase in cash and cash equivalents | | (4,440) | 11,333 |
| Cash and cash equivalents at the beginning of the period | | 37,603 | 26,244 |
| Effect of foreign exchange rate changes on cash held | | - | 26 |
| Cash and cash equivalents at the end of the period | | 33,163 | 37,603 |
�
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�
�
The accompanying notes are an integral part of this consolidated cash flow statement.
52-week period ended 27 March 2020
| | Share capital | Translation reserve | Hedging reserve | (Accumulated losses)/retained earnings | Total equity |
| | �000 | �000 | �000 | �000 | �000 |
| At 30 March 2018 | 48,644 | 1,117 | (35) | (28,318) | 21,408 |
| Total comprehensive income for the period | - | (353) | (19) | 21,558 | 21,186 |
| Transactions with owners | | | | | |
| Share-based payments | - | - | - | 926 | 926 |
| At 29 March 2019 | 48,644 | 764 | (54) | (5,834) | 43,520 |
| Total comprehensive income for the period | - | (443) | 28 | 31,627 | 31,212 |
| Transactions with owners | | | | | |
| Share-based payments | - | - | - | 649 | 649 |
| At 27 March 2020 | 48,644 | 321 | (26) | 26,442 | 75,381 |
�
The total equity is attributable to the equity shareholders of the parent company Studio Retail Group plc.
.
The accompanying notes are an integral part of this consolidated statement of changes in equity.
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Studio Retail Group plc
Notes to the Group Financial Information
1 Basis of preparation of consolidated financial information
�
The financial information set out herein does not constitute the Company's statutory financial statements for the periods ended 27 March 2020 or 29 March 2019, but is derived from those financial statements. Statutory financial statements for 2019 have been delivered to the Registrar of Companies, and those for 2020 will be delivered in due course. The financial statements were approved by the Board of directors on 22 August 2020. The auditors have reported on those financial statements; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
�
Copies of the Company's statutory financial statements will be available on the Group's corporate website. Additional copies will be available upon request from Studio Retail Group plc, Church Bridge House, Accrington, BB5 4EE.
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The Group financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use within the European Union and in accordance with the accounting policies included in the Annual Report for the period ended 29 March 2019 except as stated below.
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Going concern
The directors have adopted the going concern basis in preparing these financial statements after assessing the principal risks and having considered the impact of severe but plausible downside scenarios for COVID-19. The Group is financed by a securitisation facility and a Revolving Credit Facility ("RCF"). The directors considered the impact of the current COVID-19 environment on the business, as disclosed in the strategic report, for the next 12 months, the viability period and the longer term. Whilst there is inherent uncertainty in forecasts caused by COVID-19, the directors have considered a number of impacts on sales, profits and cash flows.
�
The directors have assumed that the Group's operations remain open and that we will continue to be able to serve our customers, as we have done through the lockdown period, with only temporary disruptions to operations being experienced in the downside scenarios. The downside sensitivities considered include a reduction in the level of future forecast revenue and gross margin growth and the impact of economic factors (particularly unemployment rates) on the ability of the Group's customer base to continue to shop with us and to service their credit accounts. The directors also considered the impact of these sensitivities occurring in combination. In the event that one of or a number of these downside scenario arise at the same time the Directors consider they are able to take reasonable mitigating actions, which include but are not limited to, a reduction in discretionary capital expenditure and a reduction in discretionary marketing spend. Implementing these mitigating actions would enable the Group to continue to operate within its existing facilities during the forecast period. �
The directors believe that the Group is well placed to manage its financing and other business risks satisfactorily, noting that its revolving credit facility matures on 31 December 2021, and have a reasonable expectation that the Group will have adequate resources to continue in operation for at least 12 months from the signing date of the consolidated financial statements. They therefore consider it appropriate to adopt the going concern basis of accounting in preparing the consolidated financial statements.
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Impact of accounting standards that have become effective during the current period
IFRS 16 Leases
IFRS 16 is effective for all accounting periods beginning on or after 1 January 2019. For Studio Retail Group plc this is the first reported accounting period under IFRS 16. The Group adopted this standard using the modified retrospective approach with a date of initial application of 30 March 2019.
Under IFRS 16, lease agreements give rise to both a right of use asset and a lease liability for future lease rentals. The right of use asset is depreciated on a straight-line basis over the life of the lease. On transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 30 March 2019. The right of use assets are measured at an amount equal to the lease liability adjusted by the amount of any prepaid or accrued lease payments. The interest is recognised on the lease liability, resulting in a higher interest expense in the earlier years of the lease term. The total expense recognised over the life of the lease will be unaffected by the new standard, however, IFRS 16 results in the timing of lease expense recognition being accelerated for leases which would be currently accounted for as operating leases.
The Group has applied the practical expedient to "grandfather" the definition of a lease on transition and applied the recognition exemption for both short term and low value assets. Consequently, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 30 March 2019. The Group has also applied a single discount rate to a portfolio of leases with reasonably similar characteristics. Previous assessments of whether leases are onerous in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application have been relied upon as an alternative to performing an impairment review.
The modified retrospective approach does not require a restatement of the prior period comparatives and consequently, there will be no adjustment to opening retained earnings. Additionally, the disclosure requirements of IFRS 16 have not generally been applied to comparative information. The Group recognised an opening right of use asset of �43.2m and a lease liability of �52.3m at 30 March 2019. The most significant lease liabilities relate to property.
The �9.0m difference between the opening right use asset and lease liability is due to the portion of the onerous lease provision held at 29 March 2019 relating to lease rentals of �8.3m being reclassified against the opening right of use asset. In addition, �0.7m has been reclassified from other creditors in respect of a rent free period on one of the Group's properties, which was being amortised to the income statement over the life of the lease under IAS 17 but under IFRS 16, is netted off the right of use asset.
Operating profit from continuing operations in the current period has increased by �0.1m as operating lease rental costs of �4.3m have been replaced by �4.2m of depreciation of right of use assets under IFRS 16. Finance costs have increased by �1.8m reflecting interest charged on lease liabilities under IFRS 16. The net impact on profit before tax was therefore �1.7m.
