Half-year Report

RNS Number : 6654D

Brown (N.) Group PLC

11 October 2018

 

11th October 2018

N Brown Group first half results for the 26 weeks ended 1 September 2018

Good growth in Financial Services, disappointing Product performance in a challenging market.

Full year expectations unchanged.

£m	H1 FY19	H1 FY18	Change
Group revenue	457.8	453.4	+1.0%
Product revenue (excluding stores)	304.5	314.1	-3.1%
Financial Services revenue	146.4	129.9	+12.7%
Adjusted EBITDA1	52.0	49.0	+6.1%
Adjusted PBT2	30.6	32.2	-5.0%
Statutory PBT	(27.1)	(27.6)	+1.8%
Adjusted EPS2	8.37p	8.77p	-4.6%
Statutory EPS	(9.14)p	(7.50)p	-21.9%
Interim dividend	2.83p	5.67p	-50.0%
Core net debt3	30.5	35.7	-14.6%
Overall net debt	420.5	305.7	+37.6%

1before exceptional items as detailed on page 4 2before exceptional items and unrealised FX movement

3excludes debt securitised on the Group's customer loan book

Continuing our transformation into an online retailer

·     Online Power Brands revenue up 8.6%

·     77% of Product revenue now online, 84% for new customers

·     Adjusted EBITDA increased by 6.1% to £52.0m

Product revenue decreased by 3.1% (excluding stores)

·     Simply Be up by 8.0%, Jacamo ahead by 2.7% and JD Williams down 3.1%

·     Significant decline in offline sales as business focuses on growing online Power Brands

·     Taken measures to address poor International performance

Financial Services revenue up 12.7% due to strong interest performance

·     Customer loan book grew by £30.0m to £677.6m (gross basis) since 3 March 2018

·     Core net debt3 of £30.5m, giving leverage of 0.3x

Tight control on operating costs, which decreased as planned by 1.5%

·     Mainly due to lower marketing costs, down by 4.3%

Exceptional costs of £65.4m drive a statutory PBT loss of £27.1m

·     New exceptional items relate to customer redress and non-cash asset impairment charges

Interim dividend reduced by 50.0% to 2.83p

·     Rebased dividend to a more sustainable level from which the Group will seek to grow

Matt Davies, Chairman, said:

"Whereas much progress has been made transforming the business into an online retailer, we have not yet achieved the growth in product or international that we would have hoped for and have decided to rebase the dividend to a more sustainable level from which we will seek to grow.

"We are now in the process of searching for a new Chief Executive to take the Group forward through the next phase of its development. In the meantime, we are pleased that Steve Johnson will lead the business. We have a strong base on which to build. Over three-quarters of our product revenue is now online and we have industry leading expertise in fashion that fits. This is supported by a strong financial services business.  Our goal of becoming a world class digital retailer remains unchanged."

Steve Johnson, Chief Executive, said:

"The Group's adjusted profit was in line with our expectations as we benefited from growth in our online Power Brands and Financial Services, along with improved marketing efficiency. We were however disappointed with our wider product performance which was impacted by the ongoing decline of our legacy offline business and challenging market conditions.

"Going forward we expect offline sales to continue to fall as we focus on online Power Brand growth. While this will hold back revenue in the short term, there are opportunities to drive profit particularly through improved efficiency, as the business further shifts online, and we accelerate the use of analytics to increase returns on our promotional spend."

"While first half trends seen in our product business are continuing into the second half, the positive outlook for Financial Services and scope for further efficiencies mean that our full year expectations are unchanged."

Meeting for analysts and investors:

Management is hosting a presentation for analysts and investors at 10.15 am today. Please contact [e-mail] for further information. A live webcast of the presentation will be available at: www.nbrown.co.uk.

