ScS Group plc

("ScS" or the "Group")

Interim results for the 26 weeks ended 28 January 2023

SCS PERFORMANCE IN LINE WITH EXPECTATIONS

ACQUISITION OF SNUG DIVERSIFIES GROUP AND POSITIONS IT TO FURTHER INCREASE MARKET SHARE

ScS, one of the UK's largest retailers of sofas, flooring and furniture, presents its interim results for the 26 weeks ended 28 January 2023 ("period" or "H1 FY23").

Financial summary:

* This report includes alternative performance measures (APMs) which are defined and reconciled to IFRS information, where applicable, within the Financial Review.

**H1 FY22 gross sales and revenue have been restated to account for warranty sales as an agent rather than principal under IFRS 15. This did not result in any change to reported profit, earnings per share, cash flows or in the consolidated statement of financial position.

On 10 January 2023, the business and assets of Snug were acquired out of administration. Due to the close proximity of the acquisition to the period end, Snug has not contributed to gross profit in the period. Total costs of £0.8m have been recognised in the period, largely due to set up and acquisition costs, all of which have been classified as adjusting items.

Financial highlights:

·      Delivered sales increased 3.4% with improvements in the supply chain reducing lead times

·      Underlying loss before tax of £4.7m, £0.9m ahead of the prior period and typical of H1 performance, which includes significant marketing expenditure to support the winter sale and where profitability is substantially H2 weighted

·      Excluding stock sales, gross margin* was in line with the prior period. Reported decline due to an increase in display stock sales as the Group rolled out the decluttering programme

·      Strong balance sheet with cash of £76.9m as at 28 January 2023 (H1 FY22: £87.9m)

·      Confidence in outlook supports ongoing shareholder returns

o  Interim dividend of 4.5p (H1 FY22: 4.5p)

o  Completion of share buyback programme, returning £7m to shareholders

Operational highlights:

·      Strong winter sale with the last 10 weeks of the period seeing like-for-like* order intake growth of 2.6%

·      Market share gains achieved during the period

·      Continued strategic progress:

-       Acquired the business and assets of Snug, expanding the Group's offering and increasing market share

-       Opened two new stores in York and Swindon

-       Implemented our new concept design into two further stores

-       Achieved Kitemark certification for domestic furniture from the British Standards Institute

-       Exceeded 400,000 reviews on Trustpilot, making ScS the 5th most reviewed company in the UK

-       Maintained the maximum 5-star 'Excellent' rating on Trustpilot, with ScS being the only company in the UK's top 10 most reviewed to hold the full 5-star rating

Current trading and outlook:

·     Like-for-like* order intake momentum continued to improve after the period end, with growth of 5.7% in the 7 weeks to 18 March 2023

·      One year like-for-like order intake for the 33 weeks is down 2.8%

·      Planned investment in a further eight stores to adopt our concept design

·      Resilient balance sheet, with cash of £83.2m as at 18 March 2023 and no debt

·      ScS remains on track to deliver a full year profit before tax in line with market expectations †

·     Pleased with the Snug acquisition which we expect will be earnings accretive in FY24. We intend in invest in the business throughout H2 and expect Snug will report a second half loss before tax of £1.0m

† The Board believe that consensus market expectation for underlying profit before tax for the full year is £7.7m. For the avoidance of doubt, this excludes the impact of Snug in FY23, guidance of which is provided for the first time today.

Steve Carson, Chief Executive Officer of ScS, commented:

"The Group made good strategic progress in the first six months of the financial year and continued to take market share. We are pleased with the strength of our winter sale performance and the subsequent increase in order momentum over the last two months.

The macroeconomic environment continues to be challenging and we are mindful of the pressures faced by many of our customers. Therefore, continuing to focus on our value driven proposition is more important than ever so that everyone is able to create the home they love.

The Board continues to believe that progress with the Group's strategy, ongoing cost management and a robust balance sheet places it in a strong financial and operational position. The outlook, therefore, is positive and ScS remains on track to deliver full year profit before tax in line with market expectations."

Enquiries:

A presentation for analysts will be held this morning at Buchanan, 107 Cheapside, London, EC2V 6DN commencing at 9.30am today, Tuesday 21 March 2023.