There is no impact on total cash flows, although from a presentation perspective, whilst operating lease rentals formed part of net cash from operating activities, lease payments under IFRS 16 now form part of net cash used in financing activities.
We do not expect the adoption of IFRS 16 to have a material impact on the Group's effective tax rate.
A reconciliation from the operating lease commitments as at 29 March 2019 to the opening lease liabilities as at 30 March 2020 is as follows:
| | | �000 |
| Operating lease commitments disclosed as at 29 March 2019 | | (57,841) |
| Discounted using the incremental borrowing rate at the date of application | | 7,993 |
| Less: low value and short-term leases not recognised as a liability | | (2,931) |
| Lease liability recognised as at 30 March 2019 | | (52,779) |
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Full details of the impact of adopting IFRS 16 on the consolidated income statement and balance sheet are given in the tables below:
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Impact on the Consolidated Income Statement and Comprehensive Income
52-week period ended 27 March 2020
�
| | | �Amounts prior to adoption of IFRS 16 | Impact of IFRS 16 adoption | As reported |
| | | �000 | �000 | �000 |
| Continuing operations | | | | |
| Revenue | | 330,352 | - | 330,352 |
| Credit account interest | | 104,542 | - | 104,542 |
| Total revenue (including credit interest) | | 434,894 | - | 434,894 |
| Cost of sales | | (208,924) | - | (208,924) |
| Impairment losses on customer receivables | | (53,930) | - | (53,930) |
| Gross profit | | 172,040 | - | 172,040 |
| Trading costs | | (157,426) | 70 | (157,356) |
| Analysis of operating profit: | | | | |
| - EBITDA* | | 25,088 | 4,301 | 29,389 |
| - Depreciation, amortisation and impairment | | (10,474) | (4,231) | (14,705) |
| Operating profit | | 14,614 | 70 | 14,684 |
| Finance costs | | (8,668) | (1,823) | (10,491) |
| Profit before tax and fair value movements on derivative financial instruments | | 5,946 | (1,753) | 4,193 |
| Fair value movements on derivative financial instruments | | 2,608 | - | 2,608 |
| Profit before tax | | 8,554 | (1,753) | 6,801 |
| Tax income | | 241 | - | 241 |
| Profit from continuing operations | | 8,795 | (1,753) | 7,042 |
| | | | | |
| Discontinued operation | | | | |
| Profit from discontinued operation, net of tax | | 1,719 | (6) | 1,713 |
| Profit for the period | | 10,514 | (1,759) | 8,755 |
| Total comprehensive income for period | | 32,971 | (1,759) | 31,212 |
| | | | | |
| Earnings per ordinary share | | | | |
| from continuing operations | | | | |
| Basic | | 10.19 | (2.03) | 8.16 |
| Diluted | | 10.14 | (2.02) | 8.12 |
| from discontinued operation | | | | |
| Basic | | 1.99 | (0.01) | 1.98 |
| Diluted | | 1.98 | (0.01) | 1.97 |
| total attributable to ordinary shareholders | | | | |
| Basic | | 12.18 | (2.04) | 10.14 |
| Diluted | | 12.12 | (2.03) | 10.09 |
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*Earnings before interest, taxation, depreciation, amortisation and fair value movements on derivative financial instruments.
Impact on the Consolidated Balance Sheet
at 27 March 2020
| | | Amounts prior to adoption of IFRS 16 | Impact of IFRS 16 adoption | As reported |
| | | 27.3.2020 | 27.3.2020 | 27.3.2020 |
| | | �'000 | �'000 | �'000 |
| Non-current assets | | | | |
| Other intangible assets | | 9 | - | 9 |
| Property, plant and equipment | | 45,840 | 34,167 | 80,007 |
| Derivative financial instruments | | 2 | - | 2 |
| Retirement benefit surplus | | 31,695 | - | 31,695 |
| Deferred tax assets | | - | - | - |
| | | 77,546 | 34,167 | 111,713 |
| Current assets | | | | |
| Inventories | | 42,827 | - | 42,827 |
| Trade and other receivables | | 235,227 | - | 235,227 |
| Derivative financial instruments | | 3,250 | - | 3,250 |
| Cash and cash equivalents | | 33,163 | - | 33,163 |
| Current tax assets | | 1,718 | - | 1,718 |
| Current assets excluding assets held for sale | | 316,185 | - | 316,185 |
| Assets held for sale | | 55,459 | 5,111 | 60,570 |
| Total current assets | | 371,644 | 5,111 | 376,755 |
| Total assets | | 449,190 | 39,278 | 488,468 |
| Current liabilities | | | | |
| Trade and other payables | | (57,908) | - | (57,908) |
| Lease liabilities | | (175) | (5,860) | (6,035) |
| Derivative financial instruments | | (36) | - | (36) |
| Current tax liabilities | | (4,335) | - | (4,335) |
| Provisions | | - | - | - |
| Current liabilities excluding liabilities held for sale | | (62,454) | (5,860) | (68,314) |
| Liabilities held for sale | | (19,704) | (4,980) | (24,684) |
| Total current liabilities | | (82,158) | (10,840) | (92,998) |
| Non-current liabilities | | | | |
| Bank loans | | (282,591) | - | (282,591) |
| Lease liabilities | | (419) | (37,042) | (37,461) |
| Provisions | | (6,845) | 6,845 | - |
| Retirement benefit obligation | | - | - | - |
| Deferred tax liabilities | | (37) | - | (37) |
| | | (289,892) | (30,197) | (320,089) |
| Total liabilities | | (372,050) | (41,037) | (413,087) |
| Net assets | | 77,140 | (1,759) | 75,381 |
| Equity | | | | |
| Share capital | | 48,644 | - | 48,644 |
| Translation reserve | | 321 | - | 321 |
| Hedging reserve | | (26) | - | (26) |
| Retained earnings | | 28,201 | (1,759) | 26,442 |
| Total equity | | 77,140 | (1,759) | 75,381 |
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Impact on the Consolidated Balance Sheet
at 30 March 2019*
| | | Amounts prior to adoption of IFRS 16 | Impact of IFRS 16 adoption | Opening balance sheet |
| | | 30.3.2019 | 30.3.2019 | 30.3.2019 |
| | | �'000 | �'000 | �'000 |
| Non-current assets | | | | |
| Other intangible assets | | 24,952 | - | 24,952 |
| Property, plant and equipment | | 45,511 | 43,239 | 88,750 |
| Derivative financial instruments | | 6 | - | 6 |
| Retirement benefit surplus | | - | - | - |
| Deferred tax assets | | 10,556 | - | 10,556 |
| | | 81,025 | 43,239 | 124,264 |
| Current assets | | | | |
| Inventories | | 48,757 | - | 48,757 |
| Trade and other receivables | | 235,923 | - | 235,923 |
| Derivative financial instruments | | 604 | - | 604 |
| Cash and cash equivalents | | 37,603 | - | 37,603 |
| Current tax assets | | - | - | - |
| Current assets excluding assets held for sale | | 322,887 | - | 322,887 |
| Assets held for sale | | - | - | - |
| Total current assets | | 322,887 | - | 322,887 |
| Total assets | | 403,912 | 43,239 | 447,151 |
| Current liabilities | | | | |
| Trade and other payables | | (72,592) | 741 | (71,851) |