N Brown Group
Steve Johnson, Chief Executive Craig Lovelace, Chief Financial Officer Simon Bielecki, Investor Relations	On the day 07825 453881 Thereafter 0161 238 1845
Website: www.nbrown.co.uk
MHP Communications
Andrew Jaques / Ollie Hoare / Nessyah Hart	0203 128 8156
[e-mail]

Summary

Group revenue in the first half increased by 1.0% to £457.8m, with Q2 up by 1.5% compared to an increase in Q1 of 0.4%, driven primarily by a strong performance in Financial Services.

Product revenue excluding stores, which have all now closed, decreased 3.1% to £304.5m. While recognising that this was a disappointing performance, it reflects the challenging market conditions in fashion retail, ongoing headwind from the migrated Fifty Plus customers onto JD Williams and the decline in the Group's offline business. Product revenue including stores was down 3.7% to £311.4m.

Our three Power Brands (JD Williams, Simply Be and Jacamo) continued to outperform the rest of the Group, with revenue up by 1.8% excluding stores. In line with our growth strategy Power Brands now account for 58% of Product revenue.

Simply Be was again the Group's best performer, recording good revenue growth of 8.0% excluding stores. JD Williams decreased by 3.1% but was up by 7.5% excluding Fifty Plus. Given that the migration of Fifty Plus customers onto the JD Williams brand commenced in the middle of the prior year, we expect this headwind to soften during the second half of FY19. Jacamo was ahead by 2.7% excluding stores. Revenues from Secondary (excl. stores) and Traditional brands were down 6.9% and 11.2% respectively as the Group's focus continued to shift to its priority Power Brands.

Our transformation to a leading online retailer continues at pace, with digital sales now accounting for 77% of Product revenue, compared to 71% in H1 FY18. Online revenue grew by 3.8% in the first half and was ahead by 8.6% for our Power Brands. Offline revenue decreased by 22.4% as the Group continued to shift its focus to its growing online business.

The Group's gross margin decreased by 60bps to 54.2% reflecting the decline in Product gross margin, which also fell by 60bps to 53.4% as we decided to invest more of our marketing expenditure in promotional activity. This reduced gross margin was counterbalanced by lower marketing costs, which decreased by 4.3%.

Financial Services performed strongly with revenue ahead by 12.7% to £146.4m, as we benefited from increased interest received from the Group's growing customer loan book. Gross margin was down 50bps, to 56.0% due to our requirement under IFRS9 to make a provision against every credit customer, including those that are trading normally.

The Group has kept a tight control on operating costs in the first half, which decreased as planned by 1.5% to £196.3m, principally driven by the reduction in marketing costs. Warehouse and fulfilment costs were marginally down, by 0.3%, and while admin & payroll increased slightly, by 1.3%, this was less than the rate of inflation. As a result, adjusted EBITDA increased by 6.1% to £52.0m. As anticipated depreciation and amortisation increased by 15.4% to £14.9m, reflecting our investment in IT systems. Adjusted operating profit was up by 2.8% to £37.1m and operating margin was ahead by 10bps to 8.1%.

As interest increased to £6.5m due to additional borrowings, adjusted profit before tax decreased by 5.0% to £30.6m and adjusted EPS was down by 4.6% to 8.37p. On a statutory basis the Group made a loss before tax for the half year of £27.1m due to exceptional costs of £65.4m.

 

Exceptional items

£m	H1 FY19	H1 FY18	FY18
Store closures	22.0	13.8	13.8
External costs related to taxation matters	2.7	1.1	3.1
Customer redress	22.4	40.0	40.0
Welcom impairment	11.2	-	-
Figleaves goodwill impairment	7.1	-	-
Total	65.4	54.9	56.9

As previously announced in its Q1 trading statement, the Group has incurred exceptional costs of £22.0m (of which £9.3m is cash) relating to the closure of its store portfolio and £2.7m advisory fees associated with ongoing legacy tax cases.

