Review of the business

Group overview               

Group revenues for the period declined by 17% (18% Constant Exchange Rate = "CER") to £729.1 million from £882.4 million in 2022.

The Group's core brands, before factoring in the impact of Debenhams marketplace commissions on statutory net revenue, declined 10% year on year, consistent with prior guidance for Group revenues to decline by 10% to 15% in the first half. This accounted for 8 percentage points of the Group's total revenue decline. More significant declines in revenues however came from our labels, following proactive actions taken to target more profitable sales. This accounted for a further 8 percentage points of the Group's revenue decline, but with much improved profitability. Strong GMV growth was achieved within the Debenhams marketplace, with its increase as a proportion of Group revenue accounting for 2 percentage points of the decline given the Group only recognises commission income on marketplace sales.

UK revenues declined 19% reflecting the impact of the macro environment on consumer demand, as well as price investments and the previously mentioned increase of the Debenhams marketplace within the sales mix. International revenues declined 15%, with extended delivery times continuing to impact our customer proposition for most of the period and annualisation against strong wholesale comparatives with new partners onboarded in the first half of the prior financial year. The Group's US distribution centre went live in August with its first brand, PrettyLittleThing, on time and on budget, as part of a phased roll-out of brands into the site. This will transform the delivery proposition for customers in a key strategic market, and for brands that are operationally live, delivery times have improved by 3 days on average since launch.

Gross product margin was 53.4%, up 90bps on the prior period (2022: 52.5%). Adjusted EBITDA was £31.3 million (2022: £35.5 million), a decrease of 12%. Adjusted EBITDA margin was 4.3%, up 30bps on the prior period (2022: 4.0%).

The improvement in adjusted EBITDA margin reflected strong improvements seen across gross margins and distribution costs, which improved by 90bps and 150bps respectively year on year. The improvement in gross margin reflected tighter inventory management and reduced input costs notwithstanding significant investments made into freight and pricing. Distribution cost savings were driven by significant efficiencies that have been unlocked from the successful automation of our Sheffield distribution centre.

Other administrative costs reduced by 16% year on year, reflective of the tight cost control measures implemented in the second half of the prior financial year but increased by 40bps as a percentage of net sales given the lower revenues reported in the first half of this financial year. Marketing costs reduced by 4% as spend was optimised across marketing channels but increased by 170bps as a percentage of sales. This reflects the impact of the macro environment on consumer demand, targeted investments in specific growth opportunities as well as underlying inflationary pressures across digital marketing channels. This will be assessed going forwards through optimisation of marketing channels to drive performance as well as brand activation campaigns to drive higher levels of organic and direct traffic.

During the period, 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 set up costs associated with the opening of the US distribution centre, and dual running costs associated with the re-platforming of the Group's e-commerce front end to its own in-house developed tech stacks. These exceptional items amounted to £10.2 million and are detailed in note 1 of the financial statements.

During the period the Group recognised a £10.2m gain on transition of its investment in Revolution Beauty plc, which was previously accounted for as a financial asset at fair value through other comprehensive income, as irrevocably designated at the time of investment, in accordance with IFRS 9, and is now classified as an investment in associate in accordance with IAS 28. This gain was significant and non-recurring and has therefore not been included in the adjusted performance measures. Further details are detailed in note 1 and note 9 of the financial statements.

While trading conditions have remained challenging due to cost inflation, uncertain consumer demand and normalisation of the channel shift online, the Group has a strong business model and clear strategy with which it is focussed on executing to unlock market share, which will allow it to build on its existing strengths of:

·    Test and repeat sourcing model that allows our brands to utilise our diverse sourcing base with agility and flexibility whilst minimising excess inventory risk

·    Attractive brand portfolio that combines the latest trends with outstanding value for consumers

·    17 million unique active customers and over 65 million followers across social media

·    A broad target addressable market of up to 500 million potential customers in key global markets

·    Well-invested infrastructure that offers best-in-class, efficient logistics and a strong customer proposition with our first international distribution centre now live, with significant capacity for future growth

·    Strong balance sheet with significant liquidity headroom; and

·    Numerous growth opportunities through our brands' direct-to-consumer proposition, Debenhams and other routes to market, including strategic partnerships with select partners globally

Key Performance Indicators

Active customer numbers in the last 12 months decreased by 12% to 17.0 million reflecting the switch back to offline following the pandemic. Average order frequency decreased by 7% from 3.21 to 2.98 times p.a.  Average order value decreased by 1% to £53.30 whilst the number of items per basket increased slightly 2.95 to 2.98, driven by the capturing of deflation in our supply chain and subsequent passing-through of cost savings to our customers.