| Lease liabilities | | (498) | (6,771) | (7,269) |
| Derivative financial instruments | | - | - | - |
| Current tax liabilities | | (3,325) | - | (3,325) |
| Provisions | | (1,762) | 978 | (784) |
| Current liabilities excluding liabilities held for sale | | (78,177) | (5,052) | (83,229) |
| Liabilities held for sale | | - | - | - |
| Total current liabilities | | (78,177) | (5,052) | (83,229) |
| Non-current liabilities | | | | |
| Bank loans | | (270,545) | - | (270,545) |
| Lease liabilities | | - | (45,510) | (45,510) |
| Provisions | | (7,753) | 7,323 | (430) |
| Retirement benefit obligation | | (68) | - | (68) |
| Deferred tax liabilities | | (3,849) | - | (3,849) |
| | | (282,215) | (38,187) | (320,402) |
| Total liabilities | | (360,392) | (43,239) | (403,631) |
| Net assets | | 43,520 | - | 43,520 |
| Equity | | | | |
| Share capital | | 48,644 | - | 48,644 |
| Translation reserve | | 764 | - | 764 |
| Hedging reserve | | (54) | - | (54) |
| Retained earnings | | (5,834) | - | (5,834) |
| Total equity | | 43,520 | - | 43,520 |
* this balance sheet discloses the initial impact of adopting IFRS 16 as at 30 March 2019, this is not a restatement of the comparative balance sheet as at 29 March 2019.
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Changes in classification of costs
During the current period management has changed presentation of Studio's trade discounts received on purchases to show them within cost of sales rather than within trading costs. Extended warranty credits have been deducted from revenue rather than shown within cost of sales. In addition, management has removed grossed up revenue and trading costs recognised in respect of free delivery services to its customers. The comparative figures have been restated to reduce revenue by �3,073,000, cost of sales by �5,909,000 and increase trading costs by �2,836,000.� These adjustments have no effect on the profit for the year.
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Non-current assets held for sale and discontinued operations
A non-current asset or a group of assets containing a non-current asset (a disposal group) is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable within one year.
On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount and fair value less costs to sell with any adjustments taken to profit or loss. The same applies to gains and losses on subsequent remeasurement although gains are not recognised in excess of any cumulative impairment loss.� Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets and investment property, which continue to be measured in accordance with the Group's accounting policies.� Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated.
A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale.� Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier.� When an operation is classified as a discontinued operation, the comparative income statement is restated as if the operation has been discontinued from the start of the comparative period.
Findel Education
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In the course of preparing the consolidated financial statements, management has made judgements and estimates that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
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Studio's trade receivables
Studio's trade receivables are recognised on the balance sheet at amortised cost (i.e. net of provision for expected credit loss). At 27 March 2020 trade receivables with a gross value of �317.8m (2019: �295.5m) were recorded on the balance sheet, less a provision for impairment of �101.8m (2019: �87.9m).
An appropriate allowance for expected credit loss in respect of trade receivables is derived from estimates and underlying assumptions such as the Probability of Default and the Loss Given Default, taking into consideration forward looking macro-economic assumptions. Changes in the assumptions applied such as the value and frequency of future debt sales in calculating the Loss Given Default, and the estimation of customer repayments and Probability of Default rates, as well as the weighting of the macro-economic scenarios applied to the impairment model could have a significant impact on the carrying value of trade receivables.
The impairment model was not designed to take into account changes to customer payment and default performance arising as a result of the Covid-19 pandemic. The deterioration in the economic outlook caused by Covid-19, particularly in relation to unemployment, has led management to increase the level of provision for expected credit loss by approximately �20m, based on information available at the end of March 2020. Whilst we have not yet� seen a significant increase in the level of customer arrears resulting from the pandemic, nor have we seen a material reduction in customer payment rates, we expect that the Coronavirus Job Retention Scheme and other support from government have delayed any deterioration in performance. We anticipate that arrears will increase when these schemes are phased out in the coming months. We note that the unprecedented level of uncertainty around the impact of Covid-19 on the UK economy as a whole, and subsequently on our customer base, continues to cause challenges in assessing bad debt on a forward-looking basis
These assumptions are continually assessed for relevance and adjusted appropriately. Revisions to estimates are recognised prospectively.
The macro-economic drivers that impact the bad debt charge are as follows:
������ Annual changes in unemployment rate;
������ Actual unemployment rate; and
������ Changes in average weekly earnings.
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The latest economic scenarios are heavily influenced by the impact of COVID-19 on the UK economy, in particular the impact on unemployment.
We consider four economic scenarios, and apply a weighting based on probability. These are:
������ Upside
Assumes the UK economy will make a rapid recovery following COVID19 lockdown restrictions and will therefore have the least detrimental impact on unemployment
������ Baseline
A short, sharp shock is expected to the economy with ongoing consumer caution and a 'V' shaped recovery to GDP. Assumes a consensus view on unemployment
������ Downside
A prolonged downturn in the economy, as ongoing consumer caution means that they do not return to pre-lockdown levels of activity for an extended period. Very high unemployment levels.
