Gloucestershire, United Kingdom - SuperGroup Plc has reported a strong financial performance for 2014, delivering a 19% increase in underlying2 profit before tax to £62.0m. Group revenues are up 20%, cash generated from operations has increased 68% and the Group has £86.2m of cash on hand at the balance sheet date.
A successful year of infrastructure implementation and strong financial performance
FINANCIAL HIGHLIGHTS
Group revenue up 19.6% to £430.9m
Group gross margin up 140 basis points to 59.7%
Underlying2 profit before tax up 18.8% to £62.0m
Underlying2 earnings per share of 58.0p (2013: 47.8p)
Basic earnings per share of 34.0p (2013: 44.7p)
Net cash generated from operations of £64.3m (2013: £38.3m)
Year-end net cash position up 58% to £86.2m (2013: £54.5m)
OPERATIONAL HIGHLIGHTS
Opened around 100,000 square feet of trading space taking the UK and European retail portfolio to 633,000 square feet (+18%), in-line with guidance.
Net increase of 46 international franchised and licensed stores during the year taking the total to 208 (2013: 162).
Retail sales growth of +17.7%; LFL sales growth of +3.2%.
Wholesale sales growth of +23.3% in-line with the order books (2013: +7.4%).
STRATEGY HIGHLIGHTS
Germany: Bought-out the agency operation and acquired seven franchise stores giving the Group the rights to open its own retail stores.
Spain: Bought-out the Spanish agency and subsequently opened 10 El Cortes Ingles concessions. Further progress made on building a stronger wholesale platform.
Post balance sheet event: Acquired SMAC Group, the Group’s long term Scandinavian distributor.
New central warehouse operation in Burton upon Trent opened and operating successfully.
New merchandise management system, HR and payroll systems implemented and a new point of sale system currently being rolled out throughout the estate.
As part of the previously announced investment programme the Group incurred £9.1m of pre-tax exceptional items, the majority of which relates to costs associated with the new warehouse and the deals concluded in Germany and Spain. In addition there were £7.7m of non-cash re-measurements. There is a reconciliation to the statutory profit before tax in note 3.
Julian Dunkerton, Chief Executive Officer, commented:
”We have delivered a solid performance over the past year, with profits3 up 19%, whilst managing the transition to our new distribution centre and the implementation of the merchandising management system. With a strong pipeline of new stores, particularly in mainland Europe, we are well positioned for further profitable growth in the year ahead. The strength of the Superdry brand and the investment we have made in our business leaves me confident in our ability to implement and deliver the growth strategy.”
Notes:
51 weeks and 6 days (the “Period” or “2014″ or “FY14″)
Underlying is defined as reported results adjusted to reflect the impact of the gain/loss recognised on re-measurement (being fair valuing deferred contingent share consideration, financial derivatives), exceptional items and, when appropriate, the related income tax. The directors believe that the underlying results provide additional guidance to statutory measures to help understand the performance of the Group. Further details of the adjustments are included in note 4. All references to underlying are after making these adjustments. Retail and Wholesale segments are presented before inter-segment royalties
Underlying profit before tax
Chairman’s Statement
This has been another year of progress for SuperGroup Plc. Revenues have grown by almost 20% and underlying profit before tax by nearly 19%. The scale of the Group has continued to increase with further new store openings, and a significant programme of infrastructure developments has been delivered aimed at supporting future growth and efficiencies. Although like-for-like sales growth in the final quarter fell short of expectations, the financial performance for the year as a whole was broadly in line with market expectations and produced largely positive movements on the Group’s key performance indicators.
In last year’s Annual Report I commented that FY2014 would see the Group enhance its capacity for future growth and enable efficiencies within its existing operations through substantial investments in its IT and logistics infrastructure. I am pleased to report that the planned projects were delivered on time and on budget. Whilst there are still more improvements to make, these initial investments have delivered a solid platform for the Group’s growth aspirations, improved its processes and controls, and will provide cost savings and efficiency gains from financial year 2015 onwards.
International growth opportunities will provide the major sources of expansion for the Group. Of the new owned retail space opened in the last year 43% was outside the UK. The buy-out of the distributor in Spain and the German agency and franchise business, together with the opening of 59 new franchise stores, and the roll out of two new websites demonstrate the potential for further international growth.
Whilst the growth opportunities are wide ranging, the challenges for SuperGroup are to ensure that the attractiveness of the Superdry brand for its customers is maintained and that high quality execution is sustained as the business expands and develops. Continual improvement and innovation in its product ranges is crucial in ensuring that we deliver the expected returns to shareholders. The Board closely monitors performance in these areas and is seeking to ensure the development of the organisation and infrastructure keeps pace with the growth ambitions of the business.
