SCS Group PLC

LSE:SCS

Earnings Call Transcript 2018-Q2

[David Knight, CEO & Director]

Welcome to our interim results presentation. I'm joined by Chris Muir, our CFO, who will shortly take you through our financials; and Alan Smith, our non-Exec Chairman. So moving to Page 3, our strategy continues to be a value retailer and positions us well to deliver profitable, sustainable growth, improve quality of earnings, improve business resilience and increase shareholder returns.So let's move to Page 4, where I'll take you quickly through the highlights. We had in the first half of this year like-for-like order intake of plus 2.2% and a 2-year like-for-like of plus 5%. Our store numbers increased with the opening of our store in Chelmsford on Boxing Day to 101 ScS stores, and we continue to have 27 House of Fraser concessions. Our Trustpilot five-star rating continues to demonstrate our excellent customer experience.Moving now to the highlight numbers. We reported -- we're reporting today a half-year profit of GBP 0.3 million, which is an improvement of GBP 2.9 million on the prior year. Our interim dividend is increased to 5.3p, demonstrating our shareholder returns. Cash continues to build to GBP 51.8 million and demonstrates our resilience.I'm now going to pass you over to Chris, who will take you through all the detail behind the numbers.

[Christopher J. R. Muir, CFO, Company Secretary & Executive Director]