New exceptional items announced today include £22.4m in respect of customer redress provisions, reflecting the estimated cost of remediating anticipated additional PPI claims. The majority of the cashflow impact is expected to occur over the next 12 months, with approximately half in H2 FY19 and half in H1 FY20.

This updated financial services redress provision has resulted from a significant recent increase in claims volumes. These have been experienced across the industry and have arisen due to both the 'Plevin' court ruling and additional marketing activity by the FCA, targeted at raising awareness of the August 2019 PPI deadline.

More specifically, the Plevin ruling has meant that if more than 50% of a consumer's PPI payments were paid as commission, customers could claim back payments, plus interest, even if they have had a prior PPI claim rejected. This has not only led to new claims from those who were previously rejected, but also has increased the general level of PPI claimants as the half has progressed.

The Group has also made two non-cash asset impairment charges in the half. Firstly, following a detailed review of the benefits likely to be achieved from its platform, the Group has terminated an agreement with a third-party IT Financial Services provider, Welcom Digital Limited ("WDL"), resulting in an asset impairment charge of £11.2m. Despite this termination, the Group has been able to deliver much of the required functionality by using in-house resources and other third-party service providers.

Secondly, following historical underperformance of Figleaves, a business the Group acquired in 2010, we have decided to impair its goodwill in full, resulting in a non-cash charge of £7.1m. Despite this impairment, the Group continues to believe in the longer-term opportunity for Figleaves and with a new management team, is implementing a turnaround plan to grow the business.

Dividend

While the Board understands the importance of dividends to investors, its current dividend cover is low and exceptional items, largely relating to legacy matters, have meant that distributions have not been covered by free cash flow.

The Board has therefore decided to rebase the interim dividend to 2.83p per share, a reduction of 50.0% on the prior year, which it also intends to reflect in the final dividend. This brings the Group's dividend down to a more sustainable level and from which the Group will seek to grow as its earnings progress.

 

Balance sheet

The Group has an available financing facility totaling £625m, made up of a securitisation facility of £500m and RCF of £125m, both secured until September 2021.

The Group's balance sheet is underpinned by its customer loan book, which at 1 September 2018 was £677.6m on a gross basis and £565.7m on a net basis, calculated under IFRS9.

Compared to 3 March 2018 the Group's overall net debt increased by £73.7m to £420.5m principally due to exceptional cash outflows of £36.8m, the majority of which relates to customer redress, and £30.0m growth in the Group's gross customer loan book. £390.0m of the Group's debt is securitised against the loan book on a non-recourse basis.

Core debt, which is defined as the amount drawn on the Group's RCF less cash, was £30.5m. On this basis, the Group's leverage is 0.3x on a net debt/EBITDA basis.

Guidance

The following updates to FY19 guidance have been made:

·     Product gross margin: 0 to -100bps (was 0 to +100bps) due to continued promotional investment

·     Group operating costs: down 1% to 3% (was up 1.5% to 3.5%) due to tight cost control

·     Net interest: £13m to £14m (was £12m to £13m) due to growth in customer loan book

·     Exceptional costs: c.£67m (was £22m to £26m) due to increased customer redress provisions and asset impairment charges

·     Net debt: £450m to £475m (was £425m to £450m) due to increased customer redress provisions and the likely acceleration of lease surrenders on store closures

Other FY19 guidance is unchanged:

·     Financial Services gross margin: -100bps to -200bps

·     Depreciation & Amortisation: £32m to £33m

·     Capex: c.£40m

·     Underlying Effective Tax Rate: c.22%

Outlook

Going forward we expect offline sales to continue to fall as we focus on online Power Brand growth. While this will hold back revenue in the short term, there are opportunities to drive profit particularly through improved efficiency, as the business further shifts online, and we accelerate the use of analytics to increase returns on our promotional spend.

While first half trends seen in our product business are continuing into the second half, the continued positive outlook for Financial Services and scope for further efficiencies mean that our full year expectations are unchanged.