A number of steps have been taken through the year to ensure that the Group operates responsibly and in the interests of its stakeholders. SuperGroup is making good progress in the key areas of employee welfare, workforce in the supply chain, environmental sustainability, and supporting the communities that SuperGroup interacts with. There is more to do in developing SuperGroup’s agenda to operate responsibly, but the foundations are now in place to deliver through the team established during the last 12 months.
On behalf of the Board I would like to thank everyone at SuperGroup for what has been achieved over the last year and wish them well for the year ahead.
Review of the Year
SuperGroup has made significant progress during the past year. The business has undertaken a comprehensive infrastructure improvement programme that will start to deliver tangible benefits into the new financial year and lay the foundations for the next phase of growth. This has been achieved whilst simultaneously delivering significant growth in revenues and underlying profits; underlying profit before tax has grown by +18.8% to £62.0m (2013: £52.2m).
The Group’s core objective continues to be delivering growth in shareholder value and, in doing so, to build a global business that is capable of delivering long term, sustainable profit and cash flow growth.
The Group has made significant progress over the year against its strategic objectives:
Growing the franchise estate: The Group opened 59 franchised stores and 4 licensed stores during the year. This results in the total franchised estate amounting to 185 and 23 licensed stores. Adjusting for the transfer of seven German franchised stores into Retail and the 10 closures during the year, the group achieved a 28% increase in its franchised estate. Early indications are that franchise partners will open around 50 stores during FY15 but, more importantly, franchise partners are contracted to open in excess of 200 further stores over the next five years.
Driving wholesale business: Order book growth of circa 25% has been matched by strong wholesale sales growth of +23.3% during the period.
European estate growth: The group opened around 100,000 square feet (+18%) of Retail space during the year taking the UK and European portfolio to 633,000 square feet. Around 43% of this growth was in mainland Europe with large format stores opened in Amsterdam, Paris, Bruges, and Marseille. In addition to the Group’s retail expansion 29 of the franchised stores opened during the period were in Europe.
Maximising / optimising the UK estate: The group has 544,000 square feet of owned retail space across 96 stores in the UK. Over the last 3 years, the average size of a typical Superdry store has increased from 5,085 square feet in 2011 to 5,671 square feet in 2014. The product range has grown at a faster rate than this, the result of which is that a number of the Group’s stores are now too space restricted to show the optimum range for that particular market. As such there are a small number of towns where the Group has targeted relocation and resizing opportunities.
Optimising and expanding the e-commerce platforms: The group operates from 18 international websites with local payment solutions, local languages, and pricing in local currencies. The Group has seen a 10 basis points improvement in its conversion rate during the period, but to maximise the long-term opportunity the Group appointed Jon Wragg as Director of e-commerce in April 2014. Jon has extensive retail experience, having recently been Multichannel Director at Asda and previously holding a number of management roles at the multi-brand online retailer, Shop Direct. E-commerce continues to be a significant global opportunity for the Group and Jon’s experience and insight, coupled with the investment already made into world-class delivery services, should generate significant growth over the medium term.
Enhance the Superdry brand through increasing the product range and brand extensions: The Superdry brand has been significantly enhanced over the past few years with the increase in breadth and depth of the product offering.
This has been done by extending and developing the core ranges to include products that previously weren’t offered, such as:
premium tailoring;
dresses;
accessories;
underwear;
watches;
sunglasses; and
cosmetics and fragrance, among others.
The Group has been increasing its focus on womenswear over recent seasons and will continue to do so as it provides a great opportunity to attract new customers and provide like-for-like growth. Womenswear currently occupies approximately 50% of retail floor space, on average, to ensure that it has presence and credibility as an offer. However, it presently accounts for around 33% of revenues, a fact that the Board views as a key opportunity to increase sales through organic growth over the medium term as sales densities move towards those of menswear. As a global brand, product excellence, innovation and design is key to sustainable long-term growth. Continued diversification into new categories and ongoing investment in the design team will underpin the strength and longevity of the Superdry brand.
A stable and developing infrastructure: The Group successfully delivered the rationalisation of its retail warehouses having relocated its retail logistics operation to a single 500,000 square feet distribution centre at Burton upon Trent. Two warehouses in Gloucester and a small site in Merchtem, Belgium, were all closed by the end of the financial year with all retail inventories, including e-commerce, now being dispatched from the new distribution centre. The operational capability of this site will support planned growth and will generate significant cost efficiencies from the second quarter of FY15.
