RNS Number:4118E
ScS Upholstery PLC
25 September 2007
FOR IMMEDIATE RELEASE 25 September 2007
ScS Upholstery plc
Preliminary Results for Ten Months Ended 28 July 2007
ScS Upholstery plc, the fully listed retailer of fabric and leather upholstered
furniture, announces its preliminary results for the ten months ended 28 July
2007. The comparatives are for the 12 months ended 30 September 2006.
KEY POINTS FOR THE TEN MONTH PERIOD (2006 COMPARATIVES: 12 MONTH PERIOD)
* Revenue #183.8m (2006: #195.8m)
* Gross margin 47.4% (2006: 48.1%)
* Trading profit #6.6m (2006: #15.9m)
* Profit before tax and property transactions #7.5m (2006: #16.8m)
* Net costs from property transactions #0.4m (2006: net income #0.4m)
* Profit before tax #7.1m (2006: #17.2m)
* Earnings per share 13.68p (2006: 35.12p)
* Proposed final dividend of 12.0p per share, giving a total dividend of
19.0p (2006: 19.0p)
* Expansion:
* 9 new stores opened during the year
* 1 store closed (old format)
* total 95 stores trading at the year end
* Strong net cash balance of #16.6m after expenditure on new stores and
refurbishments of #7.5m.
Mike Browne, Chairman, commented:
"This is a disappointing result and reflects the extremely difficult trading
environment previously reported which has prevailed throughout the reporting
period. Given our high gross margins, the resultant shortfall in sales against
our original expectations has had a significant impact on profits.
Trading conditions remain tough. However, we strongly believe in our formula;
ScS is well positioned in the middle-market and offers excellent value, choice
and service to our customers. We therefore remain cautiously optimistic for the
medium term."
For further information please contact:
ScS Upholstery plc
David Knight, Chief Executive 0191 514 6054
Buchanan Communications
Richard Oldworth / Nicola Cronk 020 7466 5000
CHAIRMAN'S STATEMENT
Results
The results for the ten months ended 28 July 2007 are a disappointment and
reflect the extremely difficult trading environment previously reported which
has prevailed since January.
Successive interest rate increases have exerted severe pressure on household
disposable income and we have seen reduced footfall year on year. In addition,
as consumer credit providers seek to minimise their risk through tougher lending
criteria, this has led to lower customer loan acceptance rates than experienced
last year and a reduction in customers able to make higher order value
purchases. The logistics issues we experienced around Christmas 2006 created
higher levels of stock than usual, which were cleared throughout the latter part
of the financial period. The combined effect of the above factors has eroded
gross margin which has decreased to 47.4% for the period under review from 48.1%
reported for the 12 months ended 30 September 2006.
We are pleased to report that the corrective actions taken to address the
logistics issues (referred to in our interim results announcement in May of this
year) resulted in a smooth delivery experience around both the March peak period
and the financial period end. The cost of these actions and of the spare
distribution capacity to protect against peak trading periods is reflected in
increased distribution costs which, as a percentage of sales, were 5.6% (2006:
4.7%). Under the guidance of an experienced logistics consultant, appointed in
May this year, we have undertaken a comprehensive review of our distribution
network and capacity and devised a strategic plan of improvement and
modernisation. Implementation of this plan is already underway and involves the
rationalisation and reconfiguration of our distribution centres and the
introduction of more efficient handling and storage methods and working
practices.
Group pre-tax profits were #7.1 million (2006: #17.2 million) after charging
other costs of #0.4 million in respect of property transactions (2006: other
income #0.4 million). Group pre-tax profits before property transactions were
#7.5million (2006: #16.8 million). This is a disappointing result but the
significant shortfall in sales against our original expectations has a
particularly adverse impact on profits given our high gross margin.
Dividend
The Board is recommending a final dividend of 12.0 pence per ordinary share,
making a total dividend of 19.0 pence per ordinary share for the ten months
ended 28 July 2007. This is the same amount as that paid for the 12 months ended
30 September 2006 and reflects the Group's strong cash position and the Board's
cautious optimism regarding the Group's prospects in the medium term.