 

FX hedging

For FY19 we have hedged 100% of our net purchases at a blended rate of £/$1.33, which will result in a c.£3m tailwind compared to FY18, when the hedged rate was £/$1.28. For FY20, we have to date hedged 77% of our net purchases at a blended rate of £/$1.34. Our policy is to be 100% hedged for FY20 by the end of FY19.

Closure of store portfolio

As announced in the Q1 trading update and following employee consultation the Group closed its remaining 20 stores during the period. In H1 FY19 the Group's stores generated £6.9m revenue and an EBITDA loss of £1.0m (H1 FY18: Revenue of £9.4m and EBITDA loss of £2.1m). To benefit from more favourable terms, the Group is likely to accelerate the surrender of leases on several stores.

Transformation into an online retailer

Product revenue*	FY14	FY15	FY16	FY17	FY18	H1 FY19
Online (£m)	333.7	344.4	386.3	425.0	470.0	238.9
Online (%)	58.3	59.1	63.7	67.8	72.0	76.7
Offline (£m)	239.1	238.5	220.3	202.3	182.6	72.5
Offline (%)	41.7	40.9	36.3	32.2	28.0	23.3
Total (£m)	572.8	582.9	606.6	627.2	652.6	311.4

* Continuing operations

The Group's transformation to a leading online retailer continues, with online sales now accounting for 77% of product revenue in H1 FY19. For new customers revenue generated online is even higher, at 84%. Whereas online revenue grew at a compound annual average rate of 8.9% over the FY14 - FY18 period, with online Power Brands up 13.8%, the Group's offline revenue has decreased at a compound annual rate of 6.5%.

In H1 FY19 online revenue grew by 3.8% and was ahead by 8.6% for our Power Brands. Offline revenue decreased by 22.4% as the Group continued to shift its focus to its growing online business. As the Group focuses more of its resources on growing its online business, going forward it expects a continued double-digit decline in its offline revenue. Although this is likely to hold back overall revenue growth, this channel shift is expected to benefit the Group's profitability as marketing and distribution costs are lower for online customers.

Product performance by brand

Product revenue, £m	H1 FY19	H1 FY18	Change
JD Williams	78.6	81.1	-3.1%
Simply Be*	65.3	60.5	8.0%
Jacamo*	30.7	29.9	2.7%
Power Brands*	174.6	171.5	1.8%
Secondary Brands*	69.4	74.5	-6.9%
Traditional Segment	60.5	68.1	-11.2%
Total*	304.5	314.1	-3.1%
Stores	6.9	9.4	-26.9%
Total including stores	311.4	323.5	-3.7%

* Excludes stores

JD Williams is our modern online department store, positioned for 45+ female customers and their families. Although revenue was down 3.1% this was due to the continued drag from migrated Fifty Plus customers, one of our legacy offline brands. Excluding Fifty Plus, JD Williams revenue was up 7.5%. Given that the migration of Fifty Plus customers onto the JD Williams brand commenced in the summer last year, this headwind is expected to soften during H2 FY19.

Research conducted by JD Williams found that more than half of women aged 45+ are unhappy with what the high street has to offer their age group, despite 60% of this age group having more money to spend on fashion now than they did in their twenties.

In response JD Williams staged JDW Midster Live AW18 - a celebration of fashion for women aged 45+. The show included the winners of the JD Williams' recent Midster Model search, a nationwide competition to find two unsigned models in their mid-life years, as part of its ongoing commitment to use age-appropriate models in its brand and advertising campaigns. This event kick started London Fashion Week and was live streamed on jdwilliams.co.uk with a click to buy functionality - allowing customers to buy the clothes they see on the catwalk.

For its latest campaign JD Williams has adopted both a new creative direction as well as the campaign mantra of 'I AM….'. Shot and directed by an all-female crew aged between 45-60 - our target customer. This celebrates everything about life after 45, the bold and empowering campaign features a mix of models and real women, diverse in age and shape, who the audience can really relate to, showcasing the AW18 collection, available in sizes 10 - 32.