������ Stress
Prolonged, deep downturn, with continued COVID19 outbreaks. Large numbers of corporate failures cause unemployment not seen since the 1930's.
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The table below summarises the peak employment levels assumed within each scenario, with the weightings we have applied to each.
| | 2020 | 2019 | ||
| Scenario | Unemployment Peak | Weighting Applied | Unemployment Peak | Weighting Applied |
| Upside | c 8% | 25% | c 4% | 5% |
| Baseline | c 10% | 60% | c 4.4% | 30% |
| Downside | c 14% | 10% | c 6.6% | 50% |
| Stress | c 20% | 5% | c 9.5% | 15% |
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Discount rate for pension scheme liabilities
At 27 March 2020 the Group's defined benefit pension scheme showed a surplus of �31.7m (2019: deficit of �0.1m). Management makes use of the PwC Single Agency corporate bond yield curve to derive the discount rate applied to the scheme's projected cash flows, in the calculation of its liabilities under IAS 19. Changes to the discount rate applied could lead to significant changes in the level of liabilities recognised.
The carrying amounts of the assets and liabilities detailed above are sensitive to the underlying assumptions used by management in their calculation. It is reasonably possible that the outcomes within the next financial year could differ from the assumptions made, which would impact upon the carrying values assumed.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any of the future periods affected.
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Other key accounting estimates which, although important estimates, are not considered to be a significant risk of resulting in a material adjustment within the next financial year are as follows:
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Inventory provisioning
The Group carries significant amounts of inventory against which there are provisions for slow moving and delisted products. At 27 March 2020 a provision of �1.3m (2019: �2.5m) was held against a gross inventory value of �44.1m (2019: �51.2m).
Provisions are made against inventory based upon its location, the planned method of sale and the level of holding compared to forecast sales levels. The provisioning calculations require a high degree of judgement in assessing which lines require provisioning against and the use of estimates around historical recovery rates for slow moving and delisted products.
If a further 10% of lines were assessed as being slow moving, then the provision required would increase by approximately �150,000. If the recovery rate assumed decreased by 10% then the provision would increase by approximately �450,000. These sensitivities reflect management's assessment of reasonably possible changes to key assumptions which could result in adjustments to the level of provision within the next financial year.
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Provisions for Financial Services redress
At 27 March 2020 an amount of �4.1m (2019: �2.2m) remains provided in the balance sheet in respect of redress and refunds for flawed financial services products. Studio saw a large increase in the level of PPI claims and enquiries in the days leading up to the FCA's deadline for claims of 29 August. This included a large block of previously unseen claims from the Official Receiver acting on behalf of bankrupt customers.
An increase in provision of �7.9m was recorded as at September 2019, which was based on management's assessment of estimated uphold rates from the population of claims received and average claim values expected to be paid in respect of claims upheld. All claims, other than those due to the Official Receiver have now been processed and refunded. The uphold rates were lower than we anticipated in September, resulting in a �2.3m release of provision (net, �5.6m increase in the year). A method of calculation has been agreed with the Official Receiver for those claims, and they are expected to be processed by the end of September 2020.
The Product Protection / Parcel Insurance refund programme is now complete, and decommissioning work at our outsourcer, Capita, was completed in June 2020. We continue to receive very low volumes of response to the mailings which were completed in 2018, and these will now be handled internally.
The Notice of Sums in Arrears (NOSIA) refund programme has begun, with contact mailings expected to be issued in the early part of FY21. This programme addresses a technical breach of the Consumer Credit Act (CCA), whereby a number of customers did not receive a NOSIA following two consecutive missed payments. This breach rendered the credit agreement unenforceable, and therefore interest and fees from this point must be refunded. An incremental �1.3m was provided in this regard in FY20.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any of the future periods affected.
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Carrying value of right of use assets
The Group has rights of use assets of �31.3m as at 27 March 2020 which is primarily made up of property leases. These assets are held at cost less accumulated depreciation and are tested annually for impairment. Tests for impairment are primarily based on the calculation of a value in use for each cash generating unit. This involves the preparation of discounted cash flow projections, which require an estimate of both future operating cash flows and an appropriate discount rate.
Judgements
Judgements made in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are as follows:
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Held for sale classification
At 27 September 2019 the Group's Education business, met the criteria to be accounted for as held for sale and as a discontinued operation as defined by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
The disposal is now subject to CMA phase 2 clearance and is likely to be completed more than twelve months after initial classification as at 27 September 2019. Therefore, as at 27 March 2020, judgement was required over whether the disposal continued to meet the criteria to be recognised as held for sale and as a discontinued operation. The Group remains committed to the disposal of Findel Education and the events that have delayed the disposal were outside of the Group's control. Whilst the disposal is delayed, it is expected to be completed within twelve months of the year end date of 27 March 2020.
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52 weeks ended 27 March 2020
| | Continuing operations | Discontinued operation | Group | ||
| | Studio | Central | Total | Education | Total |
| | �000 | �000 | �000 | �000 | �000 |
| Product revenue | 311,697 | - | 311,697 | 79,940 | 391,637 |
| Other financial services revenue | 18,617 | - | 18,617 | - | 18,617 |
| Credit account interest | 104,542 | - | 104,542 | - | 104,542 |
| Financial services revenue | 123,159 | - | 123,159 | - | 123,159 |
| Sourcing revenue | 38 | - | 38 | - | 38 |
| Reportable segment revenue | 434,894 | - | 434,894 | 79,940 | 514,834 |
| Product cost of sales | (208,924) | - | (208,924) | (51,573) | (260,497) |
| Financial services cost of sales | (53,930) | - | (53,930) | - | (53,930) |
| Sourcing costs of sales | - | - | - | - | - |
| Total cost of sales | (262,854) | - | (262,854) | (51,573) | (314,427) |
| Gross profit | 172,040 | - | 172,040 | 28,367 | 200,407 |
| Marketing costs | (31,661) | - | (31,661) | (3,161) | (34,822) |
| Distribution costs | (37,372) | - | (37,372) | (5,121) | (42,493) |
| Administrative costs | (70,508) | 2,538 | (67,970) | (14,025) | (81,995) |
| EBITDA* before individually significant items | 32,499 | 2,538 | 35,037 | 6,060 | 41,097 |
| Depreciation and amortisation | (9,773) | (3,773) | (13,546) | (2,010) | (15,556) |
| Operating profit before individually significant items | 22,726 | (1,235) | 21,491 | 4,050 | 25,541 |
| Individually significant items | (5,648) | (1,159) | (6,807) | (1,535) | (8,342) |
| Operating profit | 17,078 | (2,394) | 14,684 | 2,515 | 17,199 |
| Finance costs | | | (10,491) | (507) | (10,998) |
| Profit before tax and fair value movements on derivative financial instruments | | | 4,193 | 2,008 | 6,201 |
| Fair value movements on derivative financial instruments | | | 2,608 | - | 2,608 |
| Profit before tax | | | 6,801 | 2,008 | 8,809 |
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*Earnings before interest, tax, depreciation, amortisation, fair value movements on derivative financial instruments and individually significant items.