Thanks, David. I just like to spend a few minutes running through the financials for the 26 weeks to the 27th of January, 2018. Looking at Slide 6. You can see, we're pleased to be reporting that the group has had a good first half with a number of our key metrics improving. Looking at gross sales, they've increased by GBP 2.5 million to GBP 168.4 million, which is an increase of 1.5%. As Dave mentioned earlier, we made a profit in the first half of the year. Historically, due to our promotional spend and the seasonality of our business, the group has made an operating loss or a negative EBITDA in the first half of the year. Last year, we made a slight positive EBITDA of GBP 0.1 million, but this year we've seen that EBITDA on a bit increased to GBP 2.9 million. And we'll talk a little bit later about what the moving parts are around the EBITDA improvement we've seen. Obviously, because we've made a profit in the first half, our -- we have an earnings per share in the first half rather than loss per share, as we did last year. I'll also spend a little bit more time looking at cash flows. As you can see, the group balance sheet continues to increase in resilience, and we continue to have no debt. Free cash flow in the period was GBP 16.7 million, and we've increased our closing cash from GBP 37 million at this point last year to GBP 51.8 million at the end of January this year. To reflect the results achieved, current trading, the strength our balance sheet and the board's confidence in the future, I'm delighted to say that the board has increased the interim dividend by 8.2% to 5.3p, compared to the 4.9p that we paid at the interim last year. As you'll see from the statement, our plan is to pay 1/3, 2/3 split between the interim to final dividend. Just moving to Slide 7, which gives a breakdown of our gross sales by channel. You can see we've made progress in 3 of our 4 channels. Furniture sales, which is the largest part of our business, saw an increase of 2% or GBP 2.5 million. This area of the business has seen a GBP 17 million increase over the past 2 years and has a 2-year compound annual growth rate of 7.3%. Flooring, another area of growth, we've seen another period of strong growth with sales growing GBP 1.2 million or 5.7%. 2-year growth has totaled GBP 3.8 million with a double-digit 2-year compound annual growth rate of just over 10%. The House of Fraser concession, which was opened in 2014, has had a challenging final quarter last year and a tough quarter one this year. This has led to a reduction in sales of GBP 1.8 million. However, on a 2-year basis, we are still up 5.8% with a 2-year compound annual growth rate of 2.8%.Our final channel, which is our fastest-growing channel, is our online sales. In the half year, it's increased by just over 11% and over the last 2 years increased by nearly 40%, with a 2-year compound annual growth rate of over 18%.Of the online sales, we still see these are big opportunity for the business and as demonstrated by the growth, we're still investing in this area. We also recognize that actually a number of our customers research online, so our investment in our website and digital marketing is not just for the online sales but also supports the rest of the sales channels.Just moving on to Slide 8 to give you an idea of the moving parts in our EBITDA. So we have prepared a bridge. So it's increased overall by GBP 2.8 million in the year. So the increase in gross sales was obviously driven by the increase in sales we saw, but actually our gross margins have improved as well. So last year, our gross profit margin was 43.9%, this year it's 44.7%. So this is reduction -- was driven by a reduction in our cost of our interest-free credit and also product mix change. As you would imagine, margins remain a key focus area for the business.Driven by the increase in sales, our distribution costs in [indiscernible] have increased by GBP 0.3 million, but they've remained at 5.3% of revenue, which is the same as last year. Our investment levels in marketing have decreased by GBP 1.4 million to GBP 15.2 million in the period, as we've refined how we are talking to the market and the timing of the spend. This marketing investment goes all form of media, including TV, press and digital. The group saw small increase in payroll cost in the period of GBP 0.1 million. This was driven by 3 main items: basic payroll cost reduced by GBP 0.7 million, which was driven by a reduction in headcount and improvisation of improved controls across the business. This decrease was offset by GBP 0.6 million increase in performance-related bonuses. This represents around a 9% increase in these performance-related awards year-on-year, reflecting the current period trading to date and in comparison to the prior year.Finally, the impact of the new sites opened. These are new sites opened since September 16, including the 4 sites in that period last -- same period last year, and the 1 new site this year have increased payroll cost by GBP 0.2 million.The new sites opened, obviously, also have an impact on our rent and rates, as on the slide, which have increased by GBP 0.3 million. So overall, EBITDA has increased by GBP 2.8 million, of the two main moving parts, that was the reduction in the marketing expenditure, but also the 6-month impact year-on-year of the new stores, which we opened. So we opened 4 last year in the same period and they've had a positive impact this year, whereas last year, the impact was to reduce EBITDA by GBP 0.5 million. This year their contribution has been GBP 0.7 million, so that represents a GBP 1.2 million swing.Let's move on to Slide 9. So this is a slide we've shared at the year-end and it was -- the aim was to give the market slightly a better view on the cost base and how flexible in nature it is. So our product is made to order, so we don't carry any stock apart from what is in our showrooms or in our delivery network on the way to customers. So as in the prior year, 75% of our cost base is flexible to sales, allowing the group to react quickly to changes in demand. In the current period, performance-related payroll cost accounted for 31% of total payroll costs and this compares to 29% in the same period last year.The group feels this performance-related fixed-pay structure provides additional flexibility to the cost base and rewards our teams with a strong performance.We have structured paying in the sense reward good performance well, whilst carefully managing the lever of fixed pay we take into the business. Property cost account for around 11% of the cost base, with all new sites and lease extensions being subject to a judicious review and full plc sign off. The existing network performance is also regularly reviewed and actions taken to address underperformance.Just moving to cash flow on Slide 10. Just before I get into the current year movement, I thought maybe worth spending a little time explaining the working capital model the group operates. For card and cash sales, deposits are received at the time of order, with the balance being settled prior to delivery. Deposits are also received where our customers are using finance. The finance helps us and pay ScS approximately 7 days after delivery to the customer. This means all monies are received within 7 days of products being delivered to our customers. We then pay a majority of our suppliers at the end of the month following delivery into our distribution sites. So since the end of July, cash has increased from GBP 40.1 million to GBP 51.8 million. This increase is in line with the usual movement this time of the year and is largely driven by movements in working capital, mainly due to increased customer deposits held at the end of January, following the key winter sale period. During the period capital expenditure totaled GBP 1.5 million. The large element of this is the GBP 0.8 million cost of the new Chelmsford store and some spend on our new Basildon distribution center. The group saw a working capital inflow of GBP 16.4 million, of this, GBP 13.4 million relates to the increase in customer deposits since the year-end. Dividends totaled GBP 3.9 million, which is the 9.8p final dividend declared at the end of last year being paid in the period.So in summary, on cash flow, the group continues to have a strengthening balance sheet with good cash levels and has no debt.Just my final slide. Again, slide we introduced at the year-end where we talked a little bit more about resilience. As David mentioned earlier, the key objective the group, so just looking at Slide 11, which looks at resilience of the group, as David mentioned earlier, this is a key objective of the group. Looking at levels of cash first, we demonstrate our cash has grown since January 2014 to January 2018. So over the past 4 years, we increased our cash position by over GBP 30 million from GBP 20 million, January '14, just under GBP 52 million in January '18. We also have in place a GBP 12 million revolving credit facility, which in the period we have extended to November 2021. While [indiscernible] was never drawn on this facility, it provides increased resilience and access to further capital to take advantage of opportunities if they arise. Another area the group has been increasing flexibility in is the length for our lease commitment. Most recently leases are being executed at 10 years, replacing leases with longer 10 years. This is meant the average 10-year of our leases and our portfolio have reduced from 30% -- reduced 30% from 10 years to 7 years. We're expecting over time for the average length of lease to move closer to 5 years. This has and will continue to increase the flexibility of the group's cost base and reduce its financial commitments.I now pass back to Dave.

[David Knight, CEO & Director]