Expansion Programme
We currently have 95 stores, having opened nine stores during the financial
period and closed the old format store in Newcastle upon Tyne. In the current
financial year we will open at least five new stores, with other possible
locations under review. We will continue with the refurbishment programme with
18 major refurbishments planned in the current financial year at a cost of circa
#2.0 million.
Outlook
Like for like sales order intake in the first seven weeks of the current
financial year is 8% down, slightly below our expectations. Average order values
have, however, increased from circa. #1,400 reported for the financial period to
circa. #1,475 in the current financial year to date and there has been a slight
improvement in credit customer acceptance rates. Whilst our new product range
and advertising campaign gives us a positive outlook for the Autumn trading
period, our expectations for the remainder of the financial year are that the
difficult trading environment will continue. The short term will therefore
continue to be challenging but we will manage our business accordingly. We
believe that the business remains well placed for the medium term.
M F Browne
Chairman
The Preliminary Announcement was approved by
the Board of Directors
24 September 2007
BUSINESS REVIEW
REVIEW OF OPERATIONS
The ScS Formula
ScS is a national retailer and specialises in selling lounge room sofas and
chairs. We continue to position ourselves in the middle-market of the upholstery
retail sector, offering excellent value, choice and service to our customers.
We operate from 95 stores nationwide, 91 of which are in prime out of town
retail park locations with a high quality fit out and mezzanine floor,
maintained with a rolling programme of refurbishment. Our branch network has
developed through regional clusters supported by 11 distribution centres,
designed to deliver cost synergies in distribution and through effective use of
national media.
We do not manufacture but source our product from 15-20 principal suppliers with
whom we have developed very good working relationships, a critical success
factor.
We aim to employ the best people in whom we invest heavily in training with a
focus on customer service. Remuneration packages, which contain significant
incentives based upon sales and profits, provide the focus on maximising profits
and managing costs and support the successful implementation of strategy.
Market
With new entrants to the sofa retail market, such as superstores and the
increasing use of the internet for shopping and product research, the market
remains competitive. Whilst we will continue to carefully monitor these
developments, we do not currently consider them to be a serious threat as the
vast majority of our customers continue to order bespoke product.
Business Risks
The principal risk to the business is management of the supply chain process.
This involves the manufacture of quality product and delivery by suppliers to
our distribution centres in the requisite timeframe, the delivery of the product
to our customers in a professional manner and at prearranged dates and the
provision of an excellent after sales service. Centralised buying, very good
working relationships with a wide range of suppliers and our in house
distribution capability, with centres supporting the branch network, are
designed to enable us to manage this risk effectively.
All risks are monitored on an ongoing basis by the executive Directors and
strategies are developed as appropriate to mitigate against such risks and
minimise their impact.
Store Format and Expansion Programme
The Group's expansion programme remains based upon a format which comprises a
prime retail park location with a unique mezzanine floor layout, designed to
encourage customers to circulate around the store. Displays are set in
attractive, well-lit, open room settings and attention is paid to creating a
relaxing homelike environment.
We continue to invest in the enhancement and quality of the visual merchandising
of each store and believe that the retail standards in our stores are amongst
the highest in the sector. The quality of the store presentation is consistently
refreshed with investment in major refurbishments (replacing carpets, signage
and fully decorating the store) being made as appropriate to maintain these high
standards of modern display. We have carried out major refurbishments at 12
stores during the period at a cost of #1.4 million.
We have increased our selling space by 9% this year with the opening of nine
stores in Greenock and Livingston in Scotland and Cambridge, Huddersfield,
Waterlooville, Stafford, Scunthorpe, Luton and Grimsby. We also closed the old
format store in Newcastle upon Tyne.
The continued expansion within existing regions yields cost synergies through
the benefit of shared advertising and distribution.
We have several new store opportunities ongoing and will open at least five new
stores in the current financial year. This is a result of our strategy of
opening new stores only in the right locations; on prime retail parks adjacent
to competitors, where returns on investment are greater due to increased
footfall of customers shopping for furniture and where those returns meet our
investment criteria. Whilst the number of new store openings is significantly
less than we are capable of managing, it enables us to focus on a significant
refurbishment programme which will include major refurbishments at 18 stores at
a cost of circa #2.0 million.
Suppliers and Product Range
The Group does not manufacture any of the products it sells but purchases from a
selection of 15-20 different suppliers, of which approximately 60% are UK based,
with the balance based in Europe. Each store typically displays a range of
models, of which approximately 40% are fabric and 60% leather.