Further building on our industry leading expertise in fit, we have continued to improve our fit accuracy by using body scanners at events for our JD Williams and Simply Be customers. Following hundreds of scans, we now have with over 200 measurements for every women's size compared to a traditional retail model of just 12. Based on these findings, we are now rolling out new adjusted size blocks to our suppliers and are targeting to have covered c.70% of our ladieswear by the end of the year.

Simply Be is the go-to online destination for fashionable size 12-32 women, offering a range of own and third-party brands, often in larger sizes on an exclusive basis, reinforcing our curvy credentials. Simply Be delivered another good performance, growing by 8.0% during the period excluding stores.

To further enhance our beauty proposition, we have recently partnered with L'Oreal, the world's leading beauty manufacturer, launching 200 lines across their big three consumer brands, L'Oreal Paris, Maybelline and Garnier on Simply Be, JD Williams and Jacamo.

Our Autumn Winter campaign, called More than our bodies, encourages women to tell the world their story through their fashion choices. It is brought to life through four familiar models that embody this ethos including Felicity Haywood, who is a pioneer of the body confidence movement and Clementine Desseaux, founder of the All woman Project.

Jacamo caters for 25-45 year-old men of all body shapes and sizes. Jacamo product revenue was up 2.7% excluding stores. Building on our successful distinctive and aspirational Live YOUR Moment campaign, as part of our summer edition we collaborated with former England international and Match of the Day pundit Jermaine Jenas and rapper Wretch 32. Extending over an 11-week period, this was our largest Jacamo campaign to date.

Following its success, we are continuing this campaign into the Autumn Winter season, showing a diverse range of men reliving their inspirational life moments using three different influencers: snowboarder and Olympic medal holder, Billy Morgan, Rugby League player Luke Burgess and model and body confidence ambassador, Raul Samuel. All were chosen for their ability to convey their inspirational life moments and to promote body shape inclusivity supporting our size inclusive offer from small to 5XL.

Secondary brands revenue decreased by 6.9% excluding stores reflecting our shift in marketing investment towards Power Brands. In addition, this reflects the ongoing decline in offline revenue, down by around a quarter, more pronounced than originally anticipated. The decline was principally driven by a double-digit reduction in revenue for Marisota. As this is increasingly being used a product brand through JD Williams, the Group has been reducing investment in the Marisota brand and has stopped offline recruitment.

There was also a small decrease in revenue for Fashion World, which is the largest brand in this category. Following the success of its Simply Be and JD Williams apps, the Group launched its third app in August, Fashion World. This is targeted at improving the online experience for our Fashion World customers. Pleasingly Figleaves returned to growth as we implemented our turnaround plan, led by its new management team.

Revenue in the Traditional segment decreased by 11.2% as the Group continued to increase its focus on its online business and scaled back its offline marketing and recruitment. Given that this segment is more heavily weighted towards offline than the rest of the Group, as it typically serves more mature customers, this segment it is expected to experience the fastest rate of revenue decline going forward.

Technology

Given the termination of our relationship with WDL, alongside proactive internal efforts mitigating this impact, the Group is currently reappraising the timeline and delivery of its systems migration project. Once this has been completed it will provide more details on the expected timing of the migration of Fashion World onto Hybris.

We continue to deploy leading edge Artificial Intelligence ("AI") techniques in Merchandising. We are already operating AI in product promotions, where we've measured benefits in promotional ROI of 25% to 40% together with an improved stock position. Given this success, we are planning to extend this application in the second half to end of season sale building and the development of AI-led predictions of size curves for product purchasing, which will help to reduce stockouts and markdowns.

Market share gains in the UK

We are focused on continual improvement of the customer experience, further development of our product offer and increasing the choice of third-party brands on our websites, many of which are extended to larger sizes on an exclusive basis. Recently added brands on to our websites include Apricot, Club L London, Kate Spade, Valentino, Guess, L'Oréal, Barry M, Peter Werth, Schott and Berghaus.