Thanks, Chris. Moving just to Slide 13. This slide clearly demonstrates that we know who the core ScS customer is and who the House of Fraser customer is. This is extracted from data that we provide to Experian on our customers who've purchased for us. So it's very robust information and one we use very closely to manage what our customer wants and how we actually provide that product that meets their needs. As you can see, the core ScS customer is really what I would describe very hard-working families and the House of Fraser customer, a little more aspirational, but very, very little crossover.So moving on to Slide 14. Over the next few slides, I'm actually going to cover off the strategy for growth, how we remain focused on sales densities, how we maximized the opportunities in House of Fraser and the challenges that we faced. Optimizing the online presence, as you've seen from the numbers, an area that we have seen good growth in. It is our biggest shop window, but it really is focused very much around our bricks-and-mortar stores. And we're looking to achieve strong financial returns on new store openings by being -- by continuing to be very disciplined in our criteria for a new store.So moving to Slide 15 and talking about densities, you will see, actually, in this period, the densities have been pretty flat. However, do show a 2-year growth of 12.5%. This principally is due to a slightly smaller order book that we brought in from the previous financial year that Chris has just taken you through. So what progress have we actually made? We continue to improve in conversions through great, well-trained retail team and our very much promotionally led offer. We've seen our average order values on sofas grow from GBP 1,571 to GBP 1,610. And on flooring, we've increased our product offering, and we've been very promotionally active during the period. We've relaunched our dining and living furniture ranges, very much targeted to complement the sofa offer and give us that add-on sale with -- particularly through occasional tables that go with the sofas. We've continued to invest in online capability as, again, we've said now on a couple of occasions, this really is showcasing the product and allowing customers to do research.We're very focused on the customer journey and as you -- as I said earlier, you can see our Trustpilot scores and we use their feedback to actually continually improve.Moving to Slide 16. We've actually seen a growth in sofas over the past 2 years to 15%. We're very focused on the offering that we have. It's really a wide choice, representing great value at every price point with sofas from GBP 299 to over GBP 2,000. It is all about that choice and that value. We have very, very strong links with leading suppliers and the famous brands that we've grown and developed over the past few years. We're continually developing new products, closely monitoring trends and bringing to the market great value. Continually working with the suppliers to further improve the quality and the reliability, we are their biggest partner and it's an area that they understand that service for our customers is critical to the growth of our business.Moving to 17, just talking about our suppliers. These are long-term partnerships and they, really, just ensure that continuity of supply and, again, offering that quality and value. We have 17 major sofa suppliers and still almost 60% of them are based in the U.K. You can see the small table below showing the split. We continue to purchase everything in sterling therefore protecting us against exchange rates, and all the product that we're selling is exclusive, so again, protecting the margin. As Chris again touched on earlier, we have no stock risk, because we're own -- the only stock we have is the product that's actually in the stores on display.So moving to carpets on Slide 18. We've seen 2-year growth of 21% as we gain market share. We really have a large range on a very small footprint in the store with over 120 ranges and 500 SKUs. So it is, again, a no-stock risk and just-in-time model where we purely and simply ordering from samples to customer orders. We have a lot of the leading brands and great partnerships with people like Victoria and Headlam that you may well be familiar with. We very closely manage the self-employed fitting team. They are the last point of contact that our customer has with the business and very important if we're looking for that returning customer to do flooring in the remainder of the house. And to do that, we have a very experienced in-house support network structure that, again, is ensuring our well-trained staff fully supported.Moving on to Slide 19. This really is an area we're extremely proud of. It's a huge endorsement of our customers' experience and really gives confidence, building for our future customers as they do research. We're particularly proud that, actually, we are the only national 5-star rated sofa and carpet specialist and there has been over 93,000 reviews. As you can see, we actually score 5 star in every area, from service, online purchasing, delivery, sofa reviews, flooring reviews. So a really, really great endorsement of our business.So moving on to House of Fraser. We have seen this being a bit of a challenging time with them as the whole House of Fraser business has changed its management and it's looking at how it moves forward. We've also had issues and I think you've seen it well-reported on the website. And this has been critical to us because it's an area where customers are creating -- awareness is being created for customers. I am actually very confident in the new team that's in place and believe that they are very driven and actually want to help us move the business forward. We did actually have a really strong winter sale, which was particularly pleasing period with that new team.Moving onto 21. We've touched on online, and we've talked about the website already a number of times. This really has seen our biggest growth area, 11.3% increase in sales, in 2 years almost 40%. It is the showcase for the stores, as I said earlier, because we believe circa 80% of customers are now doing research. We are actually heavily invested -- investing in this area, both in people and in technology, we've appointed recently a new senior member to lead that team, and we're actually increasing the in-house team to enable us to be more proactive in promotions, et cetera, as we change offers.Slide 22. We opened our new store in Chelmsford, which many people have been to see, and it started off very well. We do have a very strict criteria for new stores. We're looking for payback in 3 years and it must be forecast to be incremental to the overall performance of the business before it can actually pass the test. We also are looking for noncannibalization, so we use Experian research to ensure that is the case.Moving to advertising on Slide 23. We make the spend work very hard and, as Chris said earlier, we actually have spent a little less in the first half and made it work extremely hard. It's a value-led message, really showcasing fabulous product and really talking to our core customer and showing them why they should come and shop with us right now.On House of Fraser, we are advertising and making that money also work hard through Sky AdSmart, and it is about building awareness that you can get great product inside House of Fraser.So finally, let's just look at the outlook and how we've actually been performing. We've seen sales grow -- we've seen conversions grow, and we've seen average order value growth from GBP 1,571 to GBP 1,610. House of Fraser continues to bring us a different demographic, and I do believe the new team will give us great support as we develop that channel for ourselves. Online continues with our growth, 11.3%, and really is driving quality traffic to the stores. We've opened our 101 store in Chelmsford and, as I said, that's got off to a good start. We've actually increased the dividend by 8.2% to 5.3p, and we remain extremely focused on that whole value and quality offering. And that is proving successful for us, and we very much intend to stay focused on that.