The replacement Merchandising Management System (“MMS”) was fully implemented prior to the year-end. This system is the ‘engine-room’ of the retail business and it will allow the business to improve the management of its most important asset, stock. The additional insight and power the system offers will allow the Group to operate a more swift and sophisticated replenishment operation, manage the ever growing complexity of a global store base, and provide more integrated support for the Group’s multi-channel operations. This is particularly important in a rapidly changing customer environment where the digital and physical environments are becoming increasingly blurred.
There has been significant investment in information technology (“IT”) over the past year. As well as implementing the MMS system the Group has introduced new human resources and payroll systems. Preparations are now underway for the next phase of planned investment which will include the delivery of a new in-store point of sale system, a replacement financial system, and a comprehensive upgrade of the wholesale system over the next 12 months.
OVERVIEW OF RESULTS
Profit and loss
Group revenue for the period rose by 19.6% to £430.9m (2013: £360.4m). The Group gross margin rose 140 basis points to 59.7% (2013: 58.3%) reflecting lower clearance activity, the increasing mix of international business, and the benefits of increasing scale and purchasing power. Group underlying operating margins, however, declined by 10 basis points on last year to 14.3% (2013: 14.4%) reflecting the investment made in senior management and personnel, and the costs associated with laying the foundations for a European roll-out.
Underlying profit before tax increased 18.8% to £62.0m (2013: £52.2m). Exceptional items incurred during the year include £5.7m relating to the acquisition or buy-out of partners and/or agents in Europe, and £3.4m relating to costs associated with the new retail distribution centre. There were £7.7m of non-cash items relating to financial re-measurements. Statutory profit before tax decreased to £45.2m (2013: £51.8m).
Underlying basic earnings per share increased 21.3% to 58.0p (2013: 47.8p) and basic earnings per share decreased 23.9% to 34.0p (2013: 44.7p).
Cash flow and returns
Cash inflow from operations was £64.3m, an increase of 68% over the prior year having paid a corporation tax bill of £9.6m. FY14 was a year characterised by significant investment in infrastructure and a return to higher rates of store openings. The Group invested a gross amount of £36.4m in new sites, systems, and the acquisitions/buy-out of several European agents/distributors during the year. Despite this investment representing a 104% increase in outgoings over the prior year, the Group’s cash balances increased by 58.2% to £86.2m (2013: £54.5m).
The Board has decided not to return excess cash to shareholders despite the high level of cash building on the balance sheet. There are a number of opportunities over and above the organic roll-out which, if they materialise, will require meaningful capital investment.
In coming to this decision the Board reviewed all issues relating to the strategy, direction and future development of the Group. It has also taken into consideration the requirement to return excess cash to shareholders whilst at the same time recognising the operational and financial gearing inherent in our lease-based business model. Moreover the Board do not wish to restrict the Group’s ability to take advantage of the numerous opportunities that may arise.
Despite the higher level of investment during the year, the Group has delivered another period of improving returns. In FY14, SuperGroup Plc generated an underlying ROCE of 29.8% (2013: 25.7%). This supports the Board view that excess cash is best served towards executing the Group’s global growth aspirations.
REVENUE ANALYSIS
Sales increased by 19.6% on the year; a strong result in what remains a very competitive and challenging retail environment and against a backdrop of such significant developments in infrastructure. Revenue growth was relatively consistent across the two divisions, with Retail delivering sales growth of 17.7% and Wholesale 23.3% on the prior year:
Revenue excluding VAT (£m)
2014
2013
Growth (%)
Retail
285.5
242.5
17.7%
Wholesale
145.4
117.9
23.3%
430.9
360.4
Retail
Retail revenues represented 66.3% of Group revenue and grew 17.7% in FY14 to £285.5m (2013: £242.5m).
The key drivers of the growth were:
the addition of around 100,000 square feet during financial year 2014, and
LFL sales (which includes e-commerce revenue) of +3.2%
Like-for-like sales
As a branded fashion retailer, the Group is focussed on managing the integrity of the brand in order to deliver sustainable and long-term growth. Whilst this strategy may at times cause short term volatility to like-for-like sales growth, management feel that the focus on full-price trading, limiting the level of clearance activity through discreet channels delivers strong cash generation, superior margins and consequently high rates of return on capital.
