TheWorks.co.uk plc

Good afternoon and welcome to the works.co.uk PLC FY25 interim results presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time just by using the Q&A tab that is situated in the right corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives in the meeting itself. However, the company can review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Gavin Peck. Good afternoon to you, sir.

Good afternoon and good afternoon, everyone else. Thanks for joining us today. Rosie and I look forward to updating you on the further progress we've made since we last updated in October. We'll cover our interim results, which show a strong improvement in profitability, our resilient Christmas trading, our further strategic progress made in recent months, an introduction to our new strategy, and our plenty of time at the end to answer questions. So in summary, we've made significant progress operationally, financially, and strategic in the first half. We completed our brand project, which has given us a much clearer brand identity, a new strap line in time well spent, and a new mission that underpins a new strategy that we're introducing today. We delivered broadly flat sales in a tough trading environment in the first half, reflecting resilient store performance, continuing our record of driving positive store-like products, lower online sales which were impacted by issues outside of our control our third party online fulfillment center we've driven a significant improvement in first half profitability product margins are significantly up year on year we've realized significant cost savings from actions taken in the last 12 months trading in the second half has been in line with expectations with momentum building we had a strong end to december trading and that's continued through into january The result of that is we are expecting significant improvement in profitability in FY25. We're on track for market expectations and we expect further profit growth in FY26. We're excited by the new strategy that we developed in the second half of 2024 and that we're introducing today. Delivery on that strategy will step change both the financial performance and the business in the next five years. We're targeting delivery of almost 375 million of sales and an EBITDA margin of at least 6%. There's lots to do, but we've got a really clear plan and we've already started with much of it. And I'll update more on that later. But for now, I'll hand over to Rosie to take you through the financial review.

