Black Leisure Group posted a 10.1% decrease in sales at its Boardwear division revenue for the financial year ended February 28, contributing to the U.K. retailers 9.1% drop consolidated revenues for its fiscal year. Total revenue for the year was £267.6 million ($474mm) down from £294.4 million ($590mm) last year.
The Group had a total operating loss before exceptional items of £4.4 million ($8mm) and an operating loss after exceptional items of £12.0 million ($21mm), compared to an operating profit last year of £2.2 million ($4mm) before exceptional items and a loss of £7.4 million ($15mm) after charges.
The Outdoor division, comprised of the Blacks and Millets nameplates, posted an operating profit of £6.3 million ($11mm) for the fiscal year when excluding £2.1 million ($4mm) in exceptional items, compared to a profit of £7.3 million ($15mm) before £3.2 million ($6mm) of exceptional items in the prior year. The company said the decline occurred in the latter part of the financial year when trading conditions worsened.
The Boardwear division, which includes the Freespirit and O'Neill stores and the U.K. wholesale operation of O'Neill, saw an increased operating loss of £7.8 million ($14mm) before £5.5 million ($10mm) of exceptional items, compared to a loss of £3.3 million ($7mm) before £6.1 million ($12mm) of exceptional items in the prior year. As announced in December, the group has agreed to transfer the operation of the O'Neill wholesale business in the U.K. to O'Neill Europe following the completion of the spring/summer 2009 season. The company said it plans to convert its entire Boardwear stores portfolio to its money-making Outdoor format within the next year and has already re-branded eight Boardwear stores to the Outdoor format.
Blacks had a net loss of £14.8 million ($26mm) for the year, up from a net loss of £6.1 million ($12mm) in the prior year. The loss per diluted share totaled £34.63 ($61), versus £14.20 ($28) last year. Blacks cut inventories by £5.9 million ($10mm) and decreased its working capital facility requirement from £40 million ($71mm) to £35 million ($62mm).
Blacks Leisure Posts Wider Full Year Loss; Exits Boardwear Format
Black Leisure Group saw a revenue of £267.6m for the financial year ended Feb. 28, 2009, a 9.1% percent drop from £294.4m in revenue for the same period last year.
Chairman David Bernstein said: “The Group has experienced a difficult year in a particularly challenging trading environment. Our core Outdoor division maintained a sound performance, however, our Boardwear division continued to underperform. Against this background we are continuing the programme of radical change and this is now beginning to produce the expected benefits.
The Outdoor division has made an encouraging start to the new financial year reporting like for like sales up by 1.2% in the twelve weeks to 23 May 2009, although trading in the reduced Boardwear estate continues to be soft,” he continued.
Overview
The Group has experienced a difficult year in a particularly challenging trading environment. Chief Executive Neil Gillis is leading the program of radical change which the company believes is now beginning to produce the expected benefits. Progress has been made in rebalancing, rationalising and upgrading the store portfolio and in reducing the Group overhead base.
The financial year saw the Group's core Outdoor division maintain a sound performance in a tough retail market, reporting a small reduction in operating profit compared to the previous year. By contrast, the Boardwear division's performance continued to decline over the previous year. With little prospect of an upturn in this division's fortunes the Group took the strategic decision to reduce its presence in the Boardwear market.
Results
Operating results
The Outdoor division, comprising Blacks and Millets, achieved an operating profit before £2.1m (2008: £3.2m) of exceptional items, of £6.3m (2008: £7.3m). This reflects continuing progress on product availability, improved transitional ranges and our success in meeting customer needs. The decline against the previous year only materialised in the latter part of the financial year when trading conditions worsened. Despite this, Outdoor gross margins were slightly better year on year.
The Boardwear division, comprising the Freespirit and O'Neill stores and the UK wholesale operation of O'Neill product ranges, reported an increased operating loss before £5.5m (2008: £6.1m) of exceptional items, of £7.8m (2008: £3.3m). As announced on December 10, 2008 the Group has agreed to transfer the operation of the O'Neill wholesale business in the UK to O'Neill Europe following the completion of the spring/summer 2009 season and has also rebranded eight Boardwear stores to an Outdoor format. The early signs of an improved performance from these converted stores have been encouraging and they are being monitored closely ahead of a decision on the future of the remaining Boardwear stores.
Basic loss per share was 34.63p (2008: 14.20p).
The major success of the year was the operational progress achieved. The most significant element was the improvement in controlling operational costs. This has been achieved without decreasing service levels. Moreover, retail standards and customer service levels in our stores have been improved.
