Blacks Leisure Margins Plunge Amid First Half Inventory Liquidation

Total sales from the Blacks and Millets businesses reached £81.1 million (2010: £86.8 million). 

 

Gross margins of 43.7% (2010: 48.8%) were eroded by the consumer environment as well as the need to clear excess stocks,.  This activity has, however, resulted in the Group entering the second half year with a more appropriate level and a higher quality holding of stock than it has traditionally had.

The company’s Boardwear segment, which had been loss-making for a number of years, has been sold.  No new Boardwear stock was bought for the Spring/Summer season and, instead, the focus throughout the period under review was to clear all Boardwear specific lines.  This initiative was completed during the first few months of the period, after which the used its Freespirit branded stores as clearance outlets for excess or past season stock that would ordinarily have been routed through the Blacks or Millets stores.  Since the end of the half year, the five remaining Freespirit stores have been formally rebranded under Outdoor fascias.

The clearance of past season stock has been a key focus of the business in the latter part of the Summer and the level of discounting that this has required is reflected in the significantly reduced gross margin in the period of 43.7% (2010: 48.8%).  In future the business will be run on much tighter stock cover, which will clearly be of benefit to working capital, and this clearance of older stocks is aligned to this plan.  Whilst more stock clearance is required in the second half year to achieve the planned levels of stock reduction, the Group nonetheless entered the Autumn/Winter season with a smaller and higher quality stock holding than it has traditionally had.  Total net inventories were £28.5 million (2010: £39.3 million) at the end of the half year period.
Since the end of the period Blacks Leisure has continued to experience tough economic and trading conditions and like-for-like sales have declined by 14.2%.  Margins are tracking at approximately three percentage points below the comparative period last year. 
“Under new leadership and with a fresh strategy and significantly enhanced retail expertise, there is a real opportunity with the right funding structure for the business to re-establish its forward momentum,” said Peter Williams, who was appointed interim chairman Aug. 11 to lead a new management group during the quarter.

Williams replaced David Bernstein, who had joined Blacks Leisure in 1995 and had served as Chairman since 2001.

The Board also named Julia Reynolds as CEO in early August. Julia has a wealth of experience in buying and retailing gained most recently with Figleaves.com where she was CEO and formerly during her eight years with Tesco plc where she was responsible for the launch of the Florence and Fred brand.  Julia took up her position with effect from 1 August 2011.

“Since August, we have addressed some critical retail issues facing the Group, most notably realigning the stock position and strengthening the management team in key functions, while simultaneously implementing a thorough root and branch review of the business,” Reynolds said.  “While the strategic planning process is nearing completion, it is already apparent that there are multiple opportunities to bring fresh retail ideas and disciplines to the business and more properly exploit its market leadership position, brand heritage and unparalleled brand recognition in the outdoor retail space.   Notwithstanding the challenges of a difficult economic environment, the potential opportunity for a turnaround is clear.”

Capital investment in property, plant and equipment in the period of £900,000 (2010: £3.4 million) was largely related to work undertaken at existing store locations, including the rebranding of three former Freespirit stores to the Blacks format.  At the end of the half year, the Group traded from an estate of 298 retail stores (2010: 317), comprising 195 Millets, 98 Blacks and five Freespirit branded stores (which have since been converted to Outdoor formats).

The Group's indebtedness increased during the period due to both normal seasonal factors and the disappointing trading performance, reflecting challenging market conditions affecting the UK retail sector as a whole.  The Group successfully negotiated an extension and an increase to its existing banking facilities during the period such that the Group now has total bank facilities of up to £40.0 million until 15 December 2011 at which point the facilities will revert to the previously agreed core facility of £35.0 million supplemented, during certain periods, by the seasonal peak facility of £3.0 million.  The extension of banking facilities was accompanied by an amendment to the covenants which, from the current year end of 3 March 2012, will revert to those previously set.  Although the existing facilities are available until November 2012, the Board will seek to refinance them prior to the reversion of covenants at the financial year end.

The Board is also considering the Group's overall capital requirements with a view to strengthening its capital structure and providing a platform to support the Group's plans for development and growth.
The Group's net finance costs increased to £2.2 million (2010: £1.4 million), reflecting both the higher average level of net borrowings during the period as well as direct costs and fees incurred in connection with this renegotiation of the terms of the banking facilities.
The Board has taken the decision not to pay an interim dividend (2010: nil).

As previously announced, the Group successfully negotiated an extension to its existing banking facilities during the period and agreed revised banking covenants to reflect the increase in indebtedness.  The banking covenants revert to those previously set at the end of the current financial year on March 3, 2012 and the Directors will seek to refinance these current facilities prior to that date.  The Directors acknowledge that the Group will also need additional funding in order to execute its strategic plans and the Board is therefore considering other financing options, including strengthening its capital structure, to ensure that an appropriate platform is in place.

Having considered the options available, and after making due enquiries, the Directors have a reasonable expectation that the Group will be able to continue in operational existence for the foreseeable future and, accordingly, they continue to adopt the going concern basis in the preparation of these financial statements.