ScS Group plc's Interim Results 2023 are available at www.scsplc.co.uk. An audio webcast of the presentation will also be made available later in the day.

For further information, please contact Buchanan at scs@buchanan.uk.com.

Notes to editors

ScS is one of the UK's largest retailers of sofas, flooring and furniture. We trade as two separate brands- the core ScS brand and the newly acquired Snug brand.

The ScS brand seeks to offer value and choice through a wide range of sofas, flooring and furniture products. The product range is designed to appeal to a broad customer base with a mid-market priced offering and is currently traded from 100 stores. The brand specialises primarily in fabric and leather sofas and chairs, selling a range of branded products which are not sold under registered trademarks and a range of branded products which are sold under registered trademarks owned by ScS (such as Endurance, Inspire and SiSi Italia). It also offers a range of third party brands (which include La-Z-Boy, Ideal Home and G Plan). The flooring business includes carpets, rugs, wood, laminate and luxury vinyl tiling.

Snug is an innovative digital-first sofa and sofa-bed business specialising in modular and re-configurable sofas, with quick delivery and excellent quality and customer service. Although predominantly online, Snug also operates from one store in Leeds and seven concessions throughout England.

Business review

The first six months of FY23 has been a period of further strategic progress which has resulted in a resilient financial performance despite the challenging economic climate. We are particularly pleased to report a successful winter sale and excellent order intake momentum, and to have expanded the Group through our acquisition of the business and assets of Snugsofa.com ("Snug"). Furthermore, externally sourced data shows the Group gained market share over the period.

Results

Like-for-like* order intake momentum improved significantly throughout the period but particularly through the key winter sale, as the Group started the period with tough comparatives. For the first 16 weeks of the period, like-for-like* order intake was down by 9.1% due to the comparative period benefitting from strong pent-up demand following the last national lockdown. The subsequent 10 weeks to 28 January 2023 saw a return to order intake growth of 2.6%, which included the key winter sale. Overall like-for-like* order intake was 4.7% down for the first half of the financial year, largely reflecting the challenging comparative, but this was partially mitigated by improved underlying performance.

Gross sales* for the period increased 3.4% to £154.9m compared to the prior period. Gross profit increased by 0.4% to £67.8m and gross margin* was 43.8% (45.1% in H1 FY22). The reduction in gross margin* was driven by higher levels of stock sales as the Group sold off display stock as part of a decluttering programme to improve the look and feel of our showrooms. Gross margin was in line with the prior period when adjusted for stock sales.

The Group made an underlying loss before tax* of £4.7m for the period, a £0.9m improvement on the prior period. This is in line with the Group's usual profile, predominately due to the investment in marketing in the first half of the financial year to support order intake over the key winter sale. The benefit of this investment will be reflected in the second half of the year.

Snug acquisition

On 10 January 2023 the Group acquired, out of administration, the brand, domain names, website, intellectual property and stock of Snug for £875,000. Snug is an innovative digital-first sofa and sofa-bed business specialising in modular and re-configurable sofas. It has a strong brand and differentiated digital-first offering, which the Board believe will complement the Group's existing proposition, further diversifying its customer base and increasing market share. The acquisition represents further progression in ScS's strategy, and is a great strategic and cultural fit which reinforces our commitment to helping our customers create the home they love.

Since the acquisition, the business has worked hard to re-establish relationships with suppliers, replenish stock and relaunch trading. Snug is now fully operational, trading from the website and currently operates from one store in Leeds and seven concessions throughout England. We plan to launch Snug concessions into our ScS showrooms in the coming months, which will help build the national presence and awareness of the brand. These concessions will be trialled in our concept stores.

Strategy update

Outstanding team

Ensuring our colleagues feel valued remains a top priority for the Board. At the start of the period, we invested £2.0m in our colleagues' take home pay, both through an increase in their basic salaries and a £400 one-off cost of living support payment.

As we strive to increase engagement and drive meaningful change, the results of the latest annual employee survey were encouraging as the overall survey score increased by three points to 74 which is ahead of the UK benchmark. This increase in colleague satisfaction is also reflected in our retention rates, which increased compared to the prior period.