Cash and Working Capital Management

Operating cash flow was £21.8 million (2022: £41.3 million). Working capital, particularly in relation to inventory has been tightly managed. Inventory has reduced significantly, down £94.2 million / 35% year on year.

Capital expenditure of £36.3 million included a substantial investment in property and distribution centres of £18.3 million, mainly around Sheffield automation and the opening of a warehousing facility in the USA. Net cash outflow was £40.9 million (2022: £213.3 million inflow). Net debt at the period-end increased to £35.0 million (2022: £10.4 million net debt), with total liquidity of £290.0 million.

During the prior period the Group secured a new £325 million rolling capital facility, increasing from the previous £100 million facility. The facility remains fully drawn at the end of August 2023.

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 61% of revenue (2022: 62%). Revenue was £441.3 million declining by 19% on 2022 reflecting the impact of the macro environment on consumer demand, as well as price investments and increase of the Debenhams marketplace within the sales mix. Gross margin improved from 50.2% to 51.6% and return rates have reduced slightly, which is attributable to product mix and the capturing of deflation in our supply chain and pass-through of lower prices to our consumers.

USA

USA revenues declined 11% on the prior year. Delivery times to the USA for most of the period remained elevated compared to pre-pandemic levels, and this has undoubtedly impacted demand. Successful go-live of the Group's US distribution centre on time and on budget in August has transformed the delivery proposition for US customers, and there will be a phased roll-out of brands operating in the facility. Return rates have decreased year on year reflecting brand mix. Gross margin reduced from 60.2% to 58.4% reflecting brand mix as well as the impact of duties associated with the new distribution centre.

Rest of Europe

Revenue in the rest of Europe decreased by 16% year on year, with performance impacted by annualisation against strong wholesale comparatives with new partners onboarded in the first half of the prior financial year. Gross margin improved from 52.7% to 53.3% and return rates improved year on year.

Rest of world

Revenue in the rest of the world decreased by 23% on the prior year to £44.8 million (2022: £58.3 million) and was also impacted by annualisation against strong wholesale comparatives with new partners onboarded in the first half of the prior financial year. Gross margin improved from 50.8% to 53.3% with return rates improving year on year.

Financial review

Group revenue by geographical market

1.     CER designates Constant Exchange Rate translation of foreign currency revenue, which gives a truer indication of the performance in international markets by removing year-to-year exchange rate movements when local currency sales are converted to sterling.

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 £4.1m (2022: £0.5m), an effective rate of 15.5% (2022: 3.3%). This is lower than the tax credit calculated when multiplying the loss before tax at the blended UK statutory rate of tax for the period of 24.5% (2022: 19%), due to disallowable expenses and depreciation of buildings in excess of capital allowances.

Loss per share

Loss per share for the first half of the year increased by 55% from (1.19)p to (1.85)p. Adjusted diluted loss per share was (0.91)p, up 414% on the first half of the prior year (2022: diluted earnings 0.29p).

Consolidated statement of financial position

Liquidity and financial resources

Operating cash flow was £21.8 million (2022: £41.3 million). Net cash outflow was £40.9 million (2022: £213.3 million inflow), following capital expenditure of £36.3 million (2022: £38.7 million). During 2022 the Group received a £225 million inflow from the newly committed £325 million Revolving Credit Facility. Our net debt balance (cash less bank debt, excluding lease liabilities) at the period end increased to £35.0 million (2022: £10.4 million net debt). The closing cash balance for the Group was £290.0 million.

Outlook and Guidance

The Group's focus remains on executing its back to growth strategy through disciplined investments across product, price and proposition. Given the slower volume recovery than previously anticipated and the continued targeting of more profitable sales within our labels, revenues for the year ending 28 February 2024 ("FY24") are now expected to decline by 12% to 17%.

In line with prior guidance, adjusted EBITDA margins are expected to be between 4% and 4.5% given the strong progress made on gross margin and cost control. Adjusted EBITDA is expected to be between £58 million to £70 million. Capital expenditure is expected to be approximately £75 million.

The Group's back to growth strategy will unlock the significant growth opportunity. The Board's confidence remains unchanged in rebuilding profitability over the medium term, generating a 6% to 8% adjusted EBITDA margin while getting back to growth through: continued investment in product, price and proposition, volume growth, international expansion, unlocking cost deflation; and cost control.

3 October 2023

Unaudited consolidated statement of comprehensive income

for the period ended 31 August 2023

1.        Net fair value gains/losses on cash flow hedges will be reclassified to profit or loss during the three years to 31 August 2026.