Centralised buying is critical to our success and we concentrate on developing
and maintaining effective, long term working relationships with suppliers. This
strategy has enabled the Group to secure attractive purchase terms and support
from suppliers and to negotiate exclusivity on all current product lines. All
prices are determined centrally with no regional variations and our average
order value during the financial period was circa. #1,400 (2006: circa. #1,500).
Marketing and Advertising
As the business has developed, our advertising strategy has been based upon
employing regional TV (ITV1) with national daily press (The Sun and The Daily
Mail) supported by national Sunday press (News of the World and The Mail on
Sunday) and local and regional publications, all of which have been fronted by
celebrity Martin Kemp.
The spend has historically been focused around key trading periods, such as the
Autumn campaign and January sale, with the remaining spend supporting, in the
main, all Bank Holiday periods.
As the business has grown, with stores added to existing regions and advertising
underpinned by regional TV, this has enabled us to make better use of national
press, increasing our presence in more upmarket national publications, including
colour supplements. We have also expanded our advertising coverage into other TV
media, including Satellite and Channel 4. This attracts an additional audience
to our offer and is helping us build a national brand.
The content and use of differing advertising media is constantly reviewed and we
expect to incur expenditure more evenly to support the business between the peak
trading periods referred to above, but maintaining total spend at circa 6% of
revenue for the current financial year.
Distribution Network
We have reported previously about management and capacity issues in
distribution, primarily in our southern distribution centres and the adverse
impact on revenue and profits. Additional relief management support, temporary
extra space and spare delivery capacity created by a greater use of outside
contractors, ensured there were no issues during the March peak period nor
around the financial period end.
We appointed an external expert in logistics to assist us in a strategic review
of our distribution function. A comprehensive action plan has been drawn up and
is now being implemented and the Board are confident that it will not only
resolve further capacity constraints, but will introduce a more modern and
efficient operation. A key component of the plan is the reconfiguration of our
network. We are in the process of closing four of our existing warehouses, all
of which are deemed no longer suitable for supporting the business in their
respective regions. We are replacing them with modern depots, incorporating up
to date handling and distribution methods. This will be supported by changing
working hours to a Monday to Saturday, two shift operation (currently Monday to
Friday, one shift). By operating on this basis, we will increase our delivery
capacity by some 50 per cent across the whole network. This strategy, which
will be rolled out across all warehouses over a period of time, will increase
flexibility for delivery to customers and ensure success in realising economies
of scale and increasing profitability.
The costs of exiting the four distribution centres, principally dilapidations
and asset write offs, amount to circa #0.4 million and are charged in Other
Costs on the face of the profit and loss account.
The initial review was completed in June 2007 and the implementation of the
agreed strategy is proceeding according to plan.
New Business System
After two years of procurement, planning and design, we are delighted to report
the successful implementation of our new fully integrated ERP system from
Microsoft, Dynamics NAV. This went live across the entire Group earlier this
month after undergoing a pilot phase in our North East region and is progressing
well and to plan. It will provide us with a much stronger systems foundation to
fully support our existing business and its continued future expansion.
Major benefits include: improved data integrity at point of sale which will
improve customer satisfaction and reduce errors in ordering furniture;
electronic data transfer with finance houses and our warranty provider to
improve the accuracy, speed and flow of information; the option to centralise
booking of deliveries from suppliers into warehouses and arranging delivery to
customers, thereby improving supply chain management; and the increased
transparency and availability of data to improve management reporting.
People
The Group's policy is to actively involve our people in the business and to
ensure that matters of concern to them, including the Group's aims and
objectives, are communicated in an open and regular manner. We achieve this
principally through three sales conferences held at appropriate times during the
year, supported by regular senior management meetings and briefings both on a
national and regional basis.
The Board is fully committed to delivering the highest standards of health and
safety for all our people and acknowledges its responsibility for other persons
who may be affected by the Group's activities.
We are committed to employing the right people, training them well, and coaching
and promoting from within wherever possible. The national training centre at our
Sunderland head office, which is complemented by a training centre in the
Midlands and by satellite training centres throughout the UK, is fully and
effectively utilised. We have invested in all areas of learning relevant to our
sales environment and ensure that our people are given access to local, regional
and national training opportunities.