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52 weeks ended 29 March 2019 (restated)
| | Continuing operations | Discontinued operation | Group | ||
| | Studio | Central | Total | Education | Total |
| | �000 | �000 | �000 | �000 | �000 |
| Product revenue | 304,176 | - | 304,176 | 82,081 | 386,257 |
| Other financial services revenue | 19,332 | - | 19,332 | - | 19,332 |
| Credit account interest | 98,119 | - | 98,119 | - | 98,119 |
| Financial services revenue | 117,451 | - | 117,451 | - | 117,451 |
| Sourcing revenue | 26 | - | 26 | - | 26 |
| Reportable segment revenue | 421,653 | - | 421,653 | 82,081 | 503,734 |
| Product cost of sales | (202,435) | - | (202,435) | (53,015) | (255,450) |
| Financial services cost of sales | (36,623) | - | (36,623) | - | (36,623) |
| Sourcing costs of sales | (18) | - | (18) | - | (18) |
| Total cost of sales | (239,076) | - | (239,076) | (53,015) | (292,091) |
| Gross profit | 182,577 | - | 182,577 | 29,066 | 211,643 |
| Marketing costs | (31,693) | - | (31,693) | (2,803) | (34,496) |
| Distribution costs | (36,423) | - | (36,423) | (8,836) | (45,259) |
| Administrative costs | (66,533) | (2,781) | (69,314) | (12,552) | (81,866) |
| EBITDA* before individually significant items | 47,928 | (2,781) | 45,147 | 4,875 | 50,022 |
| Depreciation and amortisation | (8,480) | (1,467) | (9,947) | (1,658) | (11,605) |
| Operating profit before individually significant items | 39,448 | (4,248) | 35,200 | 3,217 | 38,417 |
| Individually significant items | (2,918) | (1,240) | (4,158) | - | (4,158) |
| Operating profit | 36,530 | (5,488) | 31,042 | 3,217 | 34,259 |
| Finance costs | | | (9,618) | (38) | (9,656) |
| Profit before tax and fair value movements on derivative financial instruments | | | 21,424 | 3,179 | 24,603 |
| Fair value movements on derivative financial instruments | | | 4,750 | - | 4,750 |
| Profit before tax | | | 26,174 | 3,179 | 29,353 |
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*Earnings before interest, tax, depreciation, amortisation and fair value movements on derivative financial instruments.
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An analysis of individually significant items arising during the current and prior periods is as follows:
�
Continuing operations
| | | 2020 | 2019 | |
| | | �000 | �000 | |
| Impairment of right of use asset | | (1,159) | - | |
| Studio financial services redress and refund costs | | (5,648) | (2,918) | |
| Reduction in onerous lease provisions | | - | 1,220 | |
| GMP equalisation adjustment | | - | (2,460) | |
| | | (6,807) | (4,158) | |
| Tax credit in respect of individually significant items | | 1,293 | 741 | |
| Total | | (5,514) | (3,417) | |
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Discontinued operation
| | | 2020 | 2019 | |
| | | �000 | �000 | |
| Disposal costs | | (1,535) | - | |
| | | (1,535) | - | |
| Tax credit in respect of individually significant items | | 292 | - | |
| Total | | (1,243) | - | |
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A charge of �1,159,000 has been recorded in respect of the impairment of the right of use asset for the group's property at Hyde following a re-assessment of the assumptions made subsequent to transition to IFRS 16 as a result of Education being classified as held for sale from September 2019 onwards. The right of use asset in respect of the Hyde property was assessed for impairment individually rather than part of a cash generating unit.
A charge of �5,648,000 has been recorded in the current period (2019: �2,918,000) in respect of an increase in provisions for redress and refunds for flawed financial services products. For further details, please refer to the Estimates section in note 1.
Disposal costs of �1,535,000 were incurred during current period in relation to the sale of Education. These costs have been disclosed within the result from discontinued operation in accordance with IFRS 5.
During the prior period, an agreement was reached to sublease the vacant property at Enfield. Since the level of sublet income was higher than anticipated, and the reduced risk around the sublease inflows has led to a reduced 4% discount rate being applied, a reduction in provision of �1.2m was indicated. Consequently, a credit was recorded in the Consolidated Income Statement in this regard.
In October 2018, the High Court handed down a judgement involving the Lloyds Banking Group's defined benefit pension schemes.� The judgement concluded that the schemes should be amended to equalise pension benefits for men and women in relation to guaranteed minimum pension ("GMP") benefits. The issues determined by the judgement arose in relation to many other defined benefit pension schemes, including the Findel Group Pension Fund. After discussion with the trustees, actuaries and legal advisors of our fund, a past service cost of �2,460,000 was recognised in the prior period to address this historical issue
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4 Discontinued operation
On 15 December 2019 the Group entered into an agreement for the sale of Findel Education Limited and its subsidiaries to the Council of the City of Wakefield acting in its capacity as the lead authority of the joint committee known as Yorkshire Purchasing Organisation ("YPO") for a gross consideration of �50m on a debt free, cash free basis. The transaction is subject to clearance from the Competition and Markets Authority. Management consider that the disposal transaction will reduce the group's indebtedness and allow a greater level of investment and focus on growing the core Studio business.
