N Brown Group plc

Good morning, everybody, and welcome to Enbrand's full year results for FY21. I am joined by Rachel Lizard, our CFO, and unfortunately, once again, we're unable to be with you in person. As always, I hope you are all safe and well. So turning to the running order this morning. Firstly, I'll give you a brief overview of our progress during the year. I will then hand to Rachel, who will talk you through the group's financial results. I will then talk a bit more about strategic progress before turning to the outlook for FY22, and then we'll open up for Q&A. FY21 was a year of transformation with a significant amount of strategic change in the business. Our revenue has continued to recover from the sharp downturn we saw at the start of the pandemic in March last year. We saw improvements in every quarter driven by our strategic brands, and we've returned to product revenue growth at the start of this financial year. Within the business, we have made significant progress accelerating the strategic transformation of the group across our brands, products, and digital capabilities. And I will provide further details on this later in the presentation. In January, we gave guidance on our expected EBITDA performance for the year, and I'm pleased to report EBITDA ahead of our guidance. Finally, our successful equity raise, which completed in December last year, leaves us with a deleveraged balance sheet and in a significantly stronger financial position to invest in our strategy. I'll now hand over to Rachel to talk you through the financial results for the year.

Thank you, Steve. Let me start with giving you a financial summary of the group's performance in the year. As we've previously disclosed, from mid-March there was an immediate and severe reduction in customer orders and revenues. This was followed, though, by a steady recovery in every quarter. In our final quarter of the year, our strategic brands returned to growth. The net result of that sharp decline and subsequent steady recovery was group revenue down by 108.7 million compared to the prior year. Now, as part of our strategic changes, we have a much more volume variable cost base. And in the year, we were able to offset more than 80% of the decline in gross margin through maximizing efficiencies in the cost base. with the adjusted operating cost to group revenue ratio stepping down a material 7.3 percentage points in the period. Now, that ability to flex the levers of margin and operating costs meant that our adjusted EBITDA only declined 20.2 million, and the largest driver of this variance was the 15.4 million additional IFRS 9 COVID-19 provision that we made at year end. Now, as previously guided, we have reassessed the IT and tangible assets used for lives, in light of the revised strategy enabled by the equity raise and the pace of change in the tech environment, and accelerated the non-cash amortization. Hence, the adjusted profit before tax variance being higher than the adjusted EBITDA. As a result of this resilient EBITDA performance, tight management of working capital and non-operational cash flows, and support from all stakeholders, including our shareholders, we have successfully eliminated unsecured debt and extended our financing facilities. We entered the year in the pandemic with the RCF fully drawn at £125 million and have finished the year with an undrawn RCF, net cash of £80.8 million and £196.1 million reduction in adjusted net debt in the year. A strong financial year. Now let's look at the revenue performance in more detail. You can see from the chart that product revenue recovered every quarter and this was driven by the performance of our strategic brands, which are JD Williams, Simply B, Giacomo, Ambrose Wilson, and Home Essentials. Customer return rates as we move through the initial pandemic period were lower than we initially anticipated before we understood the real customer behavior. So we have also shown the product revenue VLY, we phased that real returns rate between Q1 and Q2 of last year, and that smooths the revenue trajectory out. Overall for the full year, returns were 8.8 percentage points lower in the year, And that was equally split between the mix effect of lower returning home and gift products, as well as an underlying improvement through the pandemic period across both fashion and home and gift. Across the year, our home offer has been key to enabling us to pivot towards a shift in our customers' demand to products for the home and garden. As a result of that, home and gift as a percentage of overall mix moved up from 29 points in the prior year to 41 points in FY21. And finally, financial services revenue was down as expected in light of the smaller debtor book due to lower product sales and solid customer repayments throughout the year. Moving on to gross profit margin, the group's adjusted gross margin was 44.4% compared to 52.5% in the prior year. Product gross margin declined 7.4 percentage points to 43.6%, primarily as a result of that strategic decision to meet customer demand and pivot the customer offer towards home and gift. Now, whilst home and gift have a lower gross margin, it also has a much lower returns rate. So overall, this has been a good move for us in terms of absolute gross margin. Product gross margin also tempered as a consequence of discounting to clear down all the stock, a continued highly promotional clothing market, and at the back end of the year, increased freight rates from the second half onwards. The financial services gross margin declined 9.6 percentage points to 45.8%, due to the movement in the impairment provision for future expected credit losses. Now, whilst the underlying arrears rate has improved, in accordance with IFRS 9, we need to look ahead and estimate future expected credit losses. And the group increased our impairment provision initially by 17 million in half one as a result of the estimated impact of COVID-19 on future default rates. And at the end of FY21, the impact has been reassessed at 15.4 million. Now that leaves the overall provision rate for bad debt moving from 10.9% in FY20 to 14.1% in FY21 with that COVID overlay. Moving on to our cost base. Establishing a stable, efficient and flexible cost base is one of the core enablers of our strategy. And we made significant progress in this financial year with our adjusted operating cost to group revenue ratio