Review of the business

Group overview

Group revenue for the half-year declined by 10% (9% CER) on the first half of the previous year to £882.4 million (2021: £975.9 million, 2019: £564.9 million) and increased by 56% on the first half of three years ago, pre-pandemic. Comparison with three years ago demonstrates the growth of the business excluding the exceptional growth and low returns during pandemic periods. Gross sales before returns increased on the prior half-year by 4%, indicating the continued momentum of the group's brands as they gain market share. However, with returns higher than in the pandemic period, net revenue shows a decline.

Adjusted EBITDA was £35.5 million (2021: £85.1 million, 2019: £60.8 million), a decrease of 58% on the first half of the previous year, as a result of: softer consumer demand, elevated returns rates, freight and logistics inflation, high cost inflation from the macro-economic environment, as well as strategic investments across the multi-brand platform. Gross margin of 52.5%, declined 210 basis points year-on-year due to elevated inflationary cost pressures. Gross margin did, however, improve compared to the second half of the previous financial year with tighter inventory management, and our flexibility in moving supply chain sources away from the Far East, with its associated elevated freight costs, to Europe, reducing product costs.

Adjusted EBITDA margin reduced to 4.0% (2021: 8.7%, 2019: 10.8%), but was flat when compared to the second half of the previous financial year. International distribution costs have continued to be significantly elevated against pre-pandemic rates, but we are seeing some small, steady rate reductions as the year progresses. Our more recently acquired brands are demonstrating improving profitability but continue to operate with higher overheads as a percentage of revenue compared to the much larger and more established brands we own. Central overheads increased as a percentage of net sales in the first half due to the operational deleverage from a decline in net sales year-on-year, coupled with inflationary cost pressures as a result of the macro-economic backdrop.

Loss before tax was £15.2 million (2021: Profit £24.6 million, 2019: Profit £45.2 million). Adjusted diluted earnings per share was 0.30p, down 92% on the prior half-year. Basic earnings per share was negative 1.19p, (2021: positive 1.44p, 2019: positive 2.88p).

Operating cash flow was £41.3 million (2021: £21.3 million, 2019: £55.9 million). Net cash flow was £213.3 million inflow (2021: £127.6 million outflow, 2019: £15.5 million inflow), following capital expenditure of £38.7 million and a £225 million inflow from the group's newly committed £325 million Revolving Credit Facility. Our net cash balance (cash less bank debt) at the period end decreased to £10.4 million net debt (2021: £98.4 million net cash, 2019: £207.3 million net cash), whilst the actual cash balance was £314.6 million.

Technology

Investment has continued in key technology projects, including the delivery of Customs Warehousing, which will improve gross margin on overseas sales, and building of systems for the forthcoming US distribution centre. The Sheffield distribution centre servicing PrettyLittleThing transitioned from a third-party provider to in-house, requiring significant IT development and implementation and was successfully completed in June, with 1,400 colleagues joining the boohoo family. In addition, substantial progress has been made on our automation project ahead of go-live in September. Further improvements have been made to the group's wholesale operations, with the implementation of a new sales portal giving greater choice and flexibility to partners, and greater operational efficiencies.

Distribution centres

The group continues to operate four warehouses: the long-established Burnley site, which serves boohoo, boohooMAN, MissPap and Debenhams; the Sheffield facility for PrettyLittleThing; Wellingborough, which houses Nasty Gal, Coast, Oasis and Warehouse; and Daventry, from which the newer brands Dorothy Perkins, Burton and Wallis operate, as well as Karen Millen.

The project to automate the Sheffield warehouse reached completion and go-live in September, with significant capital expenditure of £11 million incurred in the first half year. Additional costs of working of £2 million have been incurred during the construction period, disrupting the normal efficiency, and these are included in exceptional costs. Total capital expenditure for this project is anticipated to total approximately £125 million, in line with prior guidance, driving significant efficiencies and an anticipated payback of approximately five years.

Performance by market

UK

The group's largest market continues to be the UK, accounting for 62% of group revenues (2021: 58%). Revenue has declined by 4% on the prior half year, although the pre-pandemic three-year growth remains robust at 73%. Sales before returns increased on the prior half year by 12%, but the returns rate increased substantially from the low level during the latter stages of the pandemic last year, resulting in a net revenue reduction. However, we are encouraged by the performance of our more recently acquired brands as they pick up momentum from a low base, continued progression made by our Debenhams digital department store, as well as the significant gains in market share achieved across our brand portfolio over the last three years.

Gross margin decreased slightly from 51.7% to 50.2% as a result of elevated freight cost pressures that did not impact performance in the first half of the previous financial year.

USA

Performance in the USA has been below expectations, with revenue declining 29% on the prior half year, albeit revenue growth over the three-year period is strong at 60%. Delivery times to the USA are still elevated compared to pre-pandemic levels, and this is undoubtedly impacting demand, although the situation is improving slowly.

Gross margin is high, although lower than the prior half year, reducing from 61.5% to 60.2%. Distribution costs have remained high due to the ongoing elevated airfreight costs and remain materially above pre-pandemic levels.