We made good progress on these objectives during the first half. On a rolling twelve months basis our market share in Ladieswear (size 16+) was up 30bps at 5.6%, with gains across all age ranges except for 60+. Our menswear market share (chest 44"+) also improved, by 10bps to 2.7%. Our active customer file decreased by 3.2% to 4.3m, with Power Brands also down by 2.8% to 2.2m, both due to the drag from Fifty Plus on JD Williams. However, the active customer files for Simply Be and Jacamo increased by 8.3% and 3.1% respectively.

International performance

The Group was disappointed by the performance of its International business, where revenue was down 7.9% to £15.3m. This was due to revenue from the USA decreasing by 16.7% (down 11.2% in constant currency), to £6.8m, whilst Ireland was up 0.6% (down 1.8% in constant currency) to £8.5m.

In line with our strategy of shifting the Group's business mix online, during the period we switched marketing expenditure in the USA from offline to online recruitment. The anticipated lower offline revenue was not however counterbalanced by adequate levels of online growth. In light of this underperformance, we have therefore changed the management team, reappraised our digital marketing strategy and appointed new third-party providers as we look to re-engage with our target customers.

We remain committed to our international business and will be narrowing our growth focus to the USA and Ireland.

Good progress on Partnerships

This includes selling capsule ranges on other retailers' sites, on both a wholesale and marketplace offering. We also see a significant growth opportunity in influencer marketing, working together with bloggers and opinion formers to improve brand cut-through and further strengthen customer engagement.

We have made excellent progress on our partnership strategy, which despite only commencing last year, is already making a positive profit contribution to the Group. During the first half we signed new partnership deals with Lipsy (UK) and Wehkamp (The Netherlands), bringing the total number of partnerships to eleven, of which we are already live on eight. In addition to providing additional sources of revenue, partnerships provide the Group with access to new markets and customers for relatively small amounts of investment.

Financial Services performance

The Group's Financial Services business continues to perform well, driven by the continued improvement in the quality of the customer loan book. Revenue was up by 12.7% driven by a 14.2% increase in interest payments, with other non-interest lines being marginally ahead.

Although gross margin was down 50bps, to 56.0%, this was principally due to our requirement under IFRS9 to make a provision against every credit customer, including those that are up to date on their payments and trading normally. For the prior year, reported under IAS39, a provision was only made where there had been objective evidence of impairment, such as a customer falling into arrears or moved on to a payment plan.

While credit arrears increased slightly, by 40bps to 9.7%, this was due to the rate normalising compared to the prior half year, which had temporarily benefited from changes in the minimum payment rate following the reduction in the rate from 5% to 4% to give customers greater flexibility in managing their finances.

During the first half we recruited 90k new credit recruits who rolled a balance, down by a third compared to the previous half-year. This decline was in line with a disappointing product performance, which resulted in fewer new customers and reduced the number of credit recruits.

Following promising initial results from our variable APR trials, we have fully implemented our variable rate pricing strategy. Our headline rate for our Power Brands has been reduced to 24.9%, and to compliment this we have launched a pay no interest offer until March 2019. This has driven an improvement in the risk quality of credit customers and increased acceptance rates.

IFRS9

£m	1 Sept 2018	3 Mar 2018	Change
Gross customer loan balances	677.6	647.6	+4.6%
IFRS9 bad debt provision	(111.9)	(116.0)*	+3.5%
IFRS9 provision ratio	16.5%	17.9%*	-140bps
Net customer loan balances	565.7	531.6*	+6.4%

* restated for IFRS9. The bad provision previously reported under IAS39 was £48.8m (7.5%).

