Review of the business

Group overview

Group revenue for the half-year increased by 20% (20% CER) on the first half of the previous year to £975.9 million (2020: £816.5 million, 2019: £564.9 million) and by 73% on the first half of two years ago. Revenue growth in the prior year was exceptional due to the onset of the pandemic, when the high street was closed and consumers were drawn to online retail in large numbers. Looking at the growth rate over two years removes the comparative effect of an extraordinary prior year and highlights the progress the group has made as it continues its strong growth trajectory of recent years.

The pandemic is still adversely affecting consumer demand globally, both online and on the high street. We are pleased all our brands have continued to grow robustly across the two-year period, with growth being strongest in the UK and USA, the rest of Europe being less strong and the rest of world declining slightly. The weaker international growth, the group believes, is driven by COVID-related factors, such as continued lockdowns and significantly extended delivery times. Overall return rates have increased on the prior year, driven by increased rates in the UK, whereas international return rates are broadly the same as in the prior year. The increase in the UK return rates has therefore impacted profitability when compared to the prior year. The geographic performance is discussed in more detail below.

Gross margin in the first half was 54.6%, which is broadly similar to the margin in both the prior year and two years ago, which is a good achievement considering the impact of the continuing pandemic on consumer demand. Marketing expenditure in the first half is considerably more than in the same period last year as we have invested in revitalising the newly acquired brands as well as capitalising on the opportunities presented by the existing brands.

Selling and distribution expenses are also similar to the prior year as a percentage of revenue at 23.9% due to country and brand mix. However, compared to two years ago, distribution costs have remained much higher. International shipping costs have increased by £26 million, volume-adjusted, over the rates we experienced two years ago, due to the effects of the pandemic on airfreight capacity and pricing. These increased shipping costs are likely to continue until airfreight capacity is restored and pricing normalises. In addition, the two new warehouses we have acquired to provide for the next phase of growth are not operating at full capacity and are not therefore as efficient as the existing warehouses. This is a drag on profitability in the short term until revenue matches their capacity.

The overhead expenses associated with the brands acquired towards the end of the previous financial year are not as fully absorbed in revenue as the more established brands, and the effect on profitability is that the new brands' overheads are running at a rate of £11 million more than that of the established brands in the first half of the year. As revenues increase, these overheads will become a smaller percentage of revenue and hence profitability will increase.

On the acquisition of Dorothy Perkins, Wallis and Burton earlier in the year, we continued to operate the warehouses from the same site as the former owners and as such incurred additional running costs, as well as some restructuring costs. These costs have been removed from adjusted EBITDA, are classified as exceptional costs, and include redundancy costs, dual warehouse operational and relocation costs, administration and legal expenses, are considered non-recurring, and amount to £20 million. This figure also includes £4.4 million of disruption costs associated with the commissioning of two new warehouses in the period, as well as inefficiencies incurred as a result of the automation project in Sheffield for PrettyLittleThing.

Adjusted EBITDA was £85.1 million (2020: £89.8 million, 2019: £60.8 million), a decrease of 5% on the first half of the previous year. Compared to two years ago, however, adjusted EBITDA has increased by 40%. Gross margins are very similar to last year at 54.6%. Adjusted EBITDA margin reduced to 8.7% (2020: 11.0%, 2019: 10.8%). Profit before tax was £24.6 million (2020: £68.1 million, 2019: £45.2 million). Adjusted diluted earnings per share was 3.84p, down 15% on the prior half-year. Basic earnings per share was 1.44p, a decrease of 65% (2020: 4.08p, 2019: 2.88p).

Cash generation, ahead of a substantial inventory build for peak trading, was strong, with operating cash flow of £21.3 million (2020: £147.2 million, 2019: £55.9 million). Net cash flow was £127.6 million outflow (2020: £99.5 million inflow, 2019: £15.5 million inflow), following significant capital expenditure of £172.2 million. Our net cash balance (cash less bank debt) at the period end decreased to £98.4 million (2020: £344.9 million, 2019: £207.3 million), whilst the actual cash balance was £148.4 million.

Technology

The technology team has been exceptionally busy in the first half of the year, delivering the digital platforms for the four newly-acquired brands, with the Debenhams brand built from scratch on to a new industry-leading headless solution that will cater for greater customisation agility in the future as we refine the customer experience. This platform also included new functionality to accommodate concessions via a marketplace model and on-boarding of beauty brands, which will facilitate longer-term strategic growth.