We are an equal opportunities employer and have accreditation for the Investors
in People standard, which has recently been re-accredited and is in place for
the next three years. We believe that well trained and motivated people are key
to our customer orientated and profit driven culture and fundamental to the
long-term success of the business and we continue to make significant investment
in their training and development.
David Knight
Chief Executive
The Preliminary Announcement was approved by
the Board of Directors on 24 September 2007
FINANCIAL REVIEW
Revenue
Revenue was #183.8 million for the ten months ended 28 July 2007 (12 months
ended 30 September 2006: #195.8 million). This reflected the extremely tough
trading conditions which prevailed during the financial period compounded by the
logistics issues (previously reported) around Christmas 2006. The like for like
sales order intake, calculated on the basis of all stores open for 12 months or
longer is down by 7%, which resulted in revenue being significantly below our
expectations at the beginning of the financial period.
Gross Profit
Gross profit was #87.1 million (2006: #94.2 million) and gross margin was 47.4%
(2006: 48.1%). The reduction in gross margin reflected the impact of lower
average order values and higher levels of stock sales than usual following the
logistics issues.
Group Trading Profit
Group trading profit was #6.6 million (2006: #15.9 million).
This result included the costs of the corrective actions taken including spare
capacity in distribution which led to total distribution costs being 5.6% of
revenue (2006: 4.7%).
The result has been stated after absorbing the costs of opening nine new stores
during the financial period. The additional costs associated with staff
recruitment, induction and training, together with pre-opening and launch costs
for the new stores, means that there is an initial negative impact on
profitability. Also, given our policy of recognising revenue when the goods have
been delivered, and with normal lead times from suppliers of six to 12 weeks,
new stores have a significant period when costs are incurred but revenue is not
earned.
Profit Before Taxation
Profit before taxation was #7.1 million (2006: #17.2 million). Excluding costs
arising from the early termination of property leases of #0.4 million (2006:
income #0.4 million), profit before taxation was #7.5 million (2006: #16.8
million).
Taxation
The effective rate of tax on profit for the financial period was 34.7% (2006:
31.5%). This is higher than the standard rate of corporation tax in the UK of
30%, primarily due to accounting depreciation not being an eligible deduction
for tax purposes (see note 8 to the financial statements).
Balance Sheet and Cash Flow
The balance sheet remains very strong with net assets of #36.1 million (2006:
#37.6 million) and no borrowings.
Additions to fixed assets during the financial period totalled #8.5 million
(2006: #14.3 million). New store leasehold improvements and fixtures and
fittings amounted to #6.1 million (2006: #12.0 million). Expenditure on
refurbishments amounted to #1.4 million (2006: #1.2 million). Net book value of
leasehold improvements and fixtures and fittings at our stores account for #37.9
million (2006: #33.8 million) of the Group's net asset value as disclosed in the
balance sheet.
The continued profitability and strong operating cashflow of the business has
resulted in cash balances of #16.6 million at the end of the financial period
(2006: #19.7 million). This is after payments on account of corporation tax
liabilities of #3.3 million (2006: #4.8 million), dividend payments of #6.4
million (2006: #5.8 million) and total capital expenditure of #10.7 million
(2006: #14.8 million).
The strong balance sheet and significant operating cash flow generation of the
business enables us to continue the expansion strategy and the refurbishment
programme whilst supporting the payment of dividends at appropriate levels, all
of which is financed from our own resources.
Earnings Per Share and Dividends
Basic earnings per share were 13.68 pence (2006: 35.12 pence).
The final dividend proposed of 12.0 pence per ordinary share, if approved, would
make a total dividend of 19.0 pence per ordinary share for the ten months ended
28 July 2007 (12 months ended 30 September 2006: 19.0 pence per ordinary share)
and reflects the Group's strong cash position and the Board's cautious optimism
regarding the Group's prospects in the medium term.
Change of Financial Year End
The Group has changed its accounting reference date from 30 September to the
nearest Saturday to 31 July in order to alleviate the logistical issues created
by annual supplier holidays falling during August and the change has taken
effect from the current financial period. As a result, the comparative figures
in the Income Statement, Balance Sheet, Cash Flow Statement, Statement of
Changes in Equity and the related notes are not entirely comparable.