improving by 7.3 percentage points to 32.5%. Now let's look at the component parts. The largest swing was in marketing costs and there was a largest reduction down 55.7% in the year to just over 60 million. This was as a result of swift and decisive action at the start of the pandemic to maximize efficiency and preserve liquidity. But we were also significantly gaining a benefit from developing our use of predicted AI to understand customer lifetime value by the type of sale. And that really enables us to target our digital marketing spend much more efficiently. So a combination of COVID response, but an underlying strategic change to much more efficient marketing throughout the year. Looking at payroll costs in half one when the revenue impact was the most severe, under the government's CJRS support scheme, we furloughed a level of staff across the business and received 3.8 million of support. This allowed us to work through the challenges that COVID-19 initially presented for our business and preserve a significant number of jobs for our colleagues. Our warehouse and fulfillment costs were down 17% to $64.8 million. This was a faster reduction in the decline in product revenue, which was down 14.4%. And that was helped by those lower return rates and enabled by working with suppliers to ensure full volume flexibility. Finally, admin and payroll costs declined 6%. This was driven by an immediate response to COVID-19 with minimal discretionary spend and travel and continued head office efficiencies efficiencies across all of our areas. Moving on to financial services, the customer loan book has been resilient throughout the year. Repayment rates have been consistent or better than the previous year, and customer rear rates have been lower. Throughout the pandemic and in line with the FCA's guidance, we have offered customers COVID-19 payment deferrals where appropriate, and when those customers are on that payment deferral, they have not been charged interest for that period. So the amount of balances on a payment deferral peaked around 3% in May last year and is now well below the 1% mark. Looking at arrears rates, they're 1.3 percentage points lower than the prior year, and the pie chart shows a split of that view, with up-to-date balances actually increasing 3.3 percentage points in the year. Now, overall, as expected, the debtor book did contract 7.8% in the year as a result of those lower product sales and the increased repayment rates. Within this, though, you can see the improvement in quality, with the bigger contraction being seen in debtor balances, which are more than 28 days. Overall, we are pleased with the stability in the context of the pandemic year, and in particular the improved customer rears position underlying. Exceptional items were significantly lower than the prior year, as we have now reached conclusion over the majority of legacy issues, with legacy tax structures resolved and the FCA customer address deadline behind us. This year, the main component was 7.9 million of exceptional costs incurred as a result of our strategic changes. And within that, these included total redundancy costs of 5.2 million in order to align the group's people costs to deliver an organisational design in line and supporting our revised strategy. Final point to note on this slide is we continue to have a contingent liability with respect to the claim and counterclaim with Allianz. As it is not possible to reliably estimate the amount of any potential financial outflow of this dispute, we have continued a contingent liability as opposed to a provision relating to Allianz's claim of £29.4 million plus interest. As this develops over the coming year, we will update this accordingly. Now moving on to the balance sheet and cash, our net cash generation was £158.4 million in the year, compared to broadly neutral in the prior year. Now let me walk you through the building blocks behind that. We made significant progress with our working capital efficiency in the year and were able to reverse last year's 18.7 million outflow and generate 19.5 million through targeted initiatives, including successfully clearing through a level of older stock balances. Working capital was also released from the contracting debtor book and was similar in terms of working capital released prior year, whilst we successfully maintained stability in the securitisation financing. Now, lower exceptional items and tight capex control reduced our non-operational cash flows in the year, which resulted in net cash from operations being retained of 64.9 million. Moving on from that, the equity raise then delivered net proceeds of 93.5 million, and dividends were suspended as we went through the COVID year. Put that all together, and overall, this combination of managing the business and that successful equity raise resulted in 158.4 million of net cash generation. This leaves us fully undrawn on our unsecured RCS facility, and with a net unsecured cash position of 80.8 million, we're well set for trading and investing into the new financial year. Now that leads me to looking ahead and guidance for our new fiscal year. We expect to return to overall growth with group revenue up between 1% and 4%. Because since the start of FY22, we've returned product revenue growth. And for the full year, we're currently expecting product revenue growth of between 3% and 7%. However, similar to FY21, financial services revenue is expected to be lower as a result of a smaller debtor book at the start of FY22. This naturally lags the change in trend for product sales by between six months and a year. Further down the P&L on the cash flow, we expect capex to be 30 to 35 million. Appreciation and amortization of circa 40 million in line with the level in FY21 and reflecting that acceleration of our strategy. And net interest costs of circa 16 million. Overall, we currently expect FY22 adjusted EBITDA to be in the range of 93 million to 100 million. This level of adjusted EBITDA combined with investment in capital expenditure and working capital for growth will enable the group to have a continued strong unsecured net cash position. The Board will consider the resumption of dividend payments at the end of FY22. And finally, FY22 year-end adjusted net debt is expected to be in the range of 280 to 300 million. I'll now hand you back to Steve to talk you through progress on our strategy in the year.