The Group achieved like-for-like sales growth of +3.2% in FY14. Adjusting for the impact of eBay ‘mega-sales’, an activity the Group undertook historically to clear aged stock, underlying like-for-likes were +4.4%. Like-for-like sales grew strongly across the first half of the year, increasing by 8.1%. Quarter 3, which includes the important Christmas trading period and is the most significant retail quarter of the year, saw a rise in like-for-like sales of +4.5% despite the very tough comparative of +9.4% from the year before. Quarter 4 was affected by a lack of new spring stock in store, heavy competitor discounting, including some Superdry products by wholesale partners, and a late Easter. The resultant like-for-like sales were down by -3.2%, although this was -1.3% adjusting for the change in eBay.
Store openings
Around 100,000 square feet of retail space was opened during the year taking the Group to 633,000 square feet and 139 owned stores. There was a net increase of 11 new stores across the UK and Republic of Ireland, which included locations in premium shopping centres such as Southampton, Newcastle Metro centre, Reading Oracle centre, Cribbs Causeway, and the Dundrum shopping centre, near Dublin. In Europe, 15 stores were added to the portfolio, which included new larger-format stores in Aéroville (France), Amsterdam, and Bruges. These stores follow on from the successful pilot store in Oberhausen, Germany, that opened last year and represent a marked change from the current portfolio in Europe which consists mainly of smaller boutique-style stores.
In October 2014, SuperGroup bought out its German agent and, in the process, acquired its portfolio of seven stores, adding approximately 14,000 square feet to the estate. The Group created a 70% owned venture in Germany, which it runs in collaboration with previous management who run the operations for wholesale, franchise and retail. More importantly, the Group now has the rights to the German and Austrian markets, which will enable it to use its own capital to accelerate the roll-out of owned retail stores throughout these territories.
Germany offers a significant opportunity for the Group with a retail fashion market that is valued at €58.4bn by Verdict Research, some 20% larger than the UK. The Group’s confidence in the German market is underpinned by the positive performance of the Oberhausen store, which is generating strong positive like-for-like sales growth, and the success that has been experienced in the wholesale business to date.
In July 2014 SuperGroup bought out its Spanish agent, bringing the management team in house as part of the deal to preserve expertise and experience. As with the German transaction, this deal allows the Group to invest its own capital in the territory to take advantage of opportunities that could not be delivered under the previous structures, as well as improving the margins achieved through the wholesale operations. The Group has subsequently opened 10 concessions in the regionally important El Corte Ingles department store chain across Spain and in Portugal. Despite the uncertainties around the Spanish economy, the territory has provided strong growth for SuperGroup’s wholesale division over the last few years.
The German and Spanish businesses have both been successfully integrated into the Group during the second half.
Following the activities of FY14, the Group now has 139 owned stores across the European Union and trades from 633,000 square feet.
FY13
FY14 movement
FY14
Square feet
Stores
Square feet
Stores
Square feet
Stores
UK
489,000
85
55,000
11
544,000
96
EU
47,000
28
42,000
15
89,000
43
Group
536,000
113
97,000
26
633,000
139
Financial year 2015 (FY15) will see the Group open between 80,000 and 100,000 square feet of retail space with the emphasis shifting towards European stores and, in particular, the German market. The Group has a strong pipeline of space for the next eighteen months with the majority of the coming financial year’s either exchanged or with agreed heads of terms. Of particular interest is the first European flagship which will open in the German city of Munich in October.
E-commerce
The Group has delivered improvements in both its website traffic and its conversion rate during the year. This is despite moving away from discount and voucher related traffic drivers, used commonly during FY13, to deliver a premium experience that is in line with stores. A significant driver of this has been the improvements in the service levels offered on the site, which now includes both free delivery and returns, and a later cut-off time for next day delivery, a benefit provided by the new distribution facility in Burton upon Trent. Visitor growth did slow during the year as mobile became a more important channel for the customer, but the recent release of new mobile and tablet sites across most of the Group’s international websites puts the business in a strong position to return to historical growth rates.
The average order value (including VAT) rose 8.1% to £78.90 (2013: £72.96), driven by a combination of the growth in international business, product mix and around 2% growth in the average number of items per basket.
Following the opening of China and the USA over the last twelve months, the Group operates 18 international sites in 15 countries, all with localised payment solutions, localised content and local currency pricing; three of those have two separate versions for multi-language populations. 13 of those sites also have mobile versions with development underway to extend that to others.
Wholesale
Wholesale revenues represented 33.7% of total Group revenue and grew 23.3% in FY14 to £145.4m (2013: £117.9m).
Due to the numerous channels within the Wholesale business and the timing issues these generate, sales growth on a quarterly and half-yearly basis can be volatile. To counter this, the Group chooses to disclose the Wholesale order book each season, which it believes best reflects the overall performance of this channel. For FY14 the order books grew by an average of 25.9% which closely reflects the wholesale sales growth rate.