Education's results for the 52-week period to 27 March 2020 and the 52-week period to 29 March 2019 have been presented to show the discontinued operation separately from continuing operations and are summarised below:
| | | 52 weeks ended 27.3.20 | 52 weeks ended 29.3.19 |
| | | �000 | �000 |
| Revenue | | 79,940 | 82,081 |
| Expenses | | (77,932) | (78,902) |
| Profit before tax | | 2,008 | 3,179 |
| Tax charge | | (295) | (349) |
| Profit for the period | | 1,713 | 2,830 |
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No gain or loss on remeasurement has been recorded on the assets and liabilities of Education. The major classes of assets and liabilities as at 27 March 2020 were as follows:
| | | | 27.3.20 |
| | | | �000 |
| Assets | | | |
| Intangible assets | | | 24,310 |
| Tangible assets | | | 7,365 |
| Deferred tax assets | | | 2,884 |
| Inventories | | | 15,998 |
| Trade and other receivables | | | 10,013 |
| | | | 60,570 |
| | | | |
| Liabilities | | | |
| Trade and other payables | | | (19,035) |
| Lease liabilities | | | (5,649) |
| | | | (24,684) |
| | | | |
| Net assets of disposal group | | | 35,886 |
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The net cash flow used in Education during the period was as follows:
| | | | 52 weeks ended 27.3.20 |
| | | | �000 |
| Operating cash flows | | | (492) |
| Investing cash flows | | | (1,131) |
| Financing cash flows | | | 730 |
| Net cash flow | | | (893) |
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(a) Tax (credited)/charged in the income statement
| | 2020 | 2019 restated |
| | �000 | �000 |
| Current tax expense: | | |
| Current period (UK tax) | 1,104 | 3,879 |
| Current period (overseas tax) | 166 | 123 |
| Adjustments in respect of prior periods (UK tax)(1) | (986) | 185 |
| | 284 | 4,187 |
| Deferred tax expense: | | |
| Origination and reversal of temporary differences | (96) | 1,382 |
| Adjustments in respect of prior periods(1) | 998 | 146 |
| Impact of change in rate of corporation tax | (1,427) | - |
| | (525) | 1,528 |
| Tax (credit)/expense from continuing operations | (241) | 5,715 |
(1)������ The prior period adjustment in FY20 relates to the tax treatment of a post balance sheet event recorded in the statutory accounts of Studio Retail Limited, which resulted in the Group's current tax liability for 2018/19 being lower than the level assumed in the FY19 accounts. This led to a reduction in the level of brought short-term timing differences, which resulted in a corresponding adjustment to deferred tax.
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The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. As at 27 March 2020 the Group held current tax assets of �1,718,000 (2019: current tax liabilities �1,762,000).
(b) Tax recognised directly in other comprehensive income
| | 2020 | 2019 |
| | �000 | �000 |
| Deferred tax: | | |
| Tax on defined benefit pension plans | 4,043 | (643) |
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(c) Reconciliation of the total tax (income)/charge
The tax expense in the income statement for the period differs from the standard rate of corporation tax in the UK of 19% (2019: 19%).
The differences are reconciled below:
| | 2020 | 2019 restated |
| | �000 | �000 |
| Profit before tax | 6,801 | 26,174 |
| Tax calculated at standard corporation tax rate of 19% (2019: 19%) | 1,292 | 4,973 |
| Effects of: | | |
| Expenses not deductible for tax purposes | 21 | 347 |
| Higher tax rates on overseas earnings | 144 | 178 |
| Deferred tax asset not previously recognised | (283) | (114) |
| Impact of change in rate of corporation tax on deferred tax balances | (1,427) | - |
| Adjustments in respect of prior periods | 12 | 331 |
| Total tax (credit)/expense for the period | (241) | 5,715 |
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Earnings per share figures for the 52-week period ended 29 March 2019 have been restated to reflect the presentation of the results of Education as a discontinued operation as defined by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
| Weighted average number of shares | | |
| | 2020 | 2019 |
| | No. of shares | No. of shares |
| Ordinary shares in issue | 86,442,534 | 86,442,534 |
| Effect of own shares held | (114,808) | (114,808) |
| Weighted average number of shares - basic | 86,327,726 | 86,327,726 |
| Impact of potentially dilutive share options | 412,383 | - |
| Weighted average number of shares - diluted | 86,740,109 | 86,327,726 |
| | | |
From continuing operations
| Earnings attributable to ordinary shareholders | | | � |
| | 2020 | 2019 | |
| | �000 | �000 | |
| Net profit attributable to equity holders for the purposes of basic earnings per share | 7,042 | 20,459 | |
| Individually significant items (net of tax) | 5,514 | 3,417 | |
| Fair value movements on derivative financial instruments (net of tax) | (2,112) | (3,847) | |
| Net profit attributable to equity holders for the purposes of adjusted earnings per share | 10,444 | 20,029 | |
| | | | |
| Earnings per share | | | |
| Earnings per share - basic | 8.16 | 23.70 | |
| Earnings per share - adjusted* basic | 12.10 | 23.20 | |
| Earnings per share - diluted | 8.12 | 23.70 | |
| Earnings per share - adjusted* diluted | 12.04 | 23.20 | |
* Adjusted to remove the impact of individually significant items and fair value movements on derivative financial instruments.
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From discontinued operation
| Earnings attributable to ordinary shareholders | | | � |
| | 2020 | 2019 | |
| | �000 | �000 | |
| Net profit attributable to equity holders for the purposes of basic earnings per share | 1,713 | 2,830 | |
| Individually significant items (net of tax) | 1,243 | - | |
| Fair value movements on derivative financial instruments (net of tax) | - | - | |
| Net profit attributable to equity holders for the purposes of adjusted earnings per share | 2,956 | 2,830 | |
| | | | |
| Earnings per share | | | |
| Earnings per share - basic | 1.98 | 3.28 | |
| Earnings per share - adjusted* basic | 3.42 | 3.28 | |
| Earnings per share - diluted | 1.97 | 3.28 | |
| Earnings per share - adjusted* diluted | 3.41 | 3.28 | |
* Adjusted to remove the impact of individually significant items and fair value movements on derivative financial instruments.