Thank you, Rachel. I'll now talk you through our strategic progress in the year. Last June, we announced our refreshed strategy to return Enbrown to sustainable growth by developing stronger brands and product propositions for our customers, driving profitability through the retail business and continuing to offer attractive and flexible credit solutions. Since then, we've made significant progress in transforming the group in the year, and we are now firmly in the accelerate phase of our strategy, driven by our five growth pillars. First, distinct brands to attract a broader range of customers. Number two, improved product to drive customer frequency. Number three, new home offering for our customers to shop more across our categories. Our fourth is enhanced digital experience to increase customer conversion. And lastly, flexible credit to help customers shop. These growth pillars are underpinned by our people and culture. data, and a sustainable cost base appropriate for a digital retailer. I'll now give you an update of each of these pillars and enablers. As I said last year, our review of the markets in which we operate highlighted that we needed to extend our reach to a broader set of customers through a portfolio of brands with clearer, more focused propositions. This year, we have progressed our simplification journey, reducing the total number of brands by 25% to nine in total. We discontinued to hire Mighty and House of Bath brands, successfully migrating customers to Giacomo and Ambrose Wilson respectfully. The Fig Leaves website was also closed and we now offer Fig Leaves on Simply Bee. We are now communicating what makes our brand special and unique to our customers through monthly product innovation campaigns such as Alfresco Dining for Home Essentials and Denim Reengineered for Giacomo. Our use of social media has accelerated through FY21. Revenue generated by social media was up 27% across the group, with a total of 1.9 million followers across Facebook and Instagram. In our five strategic brands, we saw an 80% increase in Instagram followers. Looking ahead to this financial year, we will undertake a range of activities, including expanding the presence of the core retail brands through increased investment in brand building activity and through more specific targeted activity through digital and social channels. We will focus on ensuring that our brands are visible in the most relevant way to our target customers. Our first broadcast campaign was launched on Monday for J.D. Williams. We're also continuing to improve our photographic approach. We are upgrading our in-house studio capability to a market-leading LED studio solution. It balances efficiency with the ability to deliver market-leading aesthetics and create a more aspirational digital experience to drive conversion and retrade rates. All photography for Simply Be, JD Williams, Giacomo, and Ambrose Wilson will be shot in this new studio. Refining and improving our product offering is central to driving our new brand propositions, encouraging customer loyalty and frequency, and we've made good progress in three key areas. First, we started the process of improving our product handwriting through clearly defined designs for each brand, investing in fabric, quality, and consistency of fit. These changes to our design process mean that our prints are now completely unique to us and our pallets and products are designed with a specific customer in mind. In the year, we increased the proportion of our own design women's wear ranges from 53% to 57%. Secondly, we have redefined our good, better, best price architecture with the purpose of creating product which represents great quality and value, as well as introducing new brands which stretch the range within the best category. We have rationalized our ranges to ensure there is less duplication and a clear, more considered offer. And these investments are being well received by our customers. We've also made significant progress with launching new third party brands on our websites with Hugo Boss and Ralph Lauren both launched on Giacomo in the year. Finally, we have continued with our commitment to embed sustainability through the organization. with product ranges and all our processes. We introduced our sustainably sourced Giacomo's men's denim range, and 85% of our women's denim offer is now sustainably sourced. We've also further consolidated our supply base with an 18% year-on-year reduction in the total number of suppliers. Throughout the pandemic, we were able to respond with increasing flexibility to shifting customer demands and delivered on average a one week improvement in lead times on product changes through the year. Looking ahead, we will accelerate our initiatives around improving our product handwriting, transforming our price architecture and driving our sustainability agenda. We are investing in our design team with a particular focus on print and the famous four categories such as lingerie, denim and footwear. We are continuing our strategy of attracting exciting new third-party brands to extend the top end of our ranges. We added Finery and Nobody's Child on Simply B, and we plan to add French Connection, Sonder and Coast to JD Williams later this year. We are entering the second year of our sustainability roadmap, with the focus being on ensuring all denim ranges will have sustainable properties. completing the rollout of green polyethylene bags across Giacomo and Simply B, and reviewing recycling options for our customers. We launched our Home Essentials brand as a standalone trading site on the 1st of April 2020, which coincided with an increase in consumer demand for home and garden. We were quick to pivot our offering to address new customer demand trends For example, by expanding our electrical and home office proposition, which saw an increased demand, particularly during the first national lockdown. This drove an increase in home and gift sales of 25.4% compared to the prior year. In line with our social media strategy, we launched Facebook and Instagram pages for Home Essentials in the year, which have now gained over 80,000 followers. This encouraging start has demonstrated the opportunities available to us to inspire and serve even more potential customers through these channels and will support our customer acquisition strategy for the brand. Looking ahead, we will continue to invest in key product categories, such as furniture and bedding, to accelerate Home Essentials' second year as a standalone website. This will be supported by broadcast campaigns and continued social media activity to drive customer recruitment. Our strategic priority for enhancing the digital experience for our customers is to transform the website front-end journey. This year we've implemented Bloomreach to optimize and personalize each customer's digital experience. This has driven a 19% increase in click-through rates from search to the relevant product page and a 55% reduction in zero returns. Our agile approach to digital transformation enabled us to launch the standalone Home Essentials website, as well as migrate customers from HiMIT and House of Bath to Giacomo and Ambrose Wilson, respectfully. We've also started developing new APIs for social media integration to enable more automated retargeting of customers. Once embedded, this will increase efficiency and is expected to benefit conversion. Looking ahead, we will focus on our strategic priority of transforming the website's front end. This is because our existing websites are built on legacy technology, which has been deployed over many years. Thanks to the capital raise, we are now accelerating our investment in new front-end websites to improve the customer experience through a cleaner website, resulting in better conversion rates and search engine optimization benefits. An additional benefit to this is an improvement to site speed, which is key to enhancing search engine optimization. This will include a new sales journey, improved search, navigation, product listing, details page, bag, and checkout function. Our focus at the start of the pandemic was on protecting our customers and our business by ensuring continuity of service whilst minimizing any risk exposure and ensuring good customer outcomes. mBrown's current credit platform is built on a mainframe system, which is robust but lacks flexibility to make changes to enhance the customer proposition. Customer behaviors have evolved and are generally shifting towards a range of more flexible payment products, which the group's current system cannot currently service. To deliver more modern products, we need to develop a new financial services