In December 2022 the Group achieved the bronze 'Better Health at Work Award' as we continued to focus on health and wellbeing. In attaining this award, eleven colleagues were trained as health advocates, a number of health campaigns were launched such as 'Raising cancer awareness & health habits' and a 'Wellbeing hub' was created on our intranet. 

We continued to review our overall reward offering and have:

·      Overhauled our family friendly policies including enhanced maternity and paternity pay;

·      Introduced a 24 hour virtual general practitioner service for our colleagues and members of their households;

·      Offered access to low-cost health plans; and

·      Improved our colleague discount policy and extended it to family and friends.

As we aim to recruit excellent talent, we have launched a new careers website and application tracking system to improve efficiencies in the hiring process. In support of our colleagues participating in charitable endeavours we launched a new volunteering policy in which all colleagues are given the support of the business to volunteer for a cause of their choice.

We also welcomed 53 new colleagues into the Group as part of the acquisition of Snug. They have been a significant part of building the brand and developing the business.

Customer driven

Our mission is to be the UK's best value home retailer, delivering outstanding value, quality and choice with a seamless customer experience. As we strive to achieve this mission, improving product quality and streamlining the customer journey are key focus areas.

In recognition of our product quality, we achieved Kitemark certification for domestic furniture by the British Standards Institute. We are one of only three furniture retailers in the UK to hold this stamp of approval. The BSI Kitemark is a recognised symbol of outstanding quality, safety and trust around the world. It provides consumers with reassurance that products have been made with care and skill in an environment with rigorous factory process controls. It also demonstrates that each product type has been independently tested in accredited laboratories to withstand extremely demanding safety and durability trials.

As part of our continued efforts to improve our customer experience we have implemented a new end-to-end technology solution that delivers significant improvements such as a virtual queue in which customers do not need to wait on hold and can instead opt for one of the team to call them back. The system allocates calls to a relevant handler based on their skills to optimise efficiency and the system links into our social media platforms so that we have increased visibility of customer queries. The implementation of this new platform has led to reduced wait times and improved service levels.

We have also become a member of the Furniture & Home Improvement Ombudsman which has enhanced the development and training of our customer experience team and provides additional assurance for our customers through the Ombudsman's alternative dispute resolution services.  

Our commitment to improving product quality and the customer journey is reflected by the 18% reduction in the number of times that customers contact us regarding their order or delivered product.

A key part of enhancing the customer experience is obtaining and learning from customer feedback. We became the fifth most reviewed company in the UK on Trustpilot having received over 400,000 reviews. We also maintained the maximum 5-star 'Excellent' rating, making us the only company in the UK's top 10 most reviewed to hold the full 5-star rating, with a Trustscore of 4.8. On a local store level, over three quarters achieved the full 5-star rating, and every store attained a minimum of 4.5 stars, which is a credit to our dedicated retail teams.

We also conducted a number of customer research groups, receiving feedback on a range of topics such as marketing and promotional style and store design which has led us to onboarding a new creative agency and media partner. We look forward to refreshing and modernising our marketing style and tone in the second half of the year.

Inspiring ranges

As part of ongoing product development, we announced our partnership with Ideal Home and have since launched three exclusive Ideal Home branded sofa ranges, developed in conjunction with its team. In addition, we launched 34 new upholstery ranges in the period, bringing our customers varied styles, fabrics and colours. Given this refreshed product offering, we have seen a slight change in our customer demographic with a wider range of households shopping with us as we broaden our appeal. We are also pleased to see our furniture lead times return to historic levels through continued work with our suppliers and have seen a significant decrease in customer cancellations when compared to the prior period.

To improve our flooring offering we launched a new hard flooring proposition across laminate, luxury vinyl tiling and engineered wood. We also focused our flooring products through the introduction of 20 'star buy' ranges, increasing colleague knowledge and confidence in a more streamlined offering and delivering unbeatable value for money for our customers across a more simplified product base. In addition, we made several improvements to our customer journey by enhancing the service provided by our external fitters, leading to a reduction in customer queries.

As we continue to further improve our dining ranges, and embed our ESG strategy throughout the business, in October 2022 we launched our first sustainable dining range made from FSC certified reclaimed pine. The collection boasts both sustainable and eco-friendly credentials and is made from re-used pallets.