This is the first time that the Group has reported under IFRS9, which replaces IAS39 and relates to receivables provision accounting.  For the first half of this year the bad debt provision under IFRS9 is £111.9m, compared to a restated figure as at 3 March 2018 of £116.0m. The provision rate under IFRS9 therefore decreased by 140bps from 17.9% to 16.5% compared to 3 March 2018.

Compared to the same period last year (restated on an IFRS9 basis), the provision rate decreased by 320bps principally due to an underlying improvement in the quality of the loan book, and the disposal of some high-risk payment debt which was sold at a better rate than the book value.

As previously indicated, although the P&L impact of IFRS9 is broadly neutral, the higher provision rate that  is required under  the standard  does impact  the net customer loan book value, which is now £565.7m.

 

Key Performance Indicators

	H1 FY19	H1 FY18	Change
CUSTOMERS
Active customer accounts	4.3m	4.4m	-3.2%
Power Brand active customer accounts	2.2m	2.2m	-2.8%
% Growth of our most loyal customers1	+0.6%	+2.4%	-1.8ppts
PRODUCT
Ladieswear market share, size 16+2	5.6%	5.3%	+30bps
Menswear market share, chest 44"+2	2.7%	2.6%	+10bps
Group returns rate (rolling 12 months)	27.3%	27.2%	+10bps
ONLINE
Online penetration	77%	71%	+6ppts
Online penetration of new customers	84%	79%	+5ppts
Conversion rate	4.7%	5.2%	-50bps
% of traffic from mobile devices	75%	76%	-1ppt
FINANCIAL SERVICES
Customer account arrears rate (>28 days)	9.7%	9.3%	+40bps
Provision rate (IFRS9)	16.5%	19.7%3	-320bps
New credit recruits (Rollers)4	90k	135k	-33.3%

1 Customers who have ordered in each of the last four seasons

2 Company estimate using internal and Kantar data for the 52 weeks ending 26 August 2018

3 Restated for IFRS9.  The bad debt provision previously reported under IAS39 was 10.3%.

4 Last six months, rounded figures. Rollers are those customers who roll a credit balance.

 

Financial performance

£m	H1 FY19	H1 FY18	Change
Product revenue	311.4	323.5	-3.7%
Financial Services revenue	146.4	129.9	12.7%
Group Revenue	457.8	453.4	1.0%
Product gross profit	166.3	174.8	-4.8%
Product gross margin	53.4%	54.0%	-60bps
Financial Services gross profit	82.0	73.5	11.6%
Financial Services gross margin	56.0%	56.5%	-50bps
Group Gross Profit	248.3	248.3	0.0%
Group Gross Margin %	54.2%	54.8%	-60bps
Warehouse & fulfilment	(42.4)	(42.5)	-0.3%
Marketing & production	(84.4)	(88.2)	-4.3%
Admin & payroll	(69.5)	(68.6)	1.3%
Total operating costs	(196.3)	(199.3)	-1.5%
Adjusted EBITDA1	52.0	49.0	6.1%
Depreciation & amortisation	(14.9)	(12.9)	15.4%
Adjusted Operating Profit2	37.1	36.1	2.8%
Adjusted Operating Margin2	8.1%	8.0%	10bps
Net Finance costs	(6.5)	(3.9)	66.7%
Adjusted PBT2	30.6	32.2	-5.0%
Exceptional items	(65.4)	(54.9)	19.1%
Unrealised FX movement	7.7	(4.9)	257.1%
Taxation	1.1	6.4	-82.8%
Statutory PAT	(26.0)	(21.2)	-22.6%
Statutory EPS	(9.14)p	(7.50)p	-21.9%
Adjusted EPS3	8.37p	8.77p	-4.6%
£m	1 Sept 2018	3 March 2018	Change
Core net debt4	30.5	66.8	-55.1%
Overall net debt	420.5	346.8	21.3%

1before exceptional items as detailed on page 4 2before exceptional items and unrealised FX movement 3see note 8 for calculation of adjusted EPS

4excludes debt securitised on the Group's customer loan book

 

Revenue

Group revenue was up 1.0% to £457.8m, driven by a strong performance in Financial Services where revenue was ahead by 12.7% to £146.4m as we benefited from increased interest received from the Group's growing customer loan book. Product revenue decreased by 3.7% to £311.4m, reflecting the ongoing challenging market conditions for fashion retail, headwind from the migration of Fifty Plus and closure of our store portfolio. Excluding stores, which are all now closed, Product revenue was down 3.1%.