During the year, the Group opened 59 franchised stores and 4 licensed stores taking the totals to 185 and 23 respectively. The lower net increase of 46 is due to the transfer of seven franchised stores into Retail after their acquisition through the buyout of the agency and franchise partner in Germany, and 10 closures. Of the new stores opened, 29 were in Europe, with 9 of those in France and 8 in Spain. The Group now has a store presence in 46 countries with franchised stores having opened in two new territories during the year: the Czech Republic and Latvia.
Early indications are that franchise partners will open around 50 stores during FY15 but, more importantly, franchise partners are contracted to open in excess of 200 further stores over the next five years.
Outlook
Whilst the youth sector marketplace remains competitive, the Group has developed a strong management team and improved infrastructure whilst delivering sales and profit growth that highlight the continuing appeal of the brand. That platform will enable management to continue to realise opportunities, both in the UK and overseas, and to deliver profitable growth in the coming year. The Group will announce its quarter 1 results and autumn / winter Wholesale order book, as scheduled, on Thursday 4th September 2014.
Finance Review
Introduction
It has been a successful year for the Group with significant increases in revenue, gross margins, and underlying operating profit, full details of which are shown in the table below. This has been achieved in a year when the management team’s primary focus was on the significant investments made to secure the Group’s infrastructure and shape the business to support future growth. In total, £36.4m of investment spend was incurred against last year’s £17.8m, delivering an increased rate of new space opening, the new consolidated distribution facility, the new merchandising system, and the acquisition of the seven stores operated by the German franchise partner.
The Group has made a change to its financial reporting date, timed to coincide with the implementation of the merchandise management system. The final day has moved from the last Sunday in April to the last Saturday, effectively giving the Group a financial year of 51 weeks and 6 days (the “Period” or “FY14″). This change aligns the Group with most other retailers in operating reporting weeks on a Sunday to Saturday basis which will enable the Group to collate weekly sales performance on a Sunday and allow management to begin reviewing performance data first thing on a Monday morning, facilitating faster decision making at the weekly trading meetings.
Key performance indicators
KPI
Units
2014
2013
Change
GROWTH
Group revenue
£m
430.9
360.4
+19.6%
Like-for-like sales
%
3.2
5.7
-250 bps
Total Retail selling space (excluding concessions)
000 sq.ft
633
536
+18.1%
E-commerce – growth (excluding eBay)
%
26.7
29.3
-260 bps
Visits (excluding eBay)
m
31.9
29.9
+6.7%
Conversion (excluding eBay)
%
2.0
1.9
+10 bps
OPERATIONAL
Gross margin
%
59.7
58.3
+140 bps
Underlying operating profit margin
%
14.3
14.4
-10 bps
FINANCIAL
Underlying profit before tax
£m
62.0
52.2
+18.8%
Underlying basic EPS
p
58.0
47.8
+21.3%
Cash flow from operations
£m
73.3
46.5
+57.6%
Definitions:
Group revenue represents amounts receivable for goods supplied, net of discounts, returns and value added taxes.
Like-for-like sales growth is defined as the year-on-year increase in revenue from stores and concessions open for more than one year, and allowing for store upsizing of no more than 100% in original trading space, and includes e-commerce revenues.
Total retail selling space is defined as the trading floor area of all standalone stores, excluding concessions, and does not include stockrooms, administration and other non-trading areas.
E-commerce growth is the percentage growth in online revenues, net of returns, year-on-year.
Visits is the number of times Superdry websites were visited during the year.
Conversion is the number of website transactions expressed as a percentage of those visitor numbers.
Gross margin percentage is gross profit expressed as a percentage of Group revenue.
Underlying operating profit margin is the ratio of underlying operating profit to external revenue. Underlying operating profit is external revenue less cost of sales, selling, general and administrative expenses, plus other gains and losses (net), and before charging re-measurements and exceptional items (note 13).
Underlying basic EPS is underlying profit after tax attributable to the owners of the Company divided by the weighted average number of shares.
Cash flow from operations represents the cash generated from the core operating activities of the Group, excluding capital expenditure, financing, taxation, and acquisitions.
Group Profit and Loss
Group revenue for the period rose by 19.6% to £430.9m (2013: £360.4m). The Group gross margin rose 140 basis points to 59.7% (2013: 58.3%) reflecting lower clearance activity, the increasing mix of international business, and the benefits of increasing scale and purchasing power. Group underlying operating margins, however, declined by 10 basis points on last year to 14.3% (2013: 14.4%) reflecting the investment made in senior management and personnel, and the costs associated with laying the foundations for a European roll-out.