platform that has the flexibility to offer these products and our development project is underway. Good progress has been made in FY21 to enhance the use of different data sources and analytical tools and techniques to drive improvements in our lending proposition. Continue to work with AIR using their proprietary AI models to enhance our credit worthiness process, and have also successfully launched a new lending model using the data robot tool, which has further enhanced our capability. Our strategic focus for the medium term will be on the delivery of the new financial services platform and the launch of new credit products that will broaden the appeal of our proposition. Continue to embed regulatory changes such as the senior managers and certification regime and remain focused on providing inclusive financial services to our customers to enable them to shop our compelling products across our brands. The moving to our three enablers, the first of which is people and culture. Our colleagues are our biggest asset and they continue to show commitment like no other in their flexibility and adaptability in response to the change in ways of working due to the pandemic. We've remained fully operational through this period and we are grateful to our colleagues for the part they've played in this. We've made some important changes to our executive and leadership team in the year. Rachel started as CFO in June last year, and Sarah Welsh became our first CEO of retail earlier in the year. In the team underneath the executive board, we made important changes, particularly in product, where we have strengthened the team through a series of senior hires and appointments with a new group buying director, group design director, and a newly created role of group sourcing, sustainability, quality, and fit. Finally, as we emerge from the lockdowns, we have adopted new ways of working to ensure that we balance the need for effective collaboration and remote working. Continue to increase our use of data across the business to understand our customers better and drive continued efficiencies in revenue, marketing and product ranging. We've completed discovery projects to determine the optimal pricing strategy for our brands and we're in the process of building models which will determine how to maximize revenue margin or other strategic KPIs through promotional pricing. Our use of AI to develop a model to predict customer lifetime value now informs our marketing decisions and has been crucial in reducing unprofitable marketing expenditure and making our cost base more efficient and sustainable. Group has continued to invest in its people and infrastructure with new hires such as data scientists, architects and product managers to build out modern cloud-based data structures, increasing our ability to develop rapid insight to action analytics. The final enabler of our strategy is developing a sustainable and appropriate cost base to help build retail profitability. As Rachel outlined, we took swift and decisive action to respond to the pandemic and were able to reduce our adjusted operating costs by 28.9% in the year. We had previously identified a range of sustainable efficiencies in our marketing costs and were able to accelerate these in response to the trading environment. This resulted in our marketing costs falling 55.7% in FY21 far in excess of the 13% decline in group revenue with significant reductions in paper, PPC and TV and outdoor media. Targeted initiatives across the entire cost base resulted in adjusted operating costs as a percentage of revenue significantly improving from 39.8% in FY20 to 32.5% in FY21. For the first time, we are now reporting digital customer metrics. However, it's important to remember that this initial disclosure reflects the impact of COVID-19 on the business in FY21. We are now focused on driving improvements across these measures in FY22. Total website sessions remained relatively high in the year despite a 55.7% reduction in marketing expenditure supported by our ability to pivot into the products the customer was looking for such as home office and garden. As expected and in line with other retailers, conversion was lower in FY21 due to more customers browsing during the pandemic. Reduction in orders in FY21 was reflective of customer demand and within this there was a significant pivot from clothing and footwear to home and gift. AOV was broadly similar to the prior year reflecting the strong home and gift performance in the year offsetting the price sensitivity in clothing and footwear. The increase in AIV was driven by the mixed effect of home and gift, as this category typically has a higher average price. This mixed effect also resulted in small decreases in items per order, as home and gift items typically have a higher price point. Total active customers declined in the year, primarily driven by the reduction in other brand customers. Financial services arrears fell due to an increase in the quality of the loan book and an increased propensity for our credit customers to pay down their balances in year. A relentless focus on improving the experience for our customers resulted in NPS increasing by two points in the year to 63%. This year, we launched our new four-year sustainability plan, Sustain, which encompasses our people and our planet pillars and aligns with the values of the business. We are also proud to have signed up to the BRC Climate Action Roadmap to help the retail industry, including supply chains, to hit net zero carbon emissions by 2040. We recognize the huge potential in sharing knowledge and learning from other retail leaders as we join forces and work collaboratively towards a net zero UK. Since the beginning of COVID-19 outbreak, we have supported both our local communities affected by the crisis and those who are working tirelessly on the frontline. Through the donation of net sales proceeds from a range of products sold across our sites, we've donated over £20,000 to NHS charities together. We've also made donations of clothing and household items to frontline NHS staff in Manchester, and donated face masks and face shields to a local care home near to our main distribution center. This slide highlights the progress we've made in the first year of sustain. Our focus in the year was on plastics. I'll pull out one of the initiatives and give you more detail. We successfully conducted a trial of green polyethylene and green PE dispatch bags, and from the 1st of March 2021, replaced 90% of our packaging with green PE dispatch bags. This is a bio-based plastic manufactured from polymer derived from sugar cane and therefore produced from an entirely renewable source. The dispatch bags are also recyclable and their sustainable properties mean that we will save an estimated 112 tons of carbon per annum. The rollout of green PE bags will be extended to 100% of our packaging by the end of 2021. We also made good progress in energy efficiency with a new LED lighting project at our main warehouse and using sustainable swing tickets for JD Williams, Giacomo and JD Williams products. We first laid out our medium term targets when we announced our equity raise in November last year. We remain confident of achieving our medium term product revenue growth of 7% per annum and an adjusted EBITDA margin target of 14%. From a balance sheet perspective, we intend to maintain a net cash position. As Rachel commented, at the end of FY22, we expect to have a strong unsecured net cash position, and at that point, the Board will consider the resumption of dividend payments at the end of FY22. FY21 was a year of significant strategic progress. The business stayed profitable and is now in a much stronger position than it was at the start of the pandemic. Our product revenue has returned to growth and we expect to deliver adjusted EBITDA this year of between 93 and 100 million. We are heartened by strategic progress we have made. However, we remain cautious on the external environment given the uncertainty around the relaxing of the government restrictions and the end of the furlough scheme. We are confident that our strategy is the right one, and we have demonstrated through the year that we have a flexible and agile business model which is able to react swiftly to the external environment and deliver for our customers. We remain committed to our medium-term targets of 7% product revenue growth per annum and a 14% adjusted EBITDA margin, and achieving these will deliver sustainable returns for shareholders. And now we'll turn to Q&A. So if you are not already dialled into the conference call, please do so now and we will take your questions in a moment. Thank you.