Thanks, Gavin. And hi, everybody. I'll start by taking you through some of the highlights before we get into the detail. We've delivered revenue of £124.2 million, a 1.3% improvement on last year. Like for Likes were down 0.8%, but this reflects positive store Like for Likes of plus 0.9% and negative online Like for Likes sales of 14.7%, which I'll talk more about later. We presented our FY24 results in October and we outlined the decisive action taken in H2 last year. I'm really pleased to say that as a result, we've seen significant product margin growth and year-on-year cost savings. I'll cover both of those later, but as you can see, profit has significantly improved with a pre-IFRS 16 EBITDA loss of 2.8 million versus 8.5 million in the prior year. Net debt of 8.5 million is higher than last year because of the calendar shift bringing rent and payments into H1. And it's worth reminding you that we typically make a loss in H1 ahead of peak trading period in the golden quarter. So before we dive into performance, let's take a step back and look at the external dynamics we faced in H1. The retail environment remained tough with fragile consumer confidence and significant cost headwinds. Even when consumer confidence picked up in the early summer months, it didn't fully translate into improved spend. Consumer confidence further weakened again in the run up to the autumn budget. This didn't just impact us. Data from the British Retail Consortium showed non-food retail like-for-likes decline of 1.3% for the 26-week period. We also face significant ongoing cost headwinds in FY25 and into FY26, from higher national living and minimum wages, freight costs and business rates, along with changes to employers' national insurance contributions, which will impact us from April onwards. So let's take a look at sales. Sales performance was broadly in line with where we expected, but ahead of the wider non-food retail sector. Stores continued to drive positive sales growth overall, whilst online performance was constrained. In Q1, like-for-like sales declined 1.4%, which reflected the challenging consumer environment. The BRC reported like-for-like sales decline of 1.7% in the non-food retail sector. We also saw poor performance in our kids' books and toys and games categories, but we saw these recover in Q2. Q1 store sales declined 1.6% and online sales grew 0.4%. Q2 saw broadly flat light-for-light sales at minus 0.3% versus the BRC sector of minus 0.8%. Store like-for-like growth of 2.9% reflected our improved back-to-school offer and Halloween ranges, and we continue to see strong growth in adult fiction. We reduced our September sale activity, which adversely impacted online sales in particular, but delivered a much stronger product margin rate. Our online sales were further impacted by capacity challenges at our third-party online fulfilment provider towards the end of the quarter, although these issues have abated post-peak. We continue to focus on prioritising online profitability and this further impacted online sales growth. So overall, we're pleased with the more resilient growth delivered by our stores in the period, which were up 0.9% on a like-for-like basis. So let's take a look at product margins. We're really pleased with the action taken that has delivered strong product margin growth, increasing from 57.2% to 59.3%. Negotiations with suppliers to lower cost of goods sold has been supported by focused effort to control product mix and reduce promotional activity and has accounted for 170 bit improvement. An FX tailwind in H1 of approximately 80 bits was due to our hedged US dollar to GBP rate of 1.26 versus 1.11 last year. And this tailwind will continue in H2. There's approximately 40 bit headwind in container freight rates in H1 will continue into h2 as a result of higher average container rates over the summer of 24 due to the disruption in the red sea increasing rates another priority of ours was to reduce our cost base we've delivered a significant improvement in profit as a result of the decisive action taken we've mitigated the 9.8 national living and minimum wage headwind in h1 largely due to a result of a labour efficiency programme implemented towards the end of FY24, along with changes to our store labour model at the start of the period. Improved ways of working in our retail distribution centre, along with a strengthened management team, saw distribution costs reduced by 0.6 million. Electricity costs reduced year-on-year due to more favourable hedge contract rates, and we continued to be tough on landlords on the lease negotiations and saw good year-on-year rent savings. In January 24, we moved our third-party online fulfillment center to a more efficient facility, and this provided the savings expected outside of Peak. Admin costs had a year-on-year headwind due to a one-off release from the VAT provision last year, offset with savings and corporate costs following our move to AIM at the end of FY24. So now I'll give you a brief overview of stock and cash. We had a lower half-year stock provision versus last year due to improved ways of working. Now the merchandising function is fully embedded. Stock in transit was approximately 4 million due to higher stock on water as a result of the disruption in the Red Sea, which saw increased transit times of approximately two weeks. Our period end cash position was adversely impacted year on year by the higher stock on water balance and the timing of the period end, which meant month end payments fell within the period. But I'm pleased to say we came out of Christmas with a strong cash position of 14.7 million. We haven't declared an interim dividend, but we continue to keep capital distributions under review as profitability improves and surplus cash allows. So let's look at H2. We've had a good start to H2 trading with momentum building over the 11 weeks. Christmas trading was in line with expectations and we saw similar trends to H1. Stores had a resilient performance of plus 1% like for likes, outperforming the wider non-food sector. Online performance was impacted by our third party fulfilment challenges, as I've mentioned, and was down 14.9% year on year. We saw strong trading in December and this has continued into January. We also held our nerve in a highly promotional market with strong product margin growth of 190 bits. So looking at the full year outturn, we're well positioned to meet external expectations for FY25 with significant profit growth of 8.5 million EBITDA compared to 6 million last year. Cash is expected to be positive at around 4 million and 5 million capex spend reflects fewer new stores and lower store refits. Looking into FY26, we expect to offset significant cost headwinds and deliver profit growth. We've identified strategic initiatives to drive sales, which Gavin will talk to, and we're taking action on prices, continuing to focus on reducing COGS and controlling promotional activity, and we'll hope to create product margin improvement of 150 basis points. We're expecting to target significant cost reductions across central costs in the year. And the cost transformation project that's supported by Interpath is well underway, all of which will help offset the cost headwinds in FY26 and deliver EBITDA growth. I'll now hand you back to Gavin, who will take you through the strategy.