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Total attributable to ordinary shareholders
| Earnings attributable to ordinary shareholders | | | � |
| | 2020 | 2019 | |
| | �000 | �000 | |
| Net profit attributable to equity holders for the purposes of basic earnings per share | 8,755 | 23,289 | |
| Individually significant items (net of tax) | 6,757 | 3,417 | |
| Fair value movements on derivative financial instruments (net of tax) | (2,112) | (3,847) | |
| Net profit attributable to equity holders for the purposes of adjusted earnings per share | 13,400 | 22,859 | |
| | | | |
| Earnings per share | | | |
| Earnings per share - basic | 10.14 | 26.98 | |
| Earnings per share - adjusted* basic | 15.52 | 26.48 | |
| Earnings per share - diluted | 10.09 | 26.98 | |
| Earnings per share - adjusted* diluted | 15.45 | 26.48 | |
* Adjusted to remove the impact of individually significant items and fair value movements on derivative financial instruments.
The earnings per share attributable to convertible ordinary shareholders is �nil. The convertible shares have not converted at 27 March 2020 or subsequently and are therefore not dilute from an earnings per share perspective
7 Trade and other receivables
| | 2020 | 2019 |
| | �000 | �000 |
| Gross trade receivables | 317,891 | 304,279 |
| Allowance for expected credit loss | (101,782) | (88,030) |
| Trade receivables | 216,109 | 216,249 |
| Other debtors | 4,623 | 5,347 |
| Prepayments | 14,495 | 14,327 |
| | 235,227 | 235,923 |
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Trade receivables are measured at amortised cost. The directors consider that the Group's maximum exposure to credit risk is the carrying value of the trade and other receivables and that their carrying amount approximates their fair value.
Certain of the Group's trade receivables are funded through a securitisation facility with HSBC Bank plc and is secured against those receivables. The finance provider will seek repayment of the finance, as to both principal and interest, only to the extent that collections from the trade receivables financed allows and the benefit of additional collections remains with the Group. At the period end, receivables of �263,455,000 (2019: �239,620,000) were funded through the securitisation facility, and the facilities utilised were �197,591,000 (2019: �175,545,000).
Studio
The average credit period taken on sales of goods is 222 days (2019 restated: 213 days). On average, interest is charged at 3.5% (2019: 3.4%) per month on the outstanding balance.
Before accepting any new customer, Studio uses an external credit scoring system to assess the potential customer's credit quality and affordability of the credit and defines credit limits by customer. Limits and scoring attributed to customers are continually reviewed. There are no customers who represent more than 1% of the total balance of the Group's trade receivables.
The Group uses a number of forbearance measures to assist those customers approaching, or at the point of experiencing, financial difficulties. Such measures include arrangement to pay less than the minimum payment and the suspension of interest charges to help the customer pay off their debt. We expect customers to resume normal payments where they are able. At the balance sheet date forbearance measures were in place on 11,685 accounts (2019: 16,922) with total gross balances of �7,656,000 (2019: �10,429,000). Provisions are assessed as detailed above.
During the current period, overdue receivables with a gross value of �56,586,000 (2019: �35,492,000) were sold to third party debt collection agencies. As a result of the sales, the contractual rights to receive the cash flows from these assets were transferred to the purchasers. Any gain or loss between actual recovery and expected recovery is reflected within the bad debt charge.
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The following tables provide information about the exposure to credit risk and ECLs for trade receivables from individual customers as at 27 March 2020:
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| | 2020 | 2019 | | ||||
| | Trade | Trade receivables on forbearance | | Trade | Trade receivables on forbearance | | � |
| | receivables | arrangements | Total | receivables | arrangements | Total | � |
| Ageing of trade receivables | �000 | �000 | �000 | �000 | �000 | �000 | � |
| Not past due | 236,980 | 6,524 | 243,504 | 214,837 | 8,454 | 223,291 | � |
| Past due: | | | | | | | � |
| 0 - 60 days | 30,972 | 928 | 31,900 | 27,060 | 1,541 | 28,601 | � |
| 60 - 120 days | 12,572 | 204 | 12,776 | 12,640 | 434 | 13,074 | � |
| 120+ days | 29,605 | - | 29,605 | 30,507 | - | 30,507 | � |
| Gross trade receivables | 310,129 | 7,656 | 317,785 | 285,044 | 10,429 | 295,473 | � |
| Allowance for expected credit loss | (96,135) | (5,647) | (101,782) | (81,358) | (6,548) | (87,906) | � |
| Carrying value | 213,994 | 2,009 | 216,003 | 203,686 | 3,881 | 207,567 | � |
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| | 2020 | 2019 | |||
| | Stage 1 | Stage 2 | Stage 3 | Total | Total |
| | �000 | �000 | �000 | �000 | �000 |
| Gross trade receivables | 151,252 | 122,481 | 44,052 | 317,785 | 295,473 |
| Allowance for expected credit loss | | | | | |
| Opening balance | (9,260) | (30,267) | (48,379) | (87,906) | (76,512) |
| Impairment charge | (12,834) | (8,907) | (32,188) | (53,929) | (36,623) |
| Utilised in the period | - | - | 40,053 | 40,053 | 25,229 |
| Closing balance | (22,094) | (39,174) | (40,514) | (101,782) | (87,906) |
| Carrying value | 129,158 | 83,307 | 3,538 | 216,003 | 207,567 |
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Allowance for expected credit loss
An appropriate allowance for expected credit loss in respect of trade receivables is derived from estimates and underlying assumptions such as the Probability of Default and the Loss Given Default, taking into consideration forward looking macro-economic assumptions. Changes in the assumptions applied such as the value and frequency of future debt sales in calculating the Loss Given Default, and the estimation of customer repayments and Probability of Default rates, as well as the weighting of the macro-economic scenarios applied to the impairment model could have a significant impact on the carrying value of trade receivables.
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Sensitivity analysis
Management judgement is required in setting assumptions around probabilities of default, cash recoveries and the weighting of macro-economic scenarios applied to the impairment model, which have a material impact on the results indicated by the model.
