Review of the business

Performance during the year

Overview

Notes:

(1) Change on 2020, three years ago, compares current trading to the pre-pandemic period to give a better understanding of performance when compared to the unusual growth and characteristics of trade in 2020.

(2) Net cash is cash less borrowings, excluding lease liabilities.

(3) Adjusted items, which are not statutory measures, show the underlying performance of the group excluding large, non-cash and exceptional items (note 1).

(4) Adjusted EBITDA is calculated as profit before tax, interest, depreciation, amortisation, share-based payment charges and exceptional items.

(5) Adjusted EBIT is calculated as profit before tax, interest, amortisation of acquired intangible assets, share-based payment charges and exceptional items.

(6) Adjusted profit before tax is calculated as profit before tax, excluding amortisation of acquired intangible assets, share-based payment charges and exceptional items.

(7) Adjusted diluted earnings per share is calculated as diluted earnings per share, adding back amortisation of acquired intangible assets, share-based payment charges and exceptional items.

Group overview

Group revenue for the year declined by 11% (13% Constant Exchange Rate = "CER") to £1.769 billion from £1.983 billion in 2022 reflecting the impact of the macro-economic and consumer backdrop. UK revenues declined 9%, softening through the second half of the year as inflation increased and consumer demand was impacted by cost-of-living pressures. International revenues declined 13%, with extended delivery times continuing to impact our customer proposition. Gross sales before returns were flat; however, return rates climbed above pre-pandemic levels following the exceptionally low levels seen during the pandemic and in the early half of the previous year, which impacted net sales growth.

Adjusted EBITDA was £63.3 million (2022: £125.1 million; 2020: £126.6 million), a decrease of 49% on the previous year and a decrease of 50% on 2020. Gross profit margin was 50.6%, down 190bps on the prior year (2022: 52.5%) and down 340bps compared to 2020 (54.0%). Adjusted EBITDA margin was 3.6% (2022: 6.3%; 2020: 10.2%).

Profitability has been impacted by the fall in sales, freight and logistics inflation related to the pandemic, and labour and energy cost inflation. In addition, ongoing strategic investments have continued across the platform from which the group will benefit over the medium term, most notably the US Distribution Centre. Loss before tax was £90.7 million (2022: £7.8 million profit; 2020: £92.2 million profit). Loss per share was 6.13p (2022: 0.32p loss; 2020: 5.35p diluted earnings). Adjusted diluted loss per share was 0.02p (2022: 4.39p earnings; 2020: 5.88p earnings).

Inefficiencies in acquired brands were addressed as part of the cost-reduction programme, but operated for much of the year with higher overheads as a percentage of revenue. Central overheads increased as a percentage of net sales due to the decline in net sales year on year, but the group did see an improvement in cost ratios in the second half of the year with the initial impacts of the cost-reduction programme. Distribution costs declined year on year because of lower volumes, but also cost efficiencies following the closure of a UK warehousing facility and the successful go-live of our automation project at our Sheffield distribution centre, which drove significant efficiencies in the second half of the financial year.

During the year, the group incurred significant, non-recurring costs, which are shown as exceptional items in the financial statements and have not been included in the adjusted performance measures. These items relate to:

·    costs associated with the installation of the automation in the Sheffield facility;

·    restructuring costs and impairment of assets associated with the closure of a UK warehousing facility and at loss-making operations;

·    set-up costs associated with the opening of a warehousing facility in the USA;

·    discontinuation of cash flow hedge contracts made ineffective due to cost profile of the warehousing facility in the USA; and

·    redundancy costs.

These exceptional items amounted to £44.9 million and are detailed in note 1 of the financial statements. Additional exceptional costs associated with the opening of the warehousing facility in the USA will be incurred in the next financial year.

While the last twelve months have been challenging, over the last three years, the group has made tremendous progress towards achieving its long-term growth ambitions. Since FY2020, the group has:

·    grown significantly with total revenue +43%, (UK: +61%, International: +22%), during a period in which clothing sales in key markets remain broadly flat;

·    increased in its largest market, the UK, its share of spend online from 6.2% to 6.9%, with price, product and proposition resonating strongly with consumers;

·    increased its active customer base to 18 million active customers, up from 13 million, through organic growth and an increased brand portfolio;

·    extended target addressable market through acquisitions, with up to 500 million potential customers in key global markets;

·    built infrastructure capable of supporting more than £4 billion of net sales, with automation driving efficiencies and an international distribution centre enhancing our proposition

·    developed numerous growth opportunities through its direct-to-consumer proposition, Debenhams and other routes to market, including strategic partnerships with select partners globally; and

·    made progress on its sustainability strategy, including launching PrettyLittleThing marketplace, a clothing resale platform.