Thank you, Rosie. I mentioned up front that we finalised our brand work. And this page really just lays out how that brand work links into fulfilling our purpose, which remains unchanged, to inspire reading, learning, creativity, and play. We're really clear on the customer need that we're addressing, the increasing research and opinion around the negative impacts of the overuse of screens and screen addiction, particularly for parents in relation to their children. And in a world full of screens, it's clear that people want to find other ways to connect and spend their time. And at The Works, we're perfectly positioned to support that by connecting people with feel-good ways to spend their time. That's captured by our time well spent strapline. So that's reading a book whilst on holiday, crafting with the kids on a rainy day, or playing a board game as a family on a Saturday night. All time well spent courtesy of the works. And we started rolling out this strapline at Christmas, and so it resonated really well with both colleagues and customers alike. We're now much clearer on the brand that we want to be and what we want to be famous for, which is great value, fantastic ranges, and screen-free activities. And we're on with developing our brand and our proposition to be aligned to this. Bringing our brand identity to life will help us establish a really differentiated proposition and realise our mission to be the favourite destination for affordable, screen-free activities for the whole family. It's really important for us to have that clear place in the market and it's a foundation for our future strategy. In addition to finalising the brand work, we've continued to make good progress in other areas. We continue the evolution of our product proposition, We're having real success in adult fiction books, which are up 20% year-on-year, and we're becoming a real destination for book-top trends. We improved our back-to-school range last summer. We developed a range for primary school-age kids early in the summer, and then the more serious back-to-school stationery focused on our own brands later in the summer. We outperformed the market with year-on-year sales growth. We also had a much bigger and better Halloween range with sales up 30% year-on-year. As Rose has mentioned, we delivered significant product margin growth and that has had a big impact from Lynne who joined us as commercial director just over 15 months ago. She's upskilled and refocused the team on this area and there's much more to come in the years ahead. Rose has also referenced how the decisive action we took around costs in early 2024 is yielding results and the cost transformation project that's underway to look to secure at least 5 million pounds of cost savings as part of our strategy. We continue to maximise and optimise our store portfolio. The store estate remains the lifeblood of the business. We currently have just over 500 stores representing 90% of sales. 98% of those stores are profitable. As I mentioned up front, they continue to deliver both positive like for like sales and margin growth through them. In the first half, we opened three new stores. We relocated two and we closed eight. So the net five closures in the first half, we expect a net 10 closures in the full year. We are building a pipeline to grow the estate again in 2025, and we expect a net five new store openings in FY26. And throughout all of that, we continue to drive a significant reduction in rent, as Rosie mentioned. We completed the rollout of our new EPOS software across the store estate. That replaces the end of life previous software and provides a platform for introducing further capabilities in the future. We've got a strengthened leadership team in place. I restructured the operational board at the end of FY24. That's now embedded and we're realising the benefits of that. Steve Bellamy joined as chair in July, has brought a real fresh perspective, much more focus on strategy, long-term goals and the operational execution of that strategy. Simon Hathaway joined as non-exec in November. He's a very experienced both exec and advisor with significant experience in value retail. So together, we've reviewed our strategy. We're introducing that new strategy today, and it builds on the progress we've made in recent years. We believe it can transform our business and our financial performance over the next five years. So just turning on to that new strategy, in summary, we're looking to elevate the works, transform our business and our performance. We've got clear long-term goals with a new mission to become the favourite destination for affordable, screen-free activities for the whole family, and that will be the driving force of everything that we do. We've got really clear financial targets, which are to step change sales to over 375 million and a material improvement in EBITDA margins to at least 6%. The strategy will be delivered through three key drivers, which I'll explain shortly. There's lots to do to deliver on our strategy across all areas of the business, but we have a really clear plan of what we're going to do, when, and what that will give us. We've already started off with a lot of it and we're seeing the benefit of it. We see it as really exciting in terms of what it can do for both our brand and our performance. So talking about the three key strategic drivers in turn. The first one is grow our brand fame, and this is all about bringing our new brand identity to life. We know that Lookworks is loved by its core customers, but we remain one of the best kept secrets in UK retail, with many potential customers not knowing who we are or what we do. We've got various initiatives to evolve our brand and product proposition under this driver. First and foremost, we'll get out there and market our brand, align to our new mission and our brand identity. which will be mostly through social media and other digital channels, bringing time well spent to life. We'll continue to develop our product proposition to have a more all-year-round appeal. We want to increase the strength of our seasonal events outside of Christmas, Easter, back to school and