First question comes from Andrew Wade of Jefferies. Andrew, please go ahead, your line is open.

Hi there, team. Thanks for the presentation. There's obviously a huge amount going on in FY22 in terms of progressing the strategic elements. But given how much is going on, could you sort of point us in the direction of what you see as the sort of key changes and the things that we should be keeping an eye out for most?

Yeah, sure, Andy. I think that's a great question. I mean, across our five strategy pillars, if I just talk to those really, really sort of at the high levels, I think what we will expect to see is some sort of further brand advertising and certainly more sort of appearance at the top of the funnel in social media for our brands as we start to sort of land those. We have some really exciting plans and actually JD Williams has already started going live on Monday last week. So on the brand, there'll be a bit more sort of visibility and a bit more investment, I guess. On the product side, that's an ongoing journey. We've already made good changes already. We've launched some new brands. Our own label is improving and we know that from internal metrics and we're going to keep going at that because we think that there's a massive opportunity if we continue to improve that for our customer proposition. In relation to the home business, that one will be a bit sort of as we go. We've launched the website. We're keen to get it going. We've focused on new customer recruitment and It really helped us in the pandemic, but it's something that we're going to focus on really strongly. And also, when it comes to the sort of critical pieces in relation to financial services and our digital capabilities, the teams are really stuck into now delivering the sort of front end for our business and really replacing the old mainframe technology that essentially still powers the presentation layer for our retail business and powers all the decision making in financial services. So it's really important that this business changes that infrastructure out in the medium term. The guys are working on the retail side of the business first. They've made a start. We got the money. We started spending it. At this stage, it's really, really early days. But certainly that will be the area that we perhaps will talk to at the half year. And I'll sort of bring you up to speed with that. But fundamentally, the technology side is an area that is the key thing in our business this year. Hopefully that's helpful.

Yeah, absolutely. Thank you very much. And I guess as we go through the year, sort of reflecting the fact that your revenue trends have improved through the year, the comps obviously get more challenging as we go through the year. Should we be thinking about that sort of increase in spend on brand building and marketing as being a key driver behind how you're going to continue to deliver revenue growth against those increasingly challenging comparatives?

Yeah, so Andy, I can take that one. You're correct. Our investment in marketing, our marketing costs will step up faster than our revenue expectation this year, not for the underlying kind of efficient digital marketing below the line, but for getting back into the above the line and brand building. So we're expecting a significant step up in marketing, but we know we've got the efficiency baked in underneath. We've got some level of kind of operational gearing with growth coming back as well. So, yeah, we'll get back into the brand side of the marketing spend, keep the digital below the line, spend very efficient, effective. That should help power through on the product retail side. As you say, as we start cycling against tougher comparisons at the back end. of the year, plus those steady improvements that Sarah is making to the product side, in particular on the clothing and fashion segment. Those already green shoots, and particularly, as Steve said, some of our own brand label, we're seeing good, strong sell-through rates. So that will progress as well as we go through the seasons through the year. So those two pillars in particular will help us through quarter to quarter. The technology is the longer-term play.

Great stuff. Very helpful. Very clear. Thank you. Thanks, Emily.

The next question comes from Darren Shelley of Shore Capital. Darren, please go ahead. Your line is open.

Thank you. Morning all. A few for me as well, if you don't mind. It's nice to see the reduction in sort of the COVID provision and from 17 million at H1 to 15.4 at the year end. I mean, what does the timeline predict? to sort of further assessments of those provisions is the potential for more good news as we move through the current financial year. Any thoughts on that would be good. I mean, we've obviously seen a reduction in costs, some of which will be sort of COVID-related, but some will be structural. I think you've just highlighted there, Rachel, you're now going to be spending a bit more on marketing. If you could give us an idea of sort of how we should look at costs going forward, maybe as a percentage of sales or something like that would be useful. And then finally, just give us a bit of colour on how you see sort of gross margin outlook for the current year. I mean, particularly in product, because there's a lot of talk of inflation at the moment, obviously cotton's higher, freight costs, labour, any sort of colour and how your position there relative to growing pressures will be good as well. Thanks.