A 1% increase/decrease in the probability of default would increase/decrease the provision amount by approximately �2.9m.
A 1p increase in the assumed recoveries rate would result in the impairment provision decreasing by approximately �1.2m.
Changing the weighting of macro-economic scenarios applied to the impairment model so that the baseline scenario weighting is reduced to 50%, upside scenario to 25%, downside to 20%, and the stress scenario to 5% would result in the impairment provision decreasing by approximately �1.2m.
These sensitivities reflect management's assessment of reasonably possible changes to key assumptions which could result in a material adjustment to the level of provision within the next financial year.
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Rest of the Group
Trade receivables are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience.
Given the nature of the customer base within the rest of the Group, it is not considered necessary to utilise formal credit scoring. However, credit references are sought for all new customers prior to extending credit. There are no customers who represent more than 1% of the total balance of the Group's trade receivables.
Included in the rest of the Group's trade receivables balance in the prior period were debtors with a carrying amount �123,000 which were past due at the reporting date and were partially provided against. There had not been a significant change in credit quality and the amounts were still considered recoverable. The Group did not hold any collateral over these balances. The average age of these receivables was 152 days.
The carrying value of not past due trade receivables which are unimpaired is �nil (2019: �5,593,000).
The aged analysis of the carrying values of past due trade receivables which are unimpaired is as follows:
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| | 2020 | 2019 |
| | �000 | �000 |
| 0 - 60 days | 33 | 1,909 |
| 60 - 120 days | 40 | 849 |
| 120+ days | 33 | 208 |
| Total | 106 | 2,966 |
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The aged analysis of the carrying values of past due trade receivables which are impaired is as follows:
| | 2020 | 2019 |
| | �000 | �000 |
| 0 - 60 days | - | - |
| 60 - 120 days | - | - |
| 120+ days | - | 123 |
| Total | - | 123 |
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Movement in allowance for expected credit losses
| | Studio | Rest of | |
| | Retail | Group | Total |
| | �000 | �000 | �000 |
| Balance at 30 March 2018 | 55,084 | 125 | 55,209 |
| Adjustment to opening balance on adoption of IFRS 9 | 21,428 | - | 21,428 |
| Impairment losses recognised | 36,623 | 55 | 36,678 |
| Amounts written off as uncollectible | (25,229) | (56) | (25,285) |
| Balance at 29 March 2019 | 87,906 | 124 | 88,030 |
| Impairment losses recognised | 53,929 | - | 53,929 |
| Amounts written off as uncollectible | (40,053) | - | (40,053) |
| Impact of classification as held for sale | - | (124) | (124) |
| Balance at 27 March 2020 | 101,782 | - | 101,782 |
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| | | � Onerous leases | Studio financial services redress and refunds | Total |
| | | �000 | �000 | �000 |
| At 30 March 2018 | | 11,407 | 8,622 | 20,029 |
| Released during the period | | (1,220) | - | (1,220) |
| Provided during the period | | - | 4,157 | 4,157 |
| Utilised in the period | | (1,344) | (10,544) | (11,888) |
| At 29 March 2019 | | 8,843 | 2,235 | 11,078 |
| Adoption of IFRS 16 | | (8,301) | - | (8,301) |
| Provided during the period | | - | 6,948 | 6,948 |
| Utilised in the period | | (350) | (5,040) | (5,390) |
| At 27 March 2020 | | 192 | 4,143 | 4,335 |
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| 2020 | | | | |
| Analysed as: | | | | |
| Current | | 192 | 4,143 | 4,335 |
| Non-current | | - | - | - |
| | | 192 | 4,143 | 4,335 |
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| 2019 | | | | | � | ||||
| Analysed as: | | | | | |||||
| Current | | 1,090 | 2,235 | 3,325 | |||||
| Non-current | | 7,753 | - | 7,753 | |||||
| | | 8,843 | 2,235 | 11,078 | |||||
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Onerous Leases
A provision was made in prior periods for onerous leases regarding vacated leasehold properties.
Studio financial services redress and refunds
Provisions in excess of �30m were built up in previous years in relation to the anticipated refund of premiums and interest to customers in respect of historic flawed credit and insurance products. The amount provided was increased by �6,948,000 in the current period. Refer to note 1 for details. The provision is expected to be utilised within 12 months.
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During the current and prior periods, the Group made purchases in the ordinary course of business from Brands Inc. Limited and Firetrap Limited, subsidiaries of Frasers Group plc (formerly Sports Direct International plc), which is a significant shareholder in the ultimate parent company, Studio Retail Group plc. In the prior period, the Group also provided consultancy services to Frasers Group plc itself in the current period on arm's-length terms. The value of purchases made, and consultancy fees charged in the current and prior periods and amounts owed at the 27 March 2020 and 29 March 2019 were as follows:
Brands Inc. Limited
| | 2020 �000 | 2019 �000 |
| Purchases | 43 | 196 |
| Amounts owed | 17 | 22 |
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Firetrap Limited
| | 2020 �000 | 2019 �000 |
| Purchases | - | 176 |
| Amounts owed | - | - |
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Frasers Group plc (formerly Sports Direct International plc)
| | 2020 �000 | 2019 �000 |
| Consultancy fees received | - | 93 |
| Amounts due | - | - |
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Transactions between Studio Retail Group plc and its subsidiaries, which are related parties of Studio Retail Group plc, have been eliminated on consolidation and are not discussed in this note. All transactions and outstanding balances between group companies are priced on an arm's-length basis and are settled in the ordinary course of business.
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Compensation of key management personnel
The remuneration of the Directors including consultancy contracts and share-based payments, who are the key management of the Group, is summarised below.
| | 2020 | 2019 |
| | �000 | �000 |
| Short-term employee benefits | 1,223 | 1,730 |
| Company pension contributions | 131� | 123 |
| Long-term incentives | 519 | - |
| Termination payments | -� | 7 |
| | 1,873� | 1,860 |
| Share-based payments charge | 318 | 642 |
| | 2,191 | 2,502 |
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By order of the Board
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P B Maudsley �������������������� S M Caldwell
Group CEO�������������������������� Group CFO
22 August 2020 ����������������� 22 August 2020
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