All four brands required significant integration with new warehouses and warehouse management systems and we are immensely proud to have achieved the successful re-launches of the four brands in the first half. Optimisation and additional functionality will continue to be added in the second half of the year to support the brands' ambitions and growth.

As a group, we continue to invest into technology to drive operational efficiencies and provide a stronger infrastructure to allow for greater scalability in the future. Notable projects being delivered include customs warehousing, an order app for buyers, a new on-boarding tool for suppliers, the simplification of our finance systems, resulting in a virtual ERP and the creation of new systems to support our wholesale operations that will launch in the coming months. We are also improving the visibility of end-to-end shipping and the full product lifecycle as well as implementing a new product information management system. 

Distribution centres

The group is now operational in four warehouses: the long-established Burnley site, which serves boohoo, boohooMAN, MissPap and Debenhams; the Sheffield facility for PrettyLittleThing; Wellingborough, which now houses Nasty Gal, Karen Millen, Coast, Oasis and Warehouse; and Daventry, from which the new brands Dorothy Perkins, Burton and Wallis operate. An enormous amount of effort and expenditure has been poured into these projects, which secure for the group an enviable platform for the rapid growth of the business. Naturally, building such a substantial new platform does not come cheaply, nor does it bring immediate cost efficiencies - in fact, a significant amount of disruption costs have been incurred during transition and, of course, the new facilities are not operating at full capacity, which will impact profitability in the very short term. The additional cost of these facilities in the half year is around £4.4 million higher than the run rate in our other facilities and is included in exceptional costs.

We operated the brands Dorothy Perkins, Wallis and Burton out of the former Arcadia offices and warehouses for nearly six months under a transition services agreement. This was necessary to ensure continuation of sales during the period before our new facilities became operational, but the cost of running the operations was greater than, and in addition to, that of our own facilities. The additional costs of running the former sites was around £8.5 million. In addition, we were required to take on the employees under TUPE and when the transition period ended, we incurred redundancy costs of £3.6 million. These costs are included in exceptional costs.

The project to automate the Sheffield warehouse is now well under way, with significant capital expenditure of £50 million incurred. During the works needed to build the automation equipment whilst the facility remains operational, additional costs of working of £1.9 million have been incurred, which are included in exceptional costs. This disruption will continue into the second half of the year before the efficiency savings rapidly re-claw the expense.

Debenhams

Our acquisition of the Debenhams brand out of administration provides us with an exceptional opportunity to develop a digital department store with a wide range of products across fashion, beauty and home, extending the group's target addressable market. We are going to accomplish this through a capital light business model, using a combination of owned inventory and the marketplace solution, where selected third parties provide the product and fulfilment services in return for a commission for selling their products on the Debenhams platform. This offering, we believe, will give customers unparalleled choice and gives the brands increased visibility over their inventory and channels to market.

Through the first half of the year, we have consistently added to the Debenhams platform, starting with a small clothing offering on launch in April and have gradually built shortly thereafter with the addition of home and beauty ranges. In June we launched our marketplace and have recently added a growing number of partner brands onto the Debenhams website. All of this, as well as a programme of continuous improvement in the site and user experience, has driven strong month-on-month improvements in conversion and General Merchandise Value.

In July, Debenhams announced a strategic partnership with Alshaya Group, that will leverage the existing Debenhams presence and brand awareness in the Middle East. In addition, this will provide other brands within the group the opportunity to build brand awareness in the region through a wholesale approach.

By August of this year, we had agreements in place for our marketplace offering in excess of 50 brands, offering a diverse range of products from lingerie to homeware and electrical goods, in addition to our own large beauty store, and anticipate a doubling of marketplace partners in the next 12 months.

In the second half of this year, we will continue to upgrade site functionality, user experience and offering, all of which are aimed at driving conversion, order frequency and share of wallet.

Performance by market

UK

The group's largest market continues to be the UK, accounting for 58% of group revenues (2020: 53%). Growth was 32% on last year and 81% on two years ago. The six brands acquired since June 2020 contributed 20 percentage points to the growth on the prior year and 28 percentage points on two years ago. This highlights the resilient performance in our more established brands and the opportunity to underpin future market share gains as we invest in and scale the more recently acquired brands. Return rates have increased this year to pre-pandemic levels as consumer behaviour normalises. Our multi-brand strategy continues to enable us to gain market share in the UK through our compelling proposition and the future UK opportunity remains significant, with the group having significantly increased its target addressable market over the course of the past two years.