2014£m
Re-measurements £m
Exceptional costs£m
Reported 2014£m
Revenue:
Retail
285.5
-
-
285.5
Wholesale
145.4
-
-
145.4
Group revenue
430.9
-
-
430.9
Gross Profit
257.3
-
-
257.3
Operating profit:
Retail
54.8
(2.0)
(3.6)
49.2
Wholesale
47.8
(1.7)
(5.1)
41.0
Central costs
(41.1)
(4.0)
(0.4)
(45.5)
Total operating profit
61.5
(7.7)
(9.1)
44.7
Net Finance Income- central costs
0.6
-
-
0.6
Share of loss of investment- central costs
(0.1)
-
-
(0.1)
Profit before income tax
Retail
54.8
(2.0)
(3.6)
49.2
Wholesale
47.8
(1.7)
(5.1)
41.0
Central costs
(40.6)
(4.0)
(0.4)
(45.0)
Total profit before income tax
62.0
(7.7)
(9.1)
45.2
Underlying and reported profit
A number of adjusting items have been identified in establishing the underlying performance of the Group, which are either exceptional items or re-measurements (and the related income tax where appropriate). Underlying is defined as reported results adjusted to reflect the impact of those items. The directors believe that the underlying results provide additional guidance to statutory measures to help understand the performance of the Group. Further details of the adjustments are included in note 4 and all references to underlying are after making these adjustments.
For FY14 those items relate to the following:
the fair value re-measurement of deferred share consideration;
the loss/gain on financial derivatives;
the set up and dual running costs of the retail distribution centre;
the buy-out of the Spanish and UK agents; and
the buy-out of the German agent and business combination costs.
Group underlying profit before income tax
Underlying profit before income tax stands at £62.0m (2013: £52.2m), up 18.8% on the year, and compares to an overall growth in revenue of 19.6%. The Group’s gross profit of £257.3m (2013: £210.0m) is up 22.5% and the Group’s gross profit percentage has increased by 140 basis points to 59.7% (2013: 58.3%) as a result of favourable changes to sales mix and sourcing gains, partly offset by the impact of foreign exchange rate movements.
Despite the significant increase in gross profit, the underlying operating profit margin has declined by 10 basis points to 14.3% (2013: 14.4%), driven by the increased cost base. Underlying costs have increased by 22.8% to £200.5m (2013: £163.3m), driven predominantly by the costs associated with the ongoing growth of the store portfolio, and the investments made in infrastructure and the strengthening of the management team.
Store costs have increased by 24.6%, increasing as a percentage of retail sales by 160 basis points. The increase is predominantly due to a ramp up in the store opening programme, resulting in higher pre-opening costs and costs associated with some store relocations.
Distribution costs have increased by 10.6%, decreasing as a percentage of sales by 50 basis points. The decrease is due to lower participation of e-commerce, particularly eBay which incurred significant costs relating to the ‘mega-sale’ events.
Head office costs (including marketing costs and depreciation) have increased by 20%, broadly in line with sales growth. FY14 has continued to be a year of investment with the establishment of local management teams in Germany and Spain, increased resources to support international expansion and new IT platforms and more vigorous activity to protect the group’s intellectual property.
Robust financial management
Management believe that having robust systems and business processes is as important as strong cost control and monitoring when it comes to running the business effectively and efficiently. Improvements to business processes and financial controls have been made during the year, aided by the new distribution centre and the MMS implementation, and these will be significantly enhanced by the replacement of the finance system in FY15.
Taxation in the Period
The Group’s income tax expense on underlying profit of £14.9m (2013: £13.4m) represents an effective tax rate of 24.0% (2013: 25.7%). This is higher than the statutory rate of 22.8% (2013: 23.9%) primarily due to the depreciation and amortisation of non-qualifying assets and non-allowable expenses.
The UK corporation tax rate reduction from 23% to 21% with effect from 1 April 2014 and the further reduction to 20% with effect from 1 April 2015, are substantially enacted at the balance sheet date so the deferred tax balances at 26 April 2014 have been re-measured resulting in an exceptional deferred tax charge of £4.3m (2013: £1.5m).
During the year the Group paid more than £49m in UK taxes, which includes corporation tax, import duty, business rates, employer’s national insurance and stamp duty.