Digitally optimised

Online sales have increased 16.7% compared to the prior period and now represent 10.1% (H1 FY22: 8.9%) of total gross sales*. Supporting this, we have increased digital engagement with our customers and, to improve the customer journey, we have:

·      Added 'question and answer' sections to the product pages on our website;

·     Created a 'visual bundling solution' that enables the customer to add multiple items into one image to visualise how our products will look together;

·     Launched AI visualiser technology to some of our flooring ranges to allow our customers to see how our products would look in their home; and

·      Developed an online wishlist in which customers can save their favorite products and share with our retail teams to create a more seamless customer journey.

To drive our social media presence we have been trialling competitions and increasing our collaborations with influencers. We have seen an increase in engagement as a result of this, with engagement levels through Facebook being at their highest levels yet. The team at Snug bring with them a wealth of knowledge in this area, with a large social media following and excellent track record in social commerce through the use of innovative and creative ways to further customer engagement. We look forward to the digital team at ScS working closely with the team at Snug and both brands taking advantage of the resulting synergies.

As part of a digital marketing project, our retail colleagues within our stores have been working hard to ensure that customers who may not be ready to make a purchase remain informed about the product they are interested in by taking their details, allowing for targeted and focused marketing. The digital team has also been working with our retail teams to aid the declutter programme within our stores by launching a clearance section on our website.

During the period we engaged the support of a third party specialist to work with our teams as we look to invest in the future technology stack to support the Group. We have completed the discovery phase of this project and look forward to taking the next steps, with the ultimate aim of increasing efficiency within our teams, allowing for improved data analysis and enhanced system agility.

Engaging showrooms

During FY22 a key focus was launching our new concept store where we could trial improvements to the look and feel of our showrooms, new technology and ideas. In addition to the initial Coventry store we launched in July 2022, we have refitted two further stores during the period in Gateshead and Uddingston. Whilst there are opportunities to further improve the concept, it is pleasing that all three concept stores have outperformed the rest of the estate since re-opening. We continue to obtain valuable insight from the concept stores, through performance and customer feedback, such as understanding which layouts are most successful, where certain brands are best displayed and how technology can support the customer journey. Following the success of our initial concept stores, we have now planned investment in a further eight stores before the end of the financial year.

As we continue to enhance the in-store experience, we have rolled out our 'declutter' programme, which commenced in FY22, across the entire store network. This included reducing the amount and size of the point of sale materials and being more selective around some of the ranges on display. This programme contributed to an increase in display stock sales in the period.

We are pleased to have continued to expand our store estate by opening two new stores in York and Swindon on Boxing Day, bringing our total UK store count to 100. We continue to consider further expansion through utilising customer demographic data and a purpose built model which helps us to identify the optimum store footprint, location and likely performance of potential new stores.

Strengthen the core

To increase sales and further drive conversion we have invested in training for our retail colleagues including:

·    Delivery of 'art of selling' training to ensure that our colleagues felt equipped and empowered ahead of the key winter sale. Over the period we have seen an increase in our in-store furniture conversion KPI of 9%; and

·     Training focused on the top selling flooring ranges to enhance product knowledge and to help our colleagues to feel more confident when advising customers on the most suitable products for them. We have seen an increase in our in-store flooring conversion KPI of 12% over the period.

At the start of the period we created a divisional sales structure by splitting our national sales reporting into two divisions, North and South. This change allows colleagues to be more focused on regional and store performance within their divisions ensuring we meet our growth targets and profitability goals. We have also strengthened our regional management team.

During FY22 we enhanced the reporting visibility of our compensation and allowances cost line. This increased insight and action taken has led to a 14% reduction in this cost. We are continuously looking for ways to improve gross margin and during the period we have reviewed our pricing strategy and finalised a retender of our finance house partners. We have also reviewed our supplier mix and onboarded several new suppliers to increase our optionality in relation to product sourcing.

The Group has maintained a strong cash position and worked hard to ensure we achieve good returns on those deposits. Interest received for the period is £0.6m higher than the prior period.

As we seek to adopt more data driven approaches to aid decision making we have utilised footfall data to refine our colleague levels and opening hours across our store network. We have also sought to reduce product damage and have installed a new vehicle-to-ground lift at one of our distribution centres. We will monitor the impact on both colleagues and product damage as we consider further potential rollout to other sites. 