An improvement in working capital through a £5.9m reduction in the level of inventory was achieved and new processes have been put in place to meet and improve on the level of availability from this lower level of inventory. Cash management had a high level of focus through the year with improvements being made to our supplier terms and a greater focus on collecting our debts. The cash outflow from operating activities and capital expenditure was mitigated by the working capital improvement resulting in a cash outflow of £3.2m (2008: £5.8m cash inflow) and a closing overdraft position of £3.9m (2008: £0.8m). As a result, during the year the business successfully reduced its working capital facility requirement from £40m to £35m, in turn reducing finance charges.
Dividend
The Board has decided not to declare a final dividend for the year, believing that the recent performance of the business does not warrant the resultant cash outlay. We will resume dividend payments as soon as the performance of the Group permits.
The Group and Lloyds Banking Group are engaged in discussions regarding provision of a financial structure which will enable the Group to accelerate both the exit of the loss-making Boardwear business and the development of the Outdoor store portfolio.
In order to provide the Group with a stable platform whilst working towards an appropriate long-term financing solution, Lloyds Banking Group continues to provide a £35 million banking facility, extending the term until Aug. 31, 2009.
Strategy
The Group has a dominant position in the Outdoor market. Accordingly, the Group strategy is to focus on this strength and to manage a structured exit from the Boardwear business. A great deal of change has occurred over the last year and this will continue with a programme of upgrading stores and converting stores from Boardwear to Outdoor. More comprehensive details on these actions are given in the Chief Executive's Review.
Board changes
As announced in August, Marc Lombardo was appointed to the Board as Finance Director. In the same month Nick Samuel and Andrew Mallett were appointed Non-Executive Directors. Nick was Chief Executive of Hobbs Limited, and Andrew is currently an Executive Director of Aspire Oil Services Limited and a Non-Executive Director of Powerleague Group plc. Claude Littner has accepted the new position of Non-Executive Deputy Chairman.
Clive Sherling decided to retire from the Board in August.
Current trading and outlook
The Group has made an encouraging start to the new financial year. The Outdoor division is achieving satisfactory like-for-like sales although trading in the reduced Boardwear estate continues to be soft.
Total sales for the twelve weeks to May 23, 2009 decreased by 4.6%, as a result of store disposals and like-for-like sales held up well at only a 0.5% decline. Outdoor reported a 1.2% like-for-like increase and Boardwear declined by 10.1%. A reduced gross margin of 52.3% reflects the strategic decision to increase promotional activity to drive sales growth. The management of cash within the business is strong and cost savings continue to be made.
The first half outlook will depend on the key second quarter and the success of our camping and summer clothing lines.
Gillis said that in January of last year the Group set out the turnaround plan for the Blacks Leisure Group business.
“The primary focus of the initial phase was to reduce the cost base,” said the chief executive. “On this measure we considerably exceeded expectations with the cost base being reduced by £6.6m in the year against the original target of £3m.”
“The next objective was to provide the Group with greater security at a time of banking uncertainty by significantly reducing our working capital requirement. Over the year we reduced our debt facility from £40m to £35m by managing our supply chain more effectively and reducing range duplication within stores.
“Thirdly we set out to develop two new outdoor retailing formats for Blacks and Millets which would provide us with the opportunity to refresh and update our estate. We trialled units in Kensington, Stockport, Holborn, Haverfordwest, Croydon and two in Newcastle-Upon-Tyne. These new format stores have performed well at 14.7% better than the fascia average and given the Group the confidence that it has successful models which we can roll out across the estate as funding allows.”
The Group has also made significant progress in resolving the issue of its Boardwear business. This has been a declining category for several years as consumer tastes have changed and the items retailed in this format have become more generally available. During the year it rationalised the Boardwear business by closing the Washington (O'Neill) warehouse and offices and combining the O'Neill, Freespirit and Outdoor overheads into one. The Group also managed to exit the loss making and cash consuming O'Neill wholesale contract without penalty and we have converted eight of the Boardwear stores to its new Blacks Outdoor format and initial results suggest that this has worked well. Finally, the Group has redesigned its Millets and Blacks websites and improved the logistical infrastructure behind this growing part of its offer with the result that internet sales have more than doubled in the current year to date.
“In summary,” resumed Gillis, “A great deal of progress has been made in a short time to streamline and enhance the business. Unfortunately, this had to be completed in the teeth of a significant retail recession which has added huge additional pressures to the already major task of delivering a business turnaround.
However, the work that we have done has not only enabled us to weather this recession but has also placed Blacks Leisure in an excellent position to take full advantage of the consumer upturn as and when it occurs.
Eighteen months into the turnaround plan I am pleased with the progress we have made. We have reduced costs, reduced our working capital, and significantly reduced our exposure to the declining Boardwear business. We have also grown our internet business, developed new store formats which have grown by 14.7% and in the first twelve weeks of the new financial year grown like-for-like sales in our Outdoor business by 1.2%. We are a streamlined, enhanced and more focused business with the potential to deliver strong and sustainable growth.”