In preparation for the listing of the business on the London Stock Exchange, a substantial reorganisation was undertaken with effect from 7 March 2010 and the Group’s subsidiaries acquired net assets with a total fair value of £375m. Within this amount, £340m was identified as intangible assets and goodwill, of which the directors believe that at least £187m should be deductible against taxable profits over the useful economic lives of the respective assets. This gave rise to £52.4m of the exceptional deferred income tax credit booked in 2010. Based on this the directors consider that the Group’s future cash tax expense should be reduced by approximately £2.8m per annum using the corporation tax rate of 20%.
Earnings per share
Underlying basic earnings per share is 58.0p (2013: 47.8p). Reported basic earnings per share is 34.0p (2013: 44.7p) based on a basic weighted average of 80,580,959 shares (2013: 80,280,115 shares). The increase in the basic weighted average number of shares is predominately due to 441,917 5 pence ordinary shares being issued during February 2014 in accordance with the deferred contingent share consideration agreement following the acquisition of SuperGroup Europe BVBA in 2011. The transaction resulted in an increase of £7.1m in share premium. There was also an increase in share premium of £0.1m in respect of 16,500 5p ordinary shares issued in relation to the buy out of the Spanish distributor. In total share premium increased in the year by £7.2m.
Underlying diluted earnings per share is 57.2p (2013: 47.4p). Diluted earnings per share is 33.6p (2013: 44.3p) based on a diluted weighted average of 81,653,319 (2013: 81,049,304) shares.
Dividends
The Board recognises the level of cash building on the balance sheet but, at this stage, has decided not to return excess cash to shareholders. There are a number of opportunities over and above the organic roll out covered in the Strategic Report which, when and if they materialise, will require meaningful capital investment and the Board does not wish to restrict the Group’s ability to take advantage of these opportunities.
Consequently, the Board remains of the view that the business is best served by retaining current cash reserves to support growth, as illustrated with the deals in Germany, Spain, and the recently announced deal in Scandinavia. A recommendation will be made at the Annual General Meeting that no dividend is payable in relation to FY14 (2013: £nil). The Board will keep the dividend policy under review by considering the Group’s profitability, underlying growth, availability of cash and distributable reserves and the investment opportunities open to the business.
Despite the higher level of investment during the year, management is satisfied that the Group has delivered another period of strong returns. In FY14, SuperGroup generated a return on capital employed of 29.8% (2013: 25.7%). This supports the Board view that excess cash is best utilised executing the Group’s global growth aspirations.
Cash flow and balance sheet
The Group had net cash balances of £86.2m (2013: £54.5m) as at the end of the year. The business remains highly cash generative and operations delivered an inflow of £73.3m (2013: £46.5m). This year-on-year increase is largely due to the significant increase in revenues and underlying profit supported by an improvement in working capital management as aged stock has been cleared from the business. There has been a significant increase in investing activities to £36.4m (2013: £17.8m) driven by the capital expenditure incurred in opening the near 100,000 square feet of new retail space, the opening of the new distribution centre, and the information technology investments. It is anticipated that the Group will continue to enjoy a strong balance sheet that will enable it to continue to invest in new business opportunities and infrastructure to support future growth.
The net book value of property, plant and equipment is £70.3m (2013: £63.7m). During the year, £26.9m (2013: £15.0m) of capital additions were made, of which £21.8m (2013: £10.0m) relates to leasehold improvements across the Group. The balance is made up of furniture, fixtures and fittings (£2.7m) and computer equipment (£2.4m). Furniture and fittings with a value of £1.2m were acquired as part of the business combination in Germany.
Landlord contributions of £4.6m (2013: £3.0m) were received during the year and will be amortised over the length of the respective leases.
Intangible assets comprise goodwill, lease premiums, distribution agreements, trademarks, the website and computer software, stood at £46.7m at the year end (2013: £41.5m). Acquisitions in the year resulted in £0.7m being added to goodwill and £1.2m to intangibles.
Investment in inventories, trade receivables and trade payables decreased by 0.7% during the year to £67.9m (2013: £68.4m) and as a proportion of Group revenue was 15.8% (2013: 19.0%). Group inventory increased to £77.8m (2013: £72.5m), up 7.3%. The increase in inventory is a result of the increase in both retail space and sales, offset by a reduction in aged stock. Trade receivables (excluding prepayments and provisions) increased by 14.8% to £32.5m (2013: £28.3m) and were 7.5% (2013: 7.8%) of Group revenue. This is broadly in line year-on-year.
Trade payables were £42.4m (2013: £32.4m), an increase of 30.9% on the prior year and represented 9.8% (2013: 9.0%) of Group revenue.