We recently committed to support Shelter, a registered charity that campaigns for tenant rights across the UK, as a commercial sponsor as part of our social agenda within our ESG strategy. Over the period we helped Shelter to generate over £20,000 in sales through their stores by providing stock which was no longer required by the business. This has not only helped to further Shelter's fantastic work but it has also allowed our business to be more environmentally friendly and reduce the waste that is generated by our operations.

Board changes

The Board welcomed a number of new appointments during the period:

·     Carol Kavanagh was appointed on 26 September 2022 as a Non-Executive Director. Carol has been working closely with the Chair of the Remuneration Committee, Angela Luger, who she will succeed later this month. Angela will continue in her role as a Non-Executive Director and in November 2023 will assume the role of Senior Independent Director;

·      Andy Kemp was appointed on 1 February 2023 as a Non-Executive Director. Andy will liaise with Ron McMillan over the coming months as he prepares to take on the role of Audit Committee Chair when Ron steps down from the Board on 1 December 2023 having completed nine years as a Board member; and

·     John Walden was appointed on 1 March 2023 as Chair Designate and will work closely with Alan Smith over the coming months as he prepares to take on the role of Chair when Alan steps down on 1 December 2023 having completed nine years as a Board member. 

On 2 December 2022 Chris Muir notified the Board of his intention to step down as Chief Financial Officer. The process to identify a successor is underway. Chris has a 12 month notice period and will remain with the business while a successor is identified and to facilitate a smooth handover. A further announcement in this respect will be made in due course.

Dividend and share buyback programme

The Group continues to maintain a strong balance sheet and the Board actively reviews the allocation of capital, considering potential external and internal investment opportunities and returns to shareholders. The period has seen the Group generate strong cash flows and the strategic progress provides further confidence in the Group's future. As a consequence, the Board is pleased to announce an interim dividend of 4.5p per ordinary share (H1 FY22: 4.5p). The dividend will be payable on 11 May 2023 to shareholders on the register on 21 April 2023. The ex-dividend date is 20 April 2023.

In March 2022 the Group announced a share buyback programme which was completed in February 2023 returning £7.0m to our shareholders.

Looking forward

The Group made good strategic progress in the first six months of the financial year and continued to take market share. We are pleased with the strength of our winter sale performance and the subsequent increase in order momentum over the last two months.

The macroeconomic environment continues to be challenging and we are mindful of the pressures faced by many of our customers. Therefore, continuing to focus on our value driven proposition is more important than ever so that everyone is able to create the home they love.

The Board continues to believe that progress with the Group's strategy, ongoing cost management and a robust balance sheet places it in a strong financial and operational position. The outlook, therefore, is positive and ScS remains on track to deliver full year profit before tax in line with market expectations**.

** The Board believe that consensus market expectation for underlying profit before tax for the full year is £7.7m. For the avoidance of doubt, this excludes the impact of Snug in FY23, guidance of which is provided for the first time today.

FINANCIAL REVIEW

*    This report includes alternative performance measures (APMs) which are defined and reconciled to IFRS information, where applicable, on pages 14 to 15.

**  The prior period gross sales and revenue have been restated to account for warranty sales as an agent rather than principal under IFRS 15, see note 18. This did not result in any change to reported profit, earnings per share, cash flows or in the consolidated statement of financial position.

On 10 January 2023, the business and assets of Snug were acquired out of administration. Due to the close proximity of the acquisition to the period end, Snug has not contributed to gross profit in the period. Total costs of £0.8m have been recognised in the period, largely due to set up and acquisition costs all of which have been classified as adjusting items.

Gross sales* and revenue

Improvements in the supply chain, and consequently a reduction in lead times, saw gross sales* increase by £5.0m (3.4%) to £154.9m when compared to H1 FY22. The movement on gross sales* is further analysed as follows:

·      An increase in furniture sales in ScS stores of 3.3% to £125.1m (H1 FY22: £121.0m);

·      A decrease in flooring sales in ScS stores of 7.8% to £14.2m (H1 FY22: £15.4m); and

·      An increase in online sales of 16.7% to £15.6m (H1 FY22: £13.4m).