Rest of Europe

Although revenues in Rest of Europe declined 2% in the first half, the region saw a return to growth in the second quarter at +5%, with an improving trend in our direct-to-consumer brands and the positive benefit of our wholesale business.  Encouragingly, our more recently acquired brands are making strong progress, albeit from a low base. Growth on the pre-pandemic period three years ago is 17%, and comfortably ahead of the broader market which continues to be broadly flat versus pre-pandemic levels.

Gross margin declined marginally from 53.6% to 52.7%.

Rest of world

Rest of the world growth was 14%, driven by the success of wholesale sales to our partners in the Middle East. In addition, markets such as Australia are starting to see improvements from reduced delivery times, with lower rates of year on year declines in revenues as the first half progressed.

Gross margin reduced from 55.7% to 50.8% with profitability continuing to be impacted by elevated freight costs and high distribution costs.

Sustainability

In line with our policy on supply chain transparency, we published the group's 2022 sustainability strategy and updated the tier 1 global factory supply chain list in August 2022, available on our corporate website.

We have continued to add more sustainable clothing ranges across our brands and have entered into the second year of partnership with CottonConnect to use sustainable cotton from Pakistan. In the UK, manufacturing of our own clothing at Thurmaston Lane commenced in the first half, and will ramp up in the second half of the year.

PrettyLittleThing launched marketplace, a clothing resale platform, in August 2022. This site enables anyone to sell their used garments online, contribute towards sustainability, and gives the group an entry into a high-growth area of the clothing market. In addition, the trial of a new partnership with clothing resale service, Thrift+ was launched.

Solar panels on the Burnley distribution centre are active, with the potential to generate 2.7 megawatts of electricity to support the power requirements of our operations. This is believed to be a significant installation of its kind for businesses.

Financial review

Group revenue by geographical market

KPIs

Group

1.     Defined as having shopped in the last 12 months

2.     Defined as number of orders in last 12 months divided by number of active customers

3.     Defined as the percentage of website orders taken to internet sessions

4.     Calculated as gross sales including sales tax divided by the number of orders

Consolidated summary income statement

Taxation

The group recognised a tax credit of £0.5m, an effective rate of 3.3% (2021: 27.6%, 2019: 20.1%). This is lower than the tax credit calculated when multiplying the loss before tax at the blended UK statutory rate of tax for the year of 19%, due to disallowable expenses and depreciation of buildings in excess of capital allowances.

Earnings per share

Basic earnings per share for the first half of the year decreased by 183% from 1.44p to -1.19p. Adjusted diluted earnings per share was 0.30p, down 92% on the first half of the prior year.

Consolidated statement of financial position

Working capital has improved due to tighter inventory levels supporting the brands within the group. A new revolving credit facility of £325 million with a three-year term was agreed in March 2022 to support the group's liquidity requirements and provide a greater degree of headroom and was fully drawn down to provide sufficient buffer for intra-month trading and investment activity.

Liquidity and financial resources

Operating cash flow was £41.3 million (2021: £21.3 million, 2019: £55.9 million). Net cash flow was £213.3 million inflow (2021: £127.6 million outflow, 2019: £15.5 million inflow), following capital expenditure of £38.7 million and a £225 million inflow from the group's newly committed £325 million Revolving Credit Facility. Our net cash balance (cash less bank debt) at the period end decreased to £10.4 million net debt (2021: £98.4 million net cash, 2019: £207.3 million net cash). Capital expenditure of a substantial £38.7 million was invested in warehousing and office facilities and IT systems infrastructure for future growth. The closing cash balance for the group was £314.6 million.

Outlook

As a result of the impact that the macro-economic and consumer backdrop has had on the Group's revenues in the first half, our expectation is for a similar rate of revenue declines to persist over the remainder of the financial year if these conditions continue.

Increases in inflation-driven costs as well as the resultant operational deleverage from lower sales than previously anticipated mean that adjusted EBITDA margins are likely to be between 3% and 5%, compared to the previously guided range of 4% and 7%. 

It is the Board's view that by focusing near term on optimising its operations, the Group will be well-positioned to improve future profitability and financial performance through self-help via delivery of key projects and cost efficiencies and through easing of macro-economic headwinds facing both consumers and businesses.

Other financial guidance for FY23 is outlined below:

·    Underlying depreciation and amortisation of approximately £60 million

·    Net interest charge expected to be approximately £10-11 million reflecting interest rate increases (£7-8 million previously)

·    Capital expenditure unchanged at £100-120 million; and

·    Adjusting items of approximately £60-65 million, of which around £40-45 million relates to non-cash items, including: share-based pay, acquisition intangible amortisation, exceptional costs of Sheffield automation and warehouse commissioning costs

28 September 2022

Unaudited consolidated statement of comprehensive income

for the period ended 31 August 2022

1.        Net fair value gains/losses on cash flow hedges will be reclassified to profit or loss during the three years to 31 August 2025.