I think Darren has just handed that all firmly to me. So the £15.4 million provision, when we closed out last fiscal year FY20, we estimated it in our post-balance sheet event at note of £8-18 million. Half year, we put £17 million aside. We trued that up to £15 at the year end. What we've got driving the data underneath that, we use kind of macroeconomic indicators like unemployment, but we don't actually anchor particularly strongly in our correlation to that. We anchor more strongly to understanding where the customers are seeing kind of stress within their financials. So we've looked at internal and external data now to see where customers are on payment deferrals due to COVID and So we've got relatively modest deferrals. It peaked at 3% and is currently at 0.3%. But we've also got the external data now where we can check all our customers and see if they've availed of a deferral elsewhere, either with secured or unsecured lending. And that's a large part of what's driving our provision where we can see customers who are currently or have recently been on a payment deferral. Now, as that unwinds over the coming months and the furlough support from a government perspective steps out in September, We'll have another look at it at half year, and then we'll do the full drains up review at year end, at the end of FY22, down to see where the actual behavior landed versus our expectation. Because what we're doing, and you can see it in the appendices of the slide deck, where a customer is looking up to date, and they're in stage one for the provision model, if they're currently on a payment holiday with us or another provider, or recently have been, we've moved them from stage one to stage two because we think it's likely they're under stress. If they can then get themselves back out of stress and up back into stage one, by the time we get to full year, definitely we'll know that. But at half year, we'll have another kind of look at it. So half year, we'll talk to you again about it. Full year, it will be the full drains up to see where we actually land. That's the IFRS 9 provision. Next question was the cost to sales ratio. Is it going up, down or sideways? So what I would say, we've done hard yards this year to make sure we are as volume variable as we can be. You could see it in warehouse and fulfillment costs. You could see it in marketing. And even within our S&As or admin costs, we've got a level of volume variability within that as well. So I would expect it to move as revenue goes up, I would expect costs to go up. But we've still got a little bit of operational gearing to go in the fixed cost element of admin. but going the other way is the conversation we just had about marketing and getting back into the above the line side. So we would expect marketing costs to grow at two to three times the pace that revenue is growing, but we've got some operational gearing still to go in the fixed cost space. So I wouldn't expect to be exactly the same year on year cost to sales ratio, but I'm not expecting it to go up materially either. So a two to three point increase next year versus this year, as we step back into that marketing, but also get some economies of scale through the cost base is where I'd expect it to be. But we will be flexible with how we go through the year and where we see the revenue really trending through. Then that leads me into your final question, which was gross margin pressure. A lot going on within gross margin, in particular from a product perspective. So from a mixed perspective, moving back into as clothing and fashions, starts to respond in particular in our own brand that usually has a positive impact on our gross margin because our own brand clothing is our higher margin segment versus in particular home and in particular technology but as you say there are pressures going the other way from inflation but in particular in terms of freight rates we saw that in quarter four and within our guidance we are assuming that level so the current level of freight rates is continuing through the year So inclusive within our guidance of EBITDA of 93 to 100 million is an assumption on continuing tough levels for freight rates. And that's the biggest cost side kicking in to the gross margin. So we haven't guided tightly on gross margin percentages because we need to retain the flexibility to offer the product segment that the customer wants through the year. Now that could be into fashion, it could be back into home, or it could be a mix between the two. It's why we've kept our outlook guidance at top level growth and EBITDA because we believe we've got the flexibility between the type of product we can offer and between the cost flexibility we've now got with gross margin to then be able to flex and hit an EBITDA with confidence. But the mix within that across products, FS and different types of gross margin, that will still show a lot of development as we go through the year. So short answer is it's not a single point guidance. We've got a lot of moving parts, but we've got the level of flexibility to be able to deal with those moving parts now.

Well, thanks, Rachel. That was all very clear. And just one more, if you don't mind, I don't want to hog the line, but in terms of have you seen any change in sort of the mix of your customers using cash, taking credit, taking credit and rolling over? Has that changed material over the last 12 months?

Yeah, I think from our perspective, Darren, we're very, very focused on our medium term strategy. So we're responding to things on a day by day basis, but ultimately, as you can hopefully all see from the results, we've taken our opportunity to really strategically accelerate our focus on our strategy last year. The customer file is moving around. Again, it's not dissimilar to Rachel's answer in terms of we need to see how things shake out, what customers buy into this year, etc. I am pleased to sort of say that actually our customers have started shopping back to CNF and that's a good start from our perspective. And we'll talk more about that at the June sort of quarterly update. But fundamentally, there's a lot going on in our customer file, but it is all strategically related. And it is all sort of based on analytics driving where we spend our money. And ultimately, what we want to do is get the best return from our marketing spend. And ultimately, we're sort of less concerned Whether that's cash or credit, cash customers can deliver as much profit as credit customers where they're really, really, really loyal. And credit customers, we'd like to see the file growing with our investment in our IT technology. But as we talked about earlier, the technology sort of investments are going retail first, financial services second. And on that basis, I would just say we'll need to talk about that in the future.