Halloween, and also create our own events. So this spring we have our book event around World Book Day in March. We're introducing a broader party offering, a small selection of kids' birthday cards going into 480 stores as of next month, along with everyday roll wrap and party favours, providing a solution for both the party host and the attendee. We'll also ensure we provide a fun, family-friendly and inspiring experience for our customers that will give them a real reason to visit and revisit the works. And we'll work with our charity partners to help fulfil our purpose, so working with the National Literacy Trust as an example to help inspire reading and make it affordable and accessible for all. Improving customer convenience, We know that customers continue to demand increased convenience, and as a retailer with 500 stores and a transactional website, that's great news. And it's a real differentiator for us in terms of some of our key competitors, such as the general merchandise discounters. We'll improve the convenience that we offer our customers in multiple ways. We want to deliver a much more consistent execution of our proposition. Our store standards have improved in the last 12 months, but there's more to improve. We can also improve availability of continuity lines through better stock flows, and we're reviewing our critical path to ensure better end-to-end planning. We can make much better use of our store space through tailoring store ranges to better meet the needs of local customers. For example, we know that in university towns, we over-index on art sales, but they have the same range. And in high ethnic diversity areas where English is not the first language, we can reduce the space to books, which are under-indexed in sales there. We're looking to open a net 60 new stores from the current target list of 100 locations where we believe we can continue to drive strong payback within 12 to 18 months and access new customers. Alongside that, we want to continue to improve the shopability of the website and the way that the website links into our stores. The final strategic driver is to become a lean and efficient operator. We have to continue to offer our customers great value for money and deliver sustainable profit margins, and we therefore need to be leaner, more efficient, and more simple. We'll achieve this in a number of ways. As Rosie said, further improving our product margins through supplier negotiations, supplier rationalization, and taking a more partnership approach with key suppliers, and improving our stock and markdown management. We believe we can deliver significant operational cost savings. As mentioned, we've got the projects underway with Interpath, which will support the transformation of our cost base. Underpinning that, we'll be reviewing and simplifying our business processes, investing and replacing our outdated and inefficient systems, and looking across the business as to how we can reduce other operational and support costs, for example, driving further efficiencies through the DC. We also believe there's an opportunity to grow our average selling price. Our average selling price is around about £3, which means we're manually handling a lot of low-value items. And if we can grow that through selective price increases, looking at the mix of price points within ranges, and implementing extended ranges at higher average selling price, we can significantly reduce our cost-to-serve ratio. We'll also continue with our store portfolio optimisation. We've got about 25 million pound rent roll, and we'll continue to push out the landlords on that. Delivering on the strategy gives us multiple levers to support step change in sales. We believe we can add over 100 million pounds over the next five years. 25 million of that will come through the sales growth from 60 net new stores, the balance of which will come through our existing channels. So we're attracting new customers to the works, Increasing spend from better engagement with existing customers through both increased basket spend and visits. They're only around proposition driving more repeat visits and sales growth outside of peak. Improved availability with more consistent in-store execution. Increased sales density from better using our store space and growth in online sales to improve customer experience and improve links to stores. It will also drive a significant improvement in EBITDA margin the like for like store sales growth drops through on a largely fixed cost base i believe we can add 200 basis points to the product margin we're targeting at least five million pounds operational cost savings as part of our cost transformation i mentioned the average selling price the impact that can have on our cost to serve ratio and continuing to drive savings in rent negotiations and closing loss making stores as part of our ongoing store portfolio optimizations So overall, 375 million sales, a 6% margin, given an EBITDA in excess of 22.5 million, that's the 8.5 million market forecast this year. It's hugely exciting. There's a lot to do, but we're already progressing with most areas and we're starting to see tangible results. So in summary, we had a good progress in the first half of FY25. The brand clarity and further proposition evolution is key. We've seen significant improvement in product margins and we've got material cost savings coming through from the actions taken. Resilience to our trading in a challenging environment is pleasing and we've seen a significant improvement in H1 profit and we're on track for market expectations in FY25. We've made a decent start to half-to sales with strong December trade continuing through into January and we expect further profit growth in FY26 reflecting the proactive action taken to mitigate significant cost headwinds. We've outlined our new strategy which has clear plans to transform our business performance over the next five years Said there's a lot to do, but we're on with it and momentum is starting to build. We look forward to updating on progress again in the months ahead. And that is the end of the presentation. So we will now move on to taking questions.