FINANCIAL REVIEW
Operating loss
Operating losses for the Group comprise the results of the Outdoor division and the Boardwear division. Unallocated costs consist of the remuneration of the Board, excluding the remuneration of the Managing Director of O'Neill which is charged to the Boardwear division, plus the costs of public company compliance and advisors.
The operating performance of the two divisions varied significantly, with the Outdoor division generating a profit before exceptional items of £6.3m (2008: £7.3m) whilst the Boardwear division sustained a loss of £7.8m (2008: £3.3m). Central costs equated to £2.9m (2008: £1.8m) and finance costs as noted below amounted to £2.4m (2008: £1.9m). Exceptional items amounting to £7.6m (2008: £9.6m) were expensed in the year end financial statements. The exceptional charge relates to four distinct items:
The onerous lease provision, first set up at 3 March 2007, has been reviewed and revised due to the unfavourable trading conditions and the reduction in demand for high street premises. Although no further stores were added to the provision in the year, this has led to an increase in the provision of £4.2m (2008: £5.3m).
The Boardwear division has had a particularly tough year which has led to the impairment of goodwill arising from the annual impairment test and reflects the value in use of the cash generating unit and its carrying value. The calculation resulted in the full impairment of the Just Add Water Ltd goodwill which amounted to £1.8m.
After an internal review of the Sandcity subsidiary announced early in the year, an operational review followed and the decision was taken to relocate the O'Neill business from Washington, Tyne & Wear to the Northampton distribution centre from where the rest of the Group operates. This has led to a write down of the plant and equipment at the Washington site, redundancy costs and relocation costs totalling £1.2m.
A review of the Group's individual stores contribution for past periods and the projected period has led to the impairment in full of the property, plant and equipment for six stores totalling £0.4m (2008: £0.1m).
The Group reported an operating loss before exceptional items of £4.4m (2008: £2.2m profit) and an operating loss after exceptional items of £12.0m (2008: £7.4m).
Loss before tax
The Group's loss before tax and exceptional items was £6.8m (2008: £0.3m profit). Exceptional items amounting to £7.6m (2008: £9.6m) were expensed generating a loss before tax of £14.4m (2008: £9.3m).
Goodwill
The carrying value of goodwill was reviewed and the Board is satisfied that no provision for impairment is needed with regard to The Outdoor Group goodwill. As discussed above the Just Add Water goodwill has been impaired in full and written down to nil.
Finance costs
The Group's net finance costs increased by £0.5m to £2.4m due to the unwinding of the discount factor in respect of the onerous lease provision which amounted to £1.0m (2008: nil). This masks the greater focus on managing the Group's cash flow more effectively and the interest element in respect of a corporation tax refund.
Cash flow
Net cash generated from operating activities was £1.5m (2008: £14.4m). Working capital in the Group decreased by £2.5m (2008: £14.7m), with trade and other payables decreasing by £5.0m, trade and other receivables decreasing by £2.0m, inventories decreasing by £5.9m and provisions decreasing by £0.4m. Total inventories were £50.1m (2008: £56.0m restated) with stock cover being 158 days (2008: 163 days). Our normal stock turn target is three times per annum, but the stock holding is always higher at the year end due to receipt of the Spring/Summer season ranges.
The net cash outflow from property, plant and equipment expenditure was £5.1m (2008: £5.4m). Refurbishments and new formats, 'Cool Air' and 'Blue Sky', accounted for £2.8m, £1.2m was used for computer systems upgrades and improvements and the balance of £1.1m comprised investment in warehousing and distribution including some additional spend to accommodate the O'Neill stock relocated from Washington.
The cash outflow before financing was £1.7m (2008: £8.9m inflow). In determining the appropriate basis of preparation of financial statements, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future. The Group and Lloyds Banking Group are engaged in discussions regarding provision of a financial structure which will enable the Group to accelerate both the exit of the loss-making Boardwear business and the development of the Outdoor store portfolio.
In order to provide the Group with a stable platform whilst working towards an appropriate long-term financing solution, Lloyds Banking Group continues to provide a £35 million banking facility, extending the term until August 31, 2009.
Having reviewed the current cash flow projections, and having made reasonable enquiries in making the underlying key assumptions on sales growth, the Directors have a reasonable expectation that the Group will be able to meet its liabilities as they fall due for the foreseeable future. It is on this basis that the Directors consider it appropriate to prepare the Group's consolidated financial statements on the going concern basis. However, the Directors recognise that there is a material uncertainty, of the bank facility not being extended beyond August 31, 2009, that may cast significant doubt on the Group's ability to continue as a going concern, and therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business.