Okay, thanks. Thanks for that, Steve and Rachel. Thank you.

I'll just remind participants once again to press star followed by one if you would like to ask a question. We have a question from Matthew McEachran from N Plus One Singer. Matthew, please go ahead.

Yeah, thanks very much. Just a few follow-ups if that's okay. Can we just come back to home and sort of tie it in with credit penetration and bad debt? So what's been the experience? I mean, that's an unprecedented kind of mix shift driven by the core business and the introduction of home essentials. Just give us a little bit of flavor about how credit has performed and bad debt. And then at the end of just finalizing on home, if you could give us a sense as to whether or not the ongoing growth of home essentials could see you roughly maintain sales levels in the home category this year or whether or not you definitely feel it steps back.

We'll take the latter part to that question, Matthew, first of all. So, you know, let's keep in mind this time last year when we were selling home product, we were selling hot tubs, trampolines, computer desks, computers. We were selling anything that was sort of related to COVID. And actually for us, we were able to pivot very quickly into those areas because we had stock. we were able to spin up a website. So we did very well to sort of respond to that, given we're largely a clothing and footwear business. But fundamentally, we need to see how this turns out. So I wouldn't expect the same level of demand in home as we had at this time last year. We also got very few returns this time last year for obvious reasons. And of course, a mix shift into sort of clothing and footwear will change the mix on returns again as well. So I want to make that point. Again, I think we're a little bit early into the year, other than I would just highlight the point again, we're seeing customers shopping back into clothing and footwear and our new product is coming through, which we're very, very pleased about. In terms of customer credit and bad debts, et cetera, as the presentation shows, actually, the arrears rate has reduced quite significantly. This is as a result of a couple of things. We continue to get better and better and better at this. And we've highlighted technologies that have helped us with our decisions that are improving customer outcomes. And also, we've seen faster payback through COVID, which is quite sort of common, I think, at a sort of market level on this subject. And I've certainly seen it in other businesses' results as well. So we've stood here today, actually Matthew, we're in a better position than we were. So I wouldn't be too concerned about that. Other than, I come back to the sort of predicted COVID overlay, which sits within the IFRS 9 provision. And clearly at this stage, we have a disconnect between the performance of our file and the provision increase, which is really a predictive piece about the future. We don't know. And as Rachel has pointed out, we'll talk more about that at the half year. But as things stand, if performance continues as it is, then we should be in a very good position.

Yeah, that's very good. And in terms of the business, you've got a lot more data analytics, which you're putting to good use. In terms of cohorts that have historically come through home, what has been the historic trend in terms of cross-programming? cross-selling into clothing and footwear and fashion? Is this an area which is a good lever to catapult into that category? Or actually, do they tend to shop at home and do very little elsewhere?

Well, there is some cross-shopping that occurs historically. It's a really difficult question to answer. I'm not trying to be sort of

No, I understand it's difficult. Just your best guess, yeah.

We stood up Home Essentials in the middle of a pandemic. So the shopping behaviour on Home Essentials is not necessarily helpful in predicting future sort of cross-shopping. Yeah. I expect us, you know, to be able to do that. That is part of the strategy. So if we go back to the five pillars, the whole, you know, reason for sort of launching a home business is we think we can do well in it. And we think it's very relevant to increase that cross shopping piece that we're sort of targeting. So that's where I would expect it to go over the sort of medium to longer term. It's just the data from last year. Again, you know, hot tub shoppers are not necessarily going to give us the data we need to really understand those patterns truly at this stage. But I think, again, by half year, hopefully we'll have something more that we could sort of add a bit of colour to.

And particularly we see that on J.D. Williams a lot more because J.D. Williams is more of the department store brand. And through last year, you could see the customer very much pivoting into their basket was going towards shopping for their home. And then you can see it pivoting back into clothing and fashion. So you see that cross-shop at its most extreme in J.D. Williams. And in particular, we've got very clear kind of predictive analytics around the value of customers, the customer lifetime value. If somebody's a long-standing credit customer with us, if they've shopped on both home and fashion, their retrade rate is the highest out of any retrade rate and their long-term customer lifetime value is the highest. And so we're very clear with how we kind of focus our time and resources and energy with the teams on where we know kind of customers stay with us and shop with us. But as Steve said, we then got some odd exceptions through the pandemic year. We saw some real spikes of customers that essentially are the one and done. But we made money on the one and done because they came in, bought the hot tub. We made money on that transaction they moved on. But we do get the ability to retrade and remarket to them through the year. So we can try and keep some of them with us. So it's not a sort of complete or the one and done. But you could see some really different behavior through the year. But J.D. Williams, I think, is where what you're talking about is the most prevalent of that win-win where we've got credit as well as cash. We've got the opportunity to serve the customer with both home and with fashion.

Yeah. Yeah, that's interesting. OK, thank you. The next question just goes back to some of the discussion earlier on the Q&A just around the product sales guidance. I mean, obviously, we do have these very, very unusual comps. You know, we've had lockdown three through part of the first quarter, et cetera, et cetera. We know all of that. But just looking at the guidance, the guidance gets you only within 10% of the two-year equivalent. So I'm just wondering, and everyone in the market is looking for the two-year numbers. I mean, all our clients are demanding those numbers and some reference point to pre-COVID. So is there anything you could tell us just in terms of how you budgeted for that product sales growth? in terms of the two-year trend because it feels still like a modest number and not really pushing through into real growth without wanting to sound too cynical.