Gross margin decreased slightly from 52.1% to 51.7%.

USA

Growth in the USA has been resilient at 24% on the prior year against tough comparatives, with an exceptional 126% growth being delivered over the last two years, notwithstanding the impact of the pandemic on consumer demand and the disruption to shipping times. The growth, in spite of these pressures, has been encouraging in the circumstances and we believe it bodes well for when the recovery takes hold and lead times improve. Return rates have continued to remain lower than in the pre-pandemic period.

Gross margin improved from 59.3% to 61.5%, with decreased promotional activity offset by increased marketing expenditure. Distribution costs have remained high due to the ongoing airfreight capacity restraints.

Rest of Europe

The continuing impact of the pandemic on customer demand in Europe has been very pronounced. It is also probable that disruption at EU entry ports caused by changing COVID-19 testing requirements throughout the period and the subsequent delays to delivery times across the continent have weighed on customer demand. Overall, growth was negative at 15% on the prior year, but up +20% on two years ago. Return rates have remained at a similar level to last year.

The imposition of duties on certain products over €150 from the end of the Brexit transition period, together with customs clearance costs and irrecoverable sales tax on returns have eroded margins. Gross margin declined from 57.8% to 53.6%. Further changes in EU legislation and customs processes from 1 July 2021 will be beneficial to margin in the second half of the year, reducing customs clearance costs and irrecoverable sales taxes on returns.

Rest of world

Rest of the world comprises mainly Australia, New Zealand and Canada, with the former countries greatly impacted by airfreight availability and longer shipping times, and this has dampened consumer demand. Revenues consequently reduced by 16% on the prior year and by 1% on two years ago. Gross margin increased slightly from 55.3% to 55.7% with profitability continuing to be impacted by the high distribution costs.

Agenda for Change

One year on from launching our Agenda for Change programme, we are delighted with the progress made to date. Since publishing the Independent Review of our supply chain last September, our teams have worked tirelessly to embed new ways of working. Of the 17 recommendations from the review, we have broken these down into 34 deliverables as part of our Agenda for Change. To date the programme has completed 28 of these items, which are governed by a KPMG review cycle.  The remainder are expected to be completed in the coming months. In addition, the group has published two further progress reports from Sir Brian Leveson on Agenda for Change; the Garment and Textile Workers Trust has been formally established and the names of the founding Trustees published; and the recruitment of 150 staff for the new manufacturing facility in Leicester is underway, which is expected to open in the coming months.  We have started an NVQ training pilot with suppliers to provide garment workers with accredited qualifications and, in line with our commitment, the group has published its global factory list. We have completed 1,142 audits of overseas factories in addition to on-going audits of the Leicester manufacturers. We are working with other retailers, brands, local government organisations, enforcement bodies and NGOs within the apparel general merchandisers public private protocol (AGM PPP) to collaboratively transform the UK garment manufacturing industry.

Sustainability

We published our sustainability strategy in May 2021, which is a comprehensive document outlining how we intend to play our part in the global effort to improve sustainability and reduce the negative impacts we have on the environment.

Across our brands, we have launched 'Ready for the Future' product ranges, which are collections of clothing made with recycled, organic materials or other more sustainable materials, offering our customers the ability to make more sustainable choices in their purchases. Our aim is for these product ranges to account for 20% of our product range by the end of the year and our focus is to continue to increase this percentage.

We are also working with CottonConnect and one of our strategic suppliers in Pakistan and have trained 2,500 farmers in more sustainable cotton farming methods. The cotton is being harvested and will be available in our products in early 2022.

We have been working with suppliers and other external partners to eliminate waste in the UK supply chain going to landfill, we have piloted a more comprehensive textile waste collection programme and are working to develop resale and takeback propositions in the near future, such as PLT marketplace, a resale platform launching in 2022.

Other sustainability initiatives now operating include our despatch bags made from at least 80% recycled content, the use of renewable energy in all our facilities and the commencement of installation of solar panels on our Burnley and Manchester sites, with a completion date of November this year. We have signed up to the BRC Climate Action Roadmap and Textiles 2030 and we are engaging with suppliers on renewable energy and textile waste management issues as we drive our sustainability objectives.