Key Performance Indicators

Active customer numbers in the last 12 months decreased by 10% to 18.0 million, reflecting the switch back to offline following the pandemic. Despite this, they have increased 29% over the last three years, with organic growth from our brands and the extension of our target addressable market through brand acquisitions.

Average order frequency decreased marginally from 3.14 to 3.08 times p.a. Average order value increased by 11% to £53.32, while the number of items per basket decreased from 3.04 to 2.82, driven partly by the addition of the newer brands with lower basket sizes as well as changes in customer behaviour.

Cash and Working Capital Management

Cash generation improved because of tighter working capital management, particularly in relation to inventory. Operating cash flow was £130.9 million (2022: £10.3 million; 2020: £127.3 million). Inventory has been reduced significantly, down £101 million/36% year on year, as at the end of February.

Capital expenditure of £91.2 million included a substantial investment in property and distribution centres of £46.8 million, mainly around Sheffield automation. In addition, the group acquired 26.47% of the issued share capital of Revolution Beauty Group plc ("REVB") for £15.0m. Net cash flow increased by £229.6 million (2022: £174.7 million decrease; 2020: £47.6 million increase). The net cash balance at the year end increased to £5.9 million (2022: £1.3 million; 2020: £240.6 million), with total liquidity of £330.9 million.

During the year, the group secured a new £325 million rolling capital facility, increasing from the previous £100 million facility to facilitate our next growth phase.

The Group will continue to make selective investments to support its platform and brands, in line with its internal investment criteria and in a manner that reflects the current macro-economic environment.

Performance by market

UK

The UK market continues to be the largest for the group, accounting for 62% of revenue (2022: 61%). Revenue was £1,091.5 million declining by 9% on 2022, although the pre-pandemic three-year growth remains robust at 61%. Return rates have increased above pre-pandemic levels. This is attributable to the change in the product mix post-pandemic (casual items to occasion wear) and to the introduction of the newer, higher-price point brands, which all have higher return rates - as well as macro consumer trends. In response to those consumer trends, during the year, chargeable returns for non-Premier/Royalty customers were introduced, which more closely align the UK market with other territories.

Gross margin reduced from 49.4% to 47.9% due to substantial increases in inbound shipping rates and product cost inflation. Prices were raised across some product lines to help offset increased costs; we were unable to change sourcing to alternative geographic regions to reduce the impact of these cost increases, but looked to ensure our offer remained competitive to consumers facing high inflation and other cost-of-living challenges.

We are encouraged by the sales performance of our more recently acquired brands and 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.

USA

Performance in the USA has been below expectations, with revenue declining 19% on the prior year, although revenue growth over the three-year period is strong at 38%. 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 with growth returning in the final two months of the year. Return rates have increased above pre-pandemic levels. Gross margin is high, although lower than the prior year, reducing from 61.5% to 58.0%.

Distribution costs have remained high due to the ongoing elevated airfreight costs and remain materially above pre-pandemic levels. The opening of our US warehouse in 2023/2024 will help to alleviate these going forward.

Rest of Europe

Our revenue in the rest of Europe decreased by 6% over 2022, although it increased by 10% compared to 2020, compared to a broader market, which continues to be broadly flat versus pre-pandemic levels. Return rates have increased above pre-pandemic levels. Encouragingly, our more recently acquired brands are making strong progress, albeit from a low base. Gross margin declined from 54.5% to 52.0% with profitability continuing to be impacted by elevated freight costs and high distribution costs.

Rest of world

Revenue in the rest of the world has decreased by 2% on the prior year to £107.0 million (increased by 3% on 2020). We have seen successful growth of marketplace and wholesale sales to our partners in the Middle East. In addition, markets such as Australia are starting to see improvements from reduced delivery times. Gross margin declined from 52.5% to 50.7% with profitability continuing to be impacted by elevated freight costs and high distribution costs.

Financial review

Revenue by geographical market

KPIs

(1) Defined as having shopped in the last 12 months on the website and app, including marketplace.

(2) Defined as number of website and app orders in last 12 months divided by number of active customers.

(3) Defined as the percentage of website and app orders taken to internet sessions.

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

(5) FY22 conversion rate to sale restated due to improved data gathering

Consolidated income statement

Group revenue for the year declined by 11% (13% CER) when compared to the previous year at £1,768.7 million (2022: £1,982.8 million, 2020: £1,234.9 million) and has increased by 43% on three years ago, pre-pandemic. The comparison with three years ago demonstrates the growth of the business, excluding the exceptional growth and low returns during the pandemic periods. Gross sales before returns were flat year on year; however, with returns higher than in the pandemic period, net revenues declined.