I understand the question Matthew. The one thing I would remind you is the business is going through a transformation when looking at other organisations and whilst most businesses are transforming clearly, this one is going through a fundamental one. If I look last year, our product revenue is only down 13% for a 55% reduction in marketing. Now, some of that was cost saving at the start, but some of that is very, very strategic. And I think a comparison to two years doesn't really sort of do justice to what we're trying to do in the medium term here, which is ultimately when you look back through last year, we took a really accelerated view of the things that we were probably going to do over two to three years, a massive reduction in the marketing spend, a massive reduction, a massive change in the way that we are speaking to our customers, the building up the sort of social media files, the data and analytics driving sort of forensic decisions within the organization, the 25% reduction in our sort of brands from a rationalization perspective, All of that took place last year. So in the middle of the pandemic, we were able to take really, really radical actions. And on that basis, the business just looks different to being two years ago. So at this stage, we're looking where we are now and we're looking ahead. We're not looking back two years. I do understand that people will be asking you for that, but it's a completely different business.

Yeah. Just a quick one on the drags. There's been the mention of House of Bath and Fig Leaves where you're obviously trying to drive an improved profitability off less revenue. Could you just give us a sense as to what the drag year-on-year is from those two? Within your three to seven, what's the drag from those two?

They're particularly high in half one as well. That's what I was going to say. House of Bath and High & Mighty cycled out at the end of quarter two last year. We tucked them in under remaining brands, but as you say, you retain a core kind of very loyal customer, but we knew we'd lose the long tail, but did it for the right profitability reasons. So House & Bath & High & Mighty will be a particular half one drag, and Figleys is a drag across the full year. In particular by quarter, we're not giving exact details with that, but it is a good... I'm just trying to think.

It must be a couple of points or something.

It is very different, in particular in the first half of the year, it is. And as you said, we did that for profitability reasons, because you look at our EBITDA margin, even in FY21, it was 11.9%, and that's inclusive of the two-point drag with that IFRS 9 COVID provision. So we're essentially at our 14% EBITDA margin level that we used in terms of our medium-term targets. Because we're looking for profitable growth at a decent, punchy EBITDA margin rather than massive growth at low single-digit margin levels.

Yeah, yeah, much better quality earnings. No, no, get that.

Okay, well, maybe we just pick up... It's a cuter story to sell, but it definitely generates a good return. So, yeah, bigger drag in the first half of the year, some level of drag through the whole year of those other brands restructuring and a focus on... on EBITDA margin, not just top line.

Okay, thank you very much. Just a couple of other quick ones. Within your EBITDA guidance, which has obviously got that cost assumption built in, do you build returns rates back to what they were pre-COVID on a light-for-light category basis? Is that your assumption, even though it may not yet have already happened?

Short answer, yes. But the bigger answer is the like for like by segment because it's the mixed element.

Yeah, that's what I mean. Yeah, yeah, yeah.

Absolutely.

That's fine.

We will see a big swing from a mixed perspective as we come back into clothing and fashion. We do assume progressively the pandemic behavior washes out, but we will still retain a certain level of improvement in fit type behavior on the fashion side in particular. because we already had a relatively low returns rate compared to the broader fast fashion market. And our focus on fit through the year, we are seeing underlying slight improvements in returns rate relative to what we're doing strategically with the product.

Yeah, great. Okay, thank you. And then the final one, just in relation to supply, I get the sense that your supply and availability isn't being particularly affected by global issues. But I just wondered if you could maybe just talk about India specifically,

specifically uh in relation to whether or not you've got any concern as we move forward towards well towards autumn winter yeah i think that's a great question matthew it is something we have on a um a sort of watching brief we're continuing to work with our suppliers if you if you look at india there the the factories are still producing in india at this stage um uh there's various lockdowns and various things going on across the the world and and india Our thoughts go to a lot of the colleagues who are impacted by that. Bangladesh is another one of our sourcing areas as well, as is Turkey, which currently went into a lockdown. At the moment, our stock position is actually quite strong, and we have not seen any significant disturbance from the short-term issues that have existed. other than a few minor disruptions in some categories, like garden furniture. We have it on a watching brief as we go forward, but ultimately at this point in time, our stock position is strong. And also in Q2, that sort of comparison to our stock position this time last year, as we hit Q2, our stock position in Q2 last year was reasonably low, principally because we took radical actions at the start to preserve liquidity. So actually, we're cycling against a better position this year, even if we have some disruption in the supply market. But we are working globally to make sure that the business not only has the right levels of stock, but ultimately is supporting where we can some of our colleagues in other countries.

Yeah, yeah. Excellent. That's great.

Thank you very much indeed. Thanks, Matthew.

We have no further questions at Q&A, so I'll hand the call back to yourselves, Steve and Rachel.

I'd just like to say thank you. The business, I believe, is exiting the pandemic at this stage stronger than when it went in. We remain committed to our medium-term strategy and all the actions we're taking in this business is to create shareholder returns in the medium term. Our product revenue guidance in the medium term of 7% per annum at a 14% EBITDA margin. We remain confident in. And with that, I wish you a good day. Thank you.

Thank you all.