Perfect. Thank you very much for your presentation. What I'll do now is I'll just bring your cameras back up for the Q&A. Ladies and gentlemen, please do continue to meet your questions and you can do that just by using the Q&A tab that's situated on the top right corner of your screen. I'll go straight on into the Q&A and I'll start with the first question here, which reads as follows. Why do online sales continue to underperform?

Yes. So online sales, worth putting in perspective, are only 9% of our total sales and our stores did outperform, which I think is a trend that's been seen broadly across the sector this Christmas. But as Rosie outlined, two real factors behind that, we are focused on driving online profitability. So we had significantly reduced promotions in September and October. and then the capacity challenges that we experienced in our online fulfilment facility from the back end of September through peak were a big factor behind that. In the first quarter, we were pretty flat online, and I expect we'd have been at least that during peak without those issues.

That's great. Thanks very much, Gavin. The next question here, can you quantify the revenue impact of the third-party online fulfilment issues over Christmas? Sorry, Rosie, I think you're just on mute. I'll mute you in there.

It's brilliant. It's very smooth. Sorry. Yeah, so I'll take that question. So we estimate it to be between two to three million, but the impact could have been much worse. We took timely and decisive action to control the customer demand and protect profitability. However, we've still seen exceptional costs, fulfilment costs of around one million pounds. We're currently investigating the remedial action that we can take and considering options around the future of our online offering and fulfilment, though.

That's great. Thanks very much, Rosie. And next question here. The rise in national living and minimum wages is expected to have a six point five million pound impact. Could you elaborate on how much of this is expected to be offset by price increases versus efficiency gains?

Yeah, I can take that, Gavin. Yes. So we're looking through our strategic initiatives that Gavin's outlined to mitigate the majority, if not all of those headwinds.

Perfect. Thank you very much. The next question here is really around new stores and says that the presentation references around 60 new stores. It appears that there's an opportunity to increase the scale of the Irish business. How many stores are targeted for Ireland?

We think we're reviewing that. We think there's probably another 10 in Ireland within that 100.

Perfect. Thank you very much, Kevin. With eight stores closed and five more planned for H2 FY25, what criteria are used to determine closures versus new openings? Are there plans to focus more on urban or suburban locations?

So I can take that. So we target effectively closing stores that are marginal from profitability perspective. We obviously will negotiate hard with the landlords to try and make those stores profitable and getting the rent down as much as possible. But then we're in a position based on the lease lengths to leave those stores if we can't create the right deal. As Gavin's outlined, we've got another 100 locations in our strategy that we're looking to review. and generate those that generate significant return on investment this will then look to open these include areas such as retail parks such as Edinburgh, Fort Canard and various of the retail parks that offer a plus one million pound opportunity but we've also got some prime pitch locations that we're looking at in city centres and local towns and outlets as well.

Thank you very much turning to the next question can you comment on levels of theft and stock write-offs?

Do you want me to take this one, Gavin?

Yeah, please.

We've certainly seen, in line with the rest of the retail sector, an increase in theft and stock losses across the estate. However, we're managing to maintain and control those levels as best as we can.

Thank you very much. Another question here. Will the new strategy see the works deliver H1 profit in future years?

Yeah, I can take that if you want, Rosie. I think due to the seasonality of the business, the first half of the year is typically lost. Making that loss is much smaller now. It feels like a realistic ambition to get the first half to break even. I'm not sure that will be in the next 12, 18 months, but looking a few years out with the work we've got planned around making the works a more attractive destination, 365 days a year, I'd be hopeful of. getting into breakeven but ultimately we are always going to make a significant part of our profits in the second half given just how big Christmas is for us.

Thank you and the final question we've got for the moment is when do you expect to be able to reinstate the dividend or introduce share buybacks?

Okay I'll take this one so we continue to assess shareholder distributions which do include share buybacks but we need to review profitability and as that grows and improves and funding allows, we'll certainly take them look to reinstate.

Gavin, Rosie, that's great. Thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today. We will publish those responses out on the InvestorMeet company platform. But just before redirecting investors to provide you with their feedback, which is particularly important to you both, Gavin, could I just ask you for a few closing comments?

Yeah, sure. I think that thanks for joining. We've made good progress in the first half. We've seen good momentum build as we've moved into the second half. We're excited and optimistic about the rest of the year. We've got some good ranges landing this spring. And beyond that, with a new strategy, really excited about what that can do for the business and for our financial performance in the years ahead. And we look forward to updating on that again in the months ahead.

Gavin, Rosie, thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This won't take a few minutes to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of the works, we'd like to thank you for attending today's presentation and good afternoon to you all.