Operating costs, comprising distribution costs and administrative expenses, excluding depreciation and amortisation, have increased by 80bps to 47.0% of revenue, 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. Marketing and distribution costs have declined as a % of revenue year on year with tighter brand spend and the successful go-live of automation in our Sheffield distribution centre in the second half of the financial year.

Adjusted EBITDA, which is not a statutory measure, represents earnings before interest, tax, depreciation, amortisation, non-cash share-based payments charges and exceptional items. It provides a useful measure of the underlying profitability of the business. Adjusted EBITDA decreased by 49% from £125.1 million to £63.3 million and, as a percentage of revenue, decreased from 6.3.0% to 3.6%.

Adjusted profit after tax, as with Adjusted EBITDA, provides another more consistent measure of the underlying profitability of the business by removing non-cash amortisation of intangible assets relating to the acquisition of new brands (being their trademarks and customer lists), share-based payment charges and exceptional items.

The group recognised a total expense of £32.0 million during the year (2022: £26.1 million) relating to equity-settled share-based payment transactions. During the year, the 2019 Growth Share Plan (introduced for the CEO in 2019) and the 2020 Management Incentive Plan (introduced in 2020) were cancelled. The charge for the year and the remaining expense on these schemes totalling £15.8m has, therefore, been recognised in these financial statements in accordance with IFRS 2.

Exceptional items amounted to £44.9 million and are shown in more detail in note 1 of the financial statements.

A tax credit of £15.1m has been recognised, which represents an effective rate of tax for the year of 16.6% (2022: 151.3%). 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 19.0% (2022: 19.0%), due to the revaluation of deferred tax liabilities in line with the increase in corporation tax rates to 25%, expenditure not deductible for tax purposes, being principally depreciation on buildings and fit-out, disallowable legal claims and share-based payment charges on growth shares.

Consolidated statement of financial position

There has been a substantial investment in property and distribution centres to facilitate our next phase of growth, funded out of cash resources and partly from the £325m revolving credit facility (which is fully drawn). Balance sheet strength is maintained with £136.1 million of unencumbered freehold assets. Working capital has improved primarily due to tighter inventory levels, with inventory declining 36% year on year at the end of February 2023.

During the year, 26.47% of the issued share capital of Revolution Beauty Group plc ("REVB") was obtained for consideration of £15.0m, with the investment building upon the existing relationship between boohoo and REVB, under which REVB products are sold through several of the group's D2C brand websites and its online digital department store, Debenhams. On 1 September 2022, REVB was temporarily suspended from trading on the Alternative Investment Market pending publication of the company's annual audited accounts. As at 28 February 2023, REVB shares remain suspended from trading, with the investment held at cost on the Group's balance sheet due to the lack of an active market, currently, as well as the very short time for which the investment has been held at the balance sheet date.

Intangible and fixed asset additions

Liquidity and financial resources

Operating cash flow was £130.9 million compared to £10.3 million in the previous year and free cash inflow after tax was £30.2 million compared to an outflow of £251.2 million in the previous financial year. Capital expenditure and intangible asset purchases were £91.2 million, which includes a £46.8 million investment in our distribution centres to support future growth. The closing cash balance for the group was £330.9 million and the net cash balance £5.9 million.

Trends and factors likely to affect future performance

The global market for online fashion is forecast to continue to grow, which provides a favourable backdrop for the group. Customers throughout the world are seeking a wide choice of quality, fashion-forward products at value prices, with the convenience of home delivery. The group's target market has a high propensity to spend on fashion and the market has proven to be quite resilient to external macroeconomic factors.

The pandemic has impacted our business and is most significantly seen in the unpredictability of customer demand, the rate of customer returns, the increase in shipping times and the cost of shipping on both inbound and outbound products. Some of these factors, such as the rate of customer returns, have already reverted from the low rates during the pandemic to rates seen before the pandemic. Previous cost increases in relation to inbound freight have moved back towards pre-pandemic levels, with supply chains speeding up, allowing for the group to look to reinforce its USPs and value credentials for its fashion-conscious customers, globally.

Consolidated statement of comprehensive income

for the year ended 28 February 2023

1.        See Note 1, exceptional items

2.        2023 and 2022 total is the IFRS-compliant measure for the consolidated statement of comprehensive income

3.        Net fair value gains on cash flow hedges will be reclassified to profit or loss during the three years to 28 February 2026.