The decrease in flooring sales is due to the prior period benefitting from a large opening order book. Encouragingly flooring like-for-like* order intake has grown 5.2% in the period.

Revenue, which represents gross sales* less charges relating to interest free credit sales (see note 5 - Segmental information), increased by 2.6% from H1 FY22 to £147.9m. Revenue for the period has been adversely impacted by an increase in the cost of supplying interest free finance as rates continue to rise. As a proportion of gross sales* the cost of interest free credit has increased by 0.7% to 4.5%.

Gross profit

Gross margin* was 43.8% (H1 FY22: 45.1%). The decrease of 130 basis points was largely due to an increase in lower margin display stock sales as the Group sold off increased levels of stock as part of the roll out of our decluttering programme. Excluding stock sales and associated costs, gross margin* was in line with the prior period.

The increased volume year on year resulted in an increase in gross profit of £0.3m (0.4%).

Distribution costs

Distribution costs comprise the total cost of the in-house distribution function and includes employment costs, vehicle running costs, property and utility costs for the nine distribution centres, as well as costs of third-party delivery services contracted to support peak delivery periods.

Distribution costs increased £0.5m in the period to £10.1m (H1 FY22: £9.6m). As a percentage of gross sales* for the period, distribution costs were 6.5% (H1 FY22: 6.4%). The increase in costs was driven by the inflationary cost pressures on salaries, fuel, utilities and other property related costs.

Administrative expenses

Administrative expenses comprise:

·    Store operating costs, principally employment costs and property-related costs (depreciation, rates, utilities and store repairs);

·      Marketing expenditure; and

·     General administrative expenditure, which includes the employment costs for the Directors, senior management and all head office based support functions and other central costs.

Administration costs for the period totalled £61.0m, compared to £61.7m in the prior period. Administration costs were 39.4% of gross sales*, down from 41.2% in the prior period.

·      £0.3m decrease in marketing investment, following a rephasing of media spend;

·    £1.0m reduction in performance related pay due to a decrease in bonuses accrued for senior management as a result of the performance levels achieved;

·      £1.5m increase in other payroll costs due to the impact of inflationary wage costs;

·     £0.8m reduction in property costs, largely due to a decrease in depreciation charges on the right of use asset as a result of rent savings; and

·      £0.1m reduction in other costs.

Flexible costs

The nature of the Group's business model, where almost all sales are made to order, results in the majority of costs being proportional to sales. This provides the Group with the ability to flex its cost base as revenue changes, protecting the business should there be wider economic pressures. As shown below, the proportion of cost variability remained relatively consistent year on year.

Total underlying costs before tax for the period were £159.6m compared to H1 FY22 of £155.4m.

Of this total, 73.0% (H1 FY22: 72.4%), or £116.5m (H1 FY22: £112.5m), are variable or discretionary, and are made up of:

·      £87.0m cost of goods sold, including finance and warranty costs (H1 FY22: £82.2m);

·      £10.1m distribution costs (H1 FY22: £9.6m);

·      £14.7m marketing costs (H1 FY22: £15.0m); and

·      £4.7m performance related payroll costs (H1 FY22: £5.7m).

Semi-variable costs totalled £22.8m, or 14.3% of total costs, for the period (H1 FY22: £21.4m; 13.8%) and are predominantly other non-performance related payroll costs. Depreciation, interest, rates, heating and lighting make up the remaining £20.2m (12.7%) of total costs (H1 FY22: £21.4m; 13.8%).

Underlying operating loss*

Due to the seasonal nature of the business, the Group's result for the first half of the year is impacted by higher advertising spend to support the autumn and winter sales. The second half of the year benefits from the delivery of those orders and significantly less advertising spend. The Group's underlying operating loss* was £3.3m for the first half of the financial year, compared to £3.7m for H1 FY22.

Adjusting items

In the current period the Group has adopted an adjusting items APM to categorise certain costs or incomes that are material in size or unusual/non-recurring in nature to exclude from statutory measures to reflect management's view of the underlying performance of the Group to aid the reader of the accounts.