Ron Turnbull
Finance Director
The Preliminary Announcement was approved by
the Board of Directors on 24 September 2007
ScS Upholstery plc
Consolidated Income Statement
For the ten months ended 28 July 2007
Audited Audited Unaudited Unaudited
Ten months Year ended Ten months Year ended
ended 30 September ended 28 July
Notes 28 July 2006 29 July 2007
2007 2006
#'000 #'000 #'000 #'000
Revenue 183,794 195,828 157,608 222,014
Cost of sales (96,662) (101,615) (81,773) (116,313)
Gross profit 87,132 94,213 75,835 105,701
Distribution costs (10,319) (9,223) (7,520) (11,899)
Administration costs (70,219) (69,103) (59,265) (80,162)
(80,538) (78,326) (66,785) (92,061)
Group trading profit 6,594 15,887 9,050 13,640
Other (costs)/income 2 (374) 445 445 (223)
Group operating profit from continuing 6,220 16,332 9,495 13,417
operations
Finance revenue 853 906 785 974
Profit from continuing operations before 7,073 17,238 10,280 14,391
taxation
Income tax expense 3 (2,457) (5,430)
Profit attributable to equity shareholders 4,616 11,808
of the parent
Earnings per share - Basic - (pence) 4 13.68 35.12
Earnings per share - Diluted - (pence) 4 13.66 35.04
Dividend paid per share (pence) 5 19.0 17.5
Dividend proposed per share (pence) 5 12.0 12.0
ScS Upholstery plc
Consolidated Balance Sheet
As at 28 July 2007
Audited Audited
As at As at
28 July 30 September
2007 2006
#'000 #'000
Non-current assets
Property, plant and equipment 40,256 36,113
Intangible assets 2,374 527
Other receivables 778 823
Deferred tax asset - 99
43,408 37,562
Current assets
Trade and other receivables 9,163 9,652
Inventories 10,452 11,546
Cash and cash equivalents 16,610 19,671
36,225 40,869
Total assets 79,633 78,431
Current liabilities
Trade and other payable (33,631) (31,713)
Income tax payable (1,025) (1,984)
(34,656) (33,697)
Non-current liabilities
Trade and other payables (8,802) (7,178)
Deferred tax liability (105) -
(8,907) (7,178)
Total liabilities (43,563) (40,875)
Net assets 36,070 37,556
Equity
Share capital 341 340
Share premium account 3,123 2,971
Capital redemption reserve 195 195
Treasury shares (1,225) (1,172)
Retained earnings 33,636 35,222
Total equity 36,070 37,556
ScS Upholstery plc
Consolidated Cash Flow Statement
For the ten months ended 28 July 2007
Audited Audited
Ten months Year ended
ended 30 September
28 July 2006
2007
#'000 #'000
Cash flows from operating activities
Reconciliation of operating profit to net
cash flows from operating activities
Group operating profit 6,220 16,332
Depreciation 4,002 3,358
Depreciation of non current other receivables 45 39
Amortisation of other intangibles 324 258
Share based payments 320 271
Decrease/(increase) in inventories 1,094 (1,970)
Decrease/(increase) in trade and other receivables 489 (2,178)
Increase in trade and other payables 3,618 6,843
Cash generated from operations 16,112 22,953
Income taxes paid (3,318) (4,760)
Net cash flow from operating activities 12,794 18,193
Cash flows from investing activities
Interest received 853 906
Payments to acquire intangible fixed assets (1,887) (471)
Purchase of property, plant and equipment (8,826) (14,356)
Proceeds on disposal of property, plant and equipment 367 161
Net cash flows from investing activities (9,493) (13,760)
Cash flows from financing activities
Net proceeds from issue of ordinary shares 153 1,055
Payment to acquire own shares (99) (187)
Dividends paid to equity shareholders of the parent (6,416) (5,798)
Net cash flows from financing activities (6,362) (4,930)
Decrease in cash and cash equivalents (3,061) (497)
Cash and cash equivalents at the beginning of the financial 19,671 20,168
period
Cash and cash equivalents at the end of the financial 16,610 19,671
period
ScS Upholstery plc
Consolidated Statement of Changes in Equity
For the ten months ended 28 July 2007
Equity Share Capital
share premium redemption Treasury Retained Total
capital account reserve shares earnings equity
#'000 #'000 #'000 #'000 #'000 #'000
At 30 September 2005 336 1,920 195 (1,472) 29,205 30,184
Profit for the year - - - - 11,808 11,808
Equity dividends - - - - (5,798) (5,798)
Items recognised directly in
equity:
Share based payments - - - - 271 271
Income tax - - - - 223 223
Acquisition of treasury shares - - - (187) - (187)
Employee share options exercised 4 1,051 - - - 1,055
Transfer re. treasury shares - - - 487 (487) -
At 30 September 2006 340 2,971 195 (1,172) 35,222 37,556
Profit for the period - - - - 4,616 4,616
Equity dividends - - - - (6,416) (6,416)
Items recognised directly in
equity:
Share based payments - - - - 320 320
Income tax - - - - (106) (106)
Acquisition of treasury shares - - - (99) - (99)
Employee share options exercised 1 152 - - - 153
Treasure shares adjustment - - - 46 - 46
At 28 July 2007 341 3,123 195 (1,225) 33,636 36,070
ScS Upholstery plc
Notes to the Preliminary Report
This preliminary report was approved by the Directors on 24 September 2007. This
announcement is being sent to shareholders and will be made available at the
Company's registered office at 45-49 Villiers Street, Sunderland, SR1 1HA.
Copies of this report will also be available on the Group's website at
www.scssofas.co.uk.
1. Basis of preparation
This preliminary report has been prepared under IFRS. These standards are
subject to ongoing review and endorsement by the European Union or possible
amendment by interpretative guidance from the International Accounting Standards
Board and the International Financial Reporting Interpretations Committee and
are, therefore, still subject to change.
The financial information contained above does not constitute statutory
financial statements as defined in section 240 of the Companies Act 1985, for
the ten months ended 28 July 2007 and the year ended 30 September 2006. The
financial information is based on the audited statutory accounts for both
financial periods, upon which the auditors have issued unqualified audit
opinions. The statutory financial statements for the year ended 30 September
2006 have been filed with the Registrar of Companies. The unaudited results for
the ten months ended 29 July 2006 and year ended 28 July 2007, included in this
preliminary report, are not included in the audited statutory financial
statements for the ten months ended 28 July 2007.
2. Other (costs)/income
Audited Audited
Ten Months ended Year ended
28 July 2007 30 September 2006
#'000 #'000
Net (costs)/income on the early termination of (374) 445
property leases
Other (costs)/income represents income on the early termination of property
leases, offset by the related costs, including the disposal of fixed assets,
dilapidations and redundancies.
3. Taxation
Audited Audited
Ten months ended Year ended
28 July 30 September
2007 2006
#'000 #'000
UK Corporation tax:
Current income tax charge 2,435 5,328
Amounts (over)/under provided in previous years (20) 4
Total current income tax 2,415 5,332
Deferred tax:
Origination and reversal of timing differences 42 98
Total deferred tax 42 98
Tax charge in the income statement 2,457 5,430
Tax relating to items charged or credited to equity
Current income tax:
UK Corporation tax (56) (352)
Deferred tax:
Share based payments 162 129
Tax charge/(credit) in the statement of changes in 106 (223)
equity
UK corporation tax is calculated at 30% (2006: 30%) of the estimated assessable
profit.
A net deferred tax liability of #105,000 (2006: asset #99,000) has been
recognised in the balance sheet.
4. Earnings per share
The calculation of basic earnings per share is based on the profit for the
financial period and a weighted average of 33,752,646 shares in issue during the
financial period (2006: 33,624,005). The diluted earnings per share is based on
the profit for the financial period and a weighted average of 33,790,728 shares
in issue and under option during the financial period (2006: 33,697,001).
5. Dividends paid and proposed
Audited Audited
Ten months ended Year ended
28 July 30 September
2007 2006
#'000 #'000
Equity dividend paid: final 2006 4,052 3,519
Equity dividend paid: interim 2007 2,364 2,279
6,416 5,798
Equity dividend proposed: final 2007 4,052 4,047
6. Annual General Meeting
The Annual General Meeting will be held on 3 December 2007.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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