2014
2013
Growth
Current assets
£m
£m
%
Inventories
77.8
72.5
+7.3%
Trade and other receivables
Trade receivables
32.5
28.3
+14.8%
Other receivables/derivatives
21.8
19.0
+14.7%
Sub total receivables
54.3
47.3
+14.8%
Cash and cash equivalents
86.2
54.5
+58.2%
Total current assets
218.3
174.3
+25.2%
Trade and other payables
Trade payables
(42.4)
(32.4)
+30.9%
Other payables / derivatives / borrowings
(30.7)
(25.0)
+22.8%
Total current liabilities
(73.1)
(57.4)
+27.4%
Net current assets
145.2
116.9
+24.2%
Working Capital
Inventories
77.8
72.5
+7.3%
Trade receivables
32.5
28.3
+14.8%
Trade payables
(42.4)
(32.4)
+30.9%
Total
67.9
68.4
-0.7%
The Group continues to review its supplier base in order to manage risk and meet growth expectations. During the year, the number of suppliers decreased to 66 (2013: 79) although several of these operate from multiple locations. Changes to sourcing in recent years have resulted in the supply base being focused in three principal territories: Turkey, China and India. The flexible sourcing model that the Group has adopted, both in terms of suppliers and territories, enables the Group to generate competitive tension between suppliers and de-risk its sources of supply.
The directors report that, having reviewed the current performance forecasts, they have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for the foreseeable future. For this reason they have continued to adopt the ‘going concern’ basis in preparing the financial information.
Divisional Performance
Retail
The Retail division delivered revenue of £285.5m (2013: £242.5m), up +17.7% on the year and represents 66% of total Group revenue (2013: 67%). Like-for-like sales for the year, including the European owned stores and e-commerce revenues, were +3.2% (2013: +5.7%). During the year, management took the decision to cease the eBay ‘mega sales’ that had been previously used to clear excess aged stock. These had been successful in generating revenue but had almost no impact on profit. Stripping out the effect of these sales from last year would adjust the total sales growth to +20.5% and like-for-like sales up to +4.4%.
The Retail division’s operating profit was £49.2m (2013: £46.8m). Underlying operating profit in the year was £54.8m (2013: £46.2m), up 18.6% on the year, and underlying operating profit margin was 19.2% (2013: 19.1%).
The operating margin improvement reflects gains from sourcing, coupled with changes to the trading mix. Clearance sales have switched away from eBay and into owned outlet space, delivering a better margin. There has also been an increase in participation from the international business, which carries a 20-25% price premium over the UK. This has been partly offset by the higher cost of running the international stores, relative to the UK.
Retail division
2014
2013
Growth
£m
£m
External revenues
285.5
242.5
+17.7%
Underlying operating profit
54.8
46.2
+18.6%
Underlying operating margin (%)
19.2%
19.1%
+10bps
Re-measurementsExceptional items
(2.0)(3.6)
1.1(0.5)
Retail operating profit
49.2
46.8
+5.1%
Wholesale
The Wholesale division delivered revenue of £145.4m, up 23.3% (2013: £117.9m), representing 34% of total Group revenue (2013: 33%).
Operating profit in the year was £41.0m (2013: £37.1m), whilst underlying operating profit was £47.8m (2013: £35.6m). Underlying operating margin was 32.9% (2013: 30.2%). The improvement in operating margin of 270 basis points was predominantly delivered through the gross profit margin, reflecting gains from sourcing and the sales growth in Europe where better margins are achieved due to the pricing premium.
Wholesale revenue by territory:
2014
2013
Change
£m
£m
%
UK and Republic of Ireland
31.9
28.0
+13.9%
Europe
86.5
67.4
+28.3%
Rest of World
20.6
15.5
+32.9%
Clearance & other
6.4
7.0
-8.6%
Total Wholesale revenue
145.4
117.9
+23.3%
Revenue growth in Wholesale was achieved mainly through Europe and rest of world territories. The European growth was from independent accounts and new franchise store openings whilst the rest of world has seen an increase in orders through the existing franchise partnership base opening new stores and the addition of new partnership deals. The UK territory has improved significantly following last year’s decline, mainly driven by increased orders from UK key accounts.
There are 208 (2013: 162) Superdry branded franchise and license stores worldwide, including 23 (2013: 20) licensed stores, operating in 45 countries.
Wholesale division
2013£m
2013£m
Change%
External revenues
145.4
117.9
+23.3%
Underlying operating profit
47.8
35.6
+34.3%
Underlying operating profit margin %
32.9%
30.2%
+270bps
Re-measurements
(1.7)
1.5
Exceptional items
(5.1)
-
Wholesale operating profit
41.0
37.1
+10.5%
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Source: SuperGroup Plc