Financial review

Group revenue by geographical market

KPIs

Group

1.     Defined as having shopped in the last 12 months

2.     Defined as number of orders in last 12 months divided by number of active customers

3.     Defined as the percentage of website orders taken to internet sessions

4.     Calculated as gross sales including sales tax divided by the number of orders

Consolidated summary income statement

Taxation

The effective rate of tax for the half-year was 27.6% (2020: 23.6%, 2019: 20.1%), which is more than the blended UK statutory rate of tax for the year of 19%, due to disallowable expenses and depreciation of buildings in excess of capital allowances.

Earnings per share

Basic earnings per share for the first half of the year decreased by 65% from 4.08p to 1.44p. Adjusted diluted earnings per share was 3.84p, down 15% on the first half of the prior year.

Consolidated statement of financial position

Working capital has increased due to increased trading activity largely due to higher inventory levels supporting the new brands less the associated accruals for goods in transit. The rolling capital facility of £100 million was drawn down by £50 million to provide sufficient buffer for intra-month trading and investment activity.

Liquidity and financial resources

Operating cash flow was £21.3 million (2020: £147.2 million, 2019: £55.9 million), with high levels of trading activity driving increases in inventory and payables and accruals for inventory and goods in transit. Net cash flow was an outflow of £127.6 million compared to inflows of £99.5 million in the previous financial half-year and £15.5 million in 2019. We invested a substantial £172.2 million in capital expenditure, providing the warehousing and office facilities and IT systems infrastructure for future growth. The closing cash balance for the group was £148.4 million.

Outlook

Demand accelerating in September

Consumer demand has been improving through August, principally in the UK but also in key overseas markets such as Ireland and France, where there has been a re-acceleration in the rate of growth. This has again improved in September, where the rate of gross sales growth has increased compared to that achieved in the second quarter of the financial year.

Full year outlook

Our expectation is for full year sales growth of 20% to 25%, implying sales growth of 20% to 30% in the second half of the financial year. As we have indicated above, we have seen a re-acceleration in the rate of growth compared to that achieved in the second quarter. Adjusted EBITDA margins are expected to remain robust, and the Group will continue to invest in its existing and new brands in order to facilitate the long-term growth opportunity. Elevated short-term cost headwinds experienced in the first half are expected to continue in H2 alongside recent freight inflation in our supply chain and wage inflation within our distribution centres. Consequently, adjusted EBITDA margins are now expected to be 9% to 9.5%, compared to 9.5% to 10% as previously guided. Reflecting ongoing investments across our technology, offices and infrastructure (including the initial phase of the international distribution centre), capex is now expected to be £275million, slightly above the top end of previous guidance of approximately £250 million.

The COVID-19 factors impacting EBITDA this financial year are expected to normalise over the medium term. Recent inflation in freight, logistics, and labour costs are expected to reduce from elevated levels in time, particularly as the Group invests in its own infrastructure through implementing more advanced automation in its existing distribution centres, global travel capacity increases and our first global distribution centre opens in North America. 

Longer-term competitive positioning and opportunity to take market share unchanged

The Group expects to emerge from the pandemic in a far stronger position compared to two years ago. Reflecting significant investments in its platform, brands and people, the group has:

·    A broader portfolio of brands and a significantly larger target addressable market with 500 million potential customers in key markets

·    Greater infrastructure capacity capable of supporting in excess of £4 billion of net sales, with automation investments driving future efficiencies

·    Committed to opening a new distribution centre in North America, significantly strengthening our customer proposition

·    Significantly improved supply chain visibility

·    19 million customers globally

·    Numerous growth opportunities through our direct to consumer offer and strategic partnerships.

We remain extremely confident in the Group's future growth prospects, and as short-term demand uncertainty and material cost headwinds as a result of the pandemic unwind, we believe that the Group continues to be capable of executing its strategy aimed at leading the fashion ecommerce market with medium term guidance of sales growth of 25% per annum and adjusted EBITDA margin of 10% remaining unchanged.

30 September 2021

Unaudited consolidated statement of comprehensive income

for the period ended 31 August 2021

1.        Net fair value gains/losses on cash flow hedges will be reclassified to profit or loss during the three years to 31 August 2024.