There is a risk that the above material uncertainties as to the Group's ability to continue as a going concern may not be resolved satisfactorily. The financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern, which would include writing down the carrying value of assets, including goodwill, to their recoverable amount and providing for any further liabilities that might arise. The Board understands that the bank is supportive of the turnaround strategy of the business and would be willing to consider providing an increase on the current facility level to undertake the necessary investment plans subject to the provision of medium-term projections necessary to support the proposals.
The extension of the facility aims to provide an adequate time period to allow the planned discussions to take place.
Restatement
Following a review into negative stock balances within the stock system during the year it was identified that a release of stock credit balances of £1.1m in the year ended March 3, 2007 had been incorrect. This has been corrected as a prior year restatement which has reduced the retained earnings and reduced the inventories balance at March 1, 2008 by this amount.
Financial position
At the year end the Group's net borrowings amounted to £3.9m (2008: £0.8m). This included a drawdown loan of £22.0m, expiring on March 26, 2009, and an additional £2.6m in ancillary facilities in relation to foreign currency guarantees. Surplus cash of £13.4m was placed on the overnight money market at the year end.
The Group has extended its revolving credit bank facility of £35m until August 31, 2009. In addition asset financing facilities of £3.8m (2008: £5.0m) are in place for the Swan Valley distribution centre and our store systems. These facilities have lease lives of between five and seven years.
Financial risks and treasury policies
The key financial risks faced by the Group relate to the availability of funds to meet its business needs and the fluctuations in interest rates. The Group manages borrowing, liquidity, interest rate, foreign exchange and banking relationships in accordance with Board approved policies designed to minimise exposures.
The Group finances its operations by a combination of internally generated cash flow and bank borrowings. Refinancing risk is controlled by ensuring the Group has sufficient undrawn bank facilities to meet increases in projected borrowings over the forthcoming twelve-month period, which, at present, is subject to the discussions described above.
The Group's policy is to fix or cap a proportion of projected net debt in order to reduce the Group's exposure to fluctuations in interest rates. The policy recognises that in common with other like retailers the Group has significant liabilities through conditional obligations to pay rent under operating leases. The implicit interest rate of these liabilities is fixed in the short term.
Foreign currencies
Transaction exposure resulting from purchases in foreign currencies may be hedged by forward foreign currency transactions and currency options. The Group's policy aims to minimise any exposure with the intention of protecting the buying margin from fluctuations in the value of foreign currency. At 28 February 2009 the Group was committed to forward exchange contracts to buy $8.5 million (2008: $52.5 mm). At March 1, 2008 the Group was also committed to buy £12.0m and to sell $22.5 mm.
The Group announced on March 1, 2007 its intention to close approximately 45 loss-making stores, which are predominantly in the Millets fascia. These closures relate mainly to small, overlapping or acquired stores. The Group also announced the exit of other onerous leases.
The Group continues to make progress with either the closure or assignment of 15 stores under the onerous lease provision during the year.
Due to the unfavorable trading conditions in the financial year the assumptions made at the last year end, for the stores under the onerous lease provision, have been revised. This has created an additional exceptional charge of £4,156,000 (2008: £5,345,000).
An impairment of property, plant and equipment arises from a comparison of the value-in-use of individual stores with their net book value where circumstances indicate a possible impairment. 6 stores were identified for full impairment which amounted to £423,000 (2008: £110,000).
The impairment of goodwill arises from the annual impairment test and reflects the difference between the value-in-use of the cash generating unit and its carrying value. The impairment of £1,754,000 relates entirely to Just Add Water Ltd.
In the prior year the Board undertook a review of the infrastructure of the business which resulted in some exceptional costs for people totalling £1,770,000 and an operational review of the O'Neill business which resulted in working capital adjustments to stock and trade receivables amounting to £2,371,000.
Following an operational review of the O'Neill business it was decided that the O'Neill business should be relocated from Washington, Tyne & Wear to the Northampton distribution centre from where the rest of the Group operates. This has led to exceptional costs in relation to the write-down of property, plant and equipment at the Washington site, redundancy costs and relocation costs totalling £1,244,000.
A deferred tax asset of £1,164,000 (2008: £1,706,000) has been created as a result of the onerous lease provision. This provision is expected to be released as the costs are incurred.
Blacks Leisure Group plc
(“Blacks Leisure” or “the Group”)
Preliminary Results for the Year Ended 28 February 2009
(Loss)/profit before tax and exceptional items * �(6.8)m �0.3m
Operating loss �(12.0)m �(7.4)m
Loss before tax �(14.4)m �(9.3)m
Basic (loss)/earnings per share excluding exceptional items * (19.57)p 4.32p
Basic loss per share (34.63)p (14.20)p
Final dividend per share 0.0p 1.0p
* Exceptional items of £7,577,000 (2008: £9,596,000) relating to onerous leases and inducements, impairment of property, plant and equipment, impairment of goodwill and re-structuring costs were incurred in the year.