Adjusting items comprise:

·      £2.0m charge in relation to the impairment of the Group's property plant and equipment and right of use assets as a consequence of the current view on longer term store performance in a potentially weakened economic environment;

·      Snug pre-trading costs of £0.8m, including acquisition costs such as legal and professional fees;

·    Receipt of a £1.3m business interruption insurance payment relating to loss of profit as a result of the initial lockdown period during the COVID-19 pandemic; and

·     During the prior period, the Group benefitted from £1.9m of retail business rates relief provided in response to the COVID-19 outbreak. No further benefit was received in the period ended 28 January 2023.

For further information see note 6.

Net finance cost

The net finance cost has decreased by £0.5m to £1.4m compared to H1 FY22 as a result of increased interest income on the Group's significant cash balance.

Taxation

The tax credit for the period is lower (H1 FY22: higher) than if the standard rate of corporation tax had been applied primarily due to non-deductible expenses.

Underlying loss before tax*

The Group's underlying loss before tax* was £4.7m for the first half of the financial year, compared to £5.6m for H1 FY22.

Acquisition of Snug

Since the period end Snug has commenced trading and we are encouraged by the recent order levels. Investment is required to grow the business and it is therefore expected that Snug will generate an underlying loss before tax of £1.0m in FY23, and then go on to be earnings accretive in FY24.

Cash and cash equivalents

The Group operates a negative working capital business model whereby:

·      For cash/card sales, customers pay deposits at the point of order and settle outstanding balances before delivery;

·      For consumer credit sales, the loan provider pays ScS within two working days of delivery; and

·    The majority of product suppliers are paid at the end of the month following the month of delivery into the distribution centres.

Cash increased £6.1m in the period to £76.9m (H1 FY22: £87.9m). A summary of the Group's cash flows is shown below:

The Group continued to be cash generative in the period with a net cash inflow from operating activities of £29.0m.

Cash generated from operating activities is £4.5m higher than H2 FY22 due to an increase in working capital inflow, largely as a result of the timing of VAT payments, partially offset by a reduction in customer deposits as lead times reduce.

The payment of capital and interest elements of leases has decreased by £4.4m due to the prior period including the repayment of rent deferrals previously negotiated with landlords when stores were temporarily closed due to the Government's imposed lockdown response to COVID-19.

Cash outflow in relation to the purchase of own shares has increased by £2.3m in the period as a result of £3.5m of share buybacks, offset by a £1.2m reduction in the number of shares bought for the purposes of satisfying management incentive awards.

Capital allocation

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern whilst retaining financial flexibility to both invest in the business where economic returns are attractive and provide returns to shareholders. We aim to allocate capital, subject to strict returns criteria, to meet the strategic needs of the business. Our target is gross capital expenditure of under 4.0% of total sales per annum, on average. During the period we invested in developing two further concept stores as part of the 'Engaging showrooms' pillar of our strategy, and opened two new stores.

Return to shareholders

The Board is confident the Group can build on the strong strategic progress experienced in the first half of the year. As a consequence, the Board is pleased to announce an interim dividend of 4.5p per ordinary share (H1 FY22: 4.5p). Full year profit expectations and the strength of the balance sheet gives the Board confidence to maintain the dividend at the same level.

The 4.5p dividend reflects an anticipated one third and two thirds split between the interim and final dividend respectively. This dividend will be payable on 11 May 2023 to shareholders on the register on 21 April 2023. The ex-dividend date is 20 April 2023.

In March 2022 the Group announced a share buyback programme which was completed in February 2023 returning £7.0m to our shareholders.

Principal risks and uncertainties

The principal risks and uncertainties which the Group faces are unchanged from those detailed on pages 50 to 58 of the Annual Report for 2022, which is dated 10 October 2022 and is available from the ScS Group plc website: www.scsplc.co.uk.

A summary of the principal risks is set out below:

·      Changes in consumer confidence

·      Changes in interest rates, currency rates and availability of consumer credit could lead to cost pressure and changes in customer spending

·      Competition with other retailers and failing to respond to key changes in the competitive environment

·      Regulatory and compliance risk

·      Supply chain and sourcing risk

·      Disruption to the Group's IT systems

·      Challenges in retaining and developing our colleagues

·      Protecting our brand and reputation

·      External factors adversely affecting footfall in our stores over key trading periods

Steve Carson

Chief Executive Officer

20 March 2023