The Group's revenue performance by quarter was:

	Q1 FY19	Q2 FY19	H1 FY19
	13wks to 2 Jun	13wks to 1 Sep	26wks to 1 Sep
Product	-2.8%	-4.7%	-3.7%
Financial Services	+9.0%	+16.0%	+12.7%
Group	+0.4%	+1.5%	+1.0%

Product revenue by category in the first half was:

£m	H1 FY19	H1 FY18	Change
Ladieswear	139.4	143.4	-2.8%
Menswear	43.4	44.9	-3.3%
Footwear & Accessories	36.3	38.7	-6.2%
Home & Gift	92.3	96.5	-4.4%
Product total	311.4	323.5	-3.7%

Gross margin

The Group's gross margin was 54.2%, down 60bps compared to H1 FY18. This decline was due to a 60bps reduction in Product gross margin, to 53.4%, which was due to the promotional retail environment, although this was counterbalanced to some degree by lower marketing costs.

Financial Services gross margin also declined by 50bps to 56.0% mainly due to the requirement under IFRS9 to make a provision against every new credit customer, including those that are trading normally.

Operating costs

The Group has kept a tight control of its operating costs, which decreased by 1.5% to £196.3m principally due to a 4.3% reduction in marketing and production costs, to £84.4m. Warehouse and fulfilment costs were down marginally, by 0.3% to £42.4m, reflecting lower product volumes, and with admin and payroll costs only up by 1.3%, to £69.5m, less than the rate of inflation.

As a result, adjusted EBITDA increased by 6.1% to £52.0m. As anticipated Depreciation and Amortisation increased by 15.4% to £14.9m due to investment in IT systems, resulting in operating profit before exceptional items and unrealised FX movement of £37.1m, up 2.8%.

Net finance costs

Net finance costs were £6.5m, an increase of £2.6m on the H1 FY18, because of the Group's increased overall debt, which is principally due to ongoing growth in its customer loan book.

Taxation

The effective underlying rate of corporation tax was 21.8% (H1 FY18: 23.2%). The overall tax charge was a credit of £1.1m (H1 FY18: £6.4m credit).

The Group has on-going discussions with HMRC in respect of a number of VAT positions, the most material of which relates to the VAT consequences of the allocation of certain costs between its retail and credit businesses. These proceedings have been to tribunal during the half and we are currently awaiting the court's judgement.

As previously disclosed in our FY18 Annual report, the Group estimates that an unfavourable settlement of these cases could result in a charge to the income statement of up to £53.1m and a cash payment to HMRC of up to £10.3m. A favourable settlement would result in a repayment of tax and associated interest of up to £41.2m with no impact on the income statement. Further details are set out in Note 11.

In addition, following the review of the carrying value of Figleaves goodwill the Group has also written off the remaining deferred tax asset of £3m in relation to future unutilised tax losses. This has been presented as an exceptional tax item.

Earnings per share

Loss per share from continuing operations was 9.14p (Loss in H1 FY18: 7.50p) due to exceptional items. Adjusted earnings per share were 8.37p (H1 FY18: 8.77p).

Balance Sheet and cash flow

Capital expenditure was £17.9m (H1 FY18: £21.8m). Inventory levels at the period end decreased by 6.1% to £98.3m (H1 FY18: £104.7m), lower than the 3.7% decline in product revenue.

There was a net cash outflow from operations (excluding taxation) of £22.3m (H1 FY18: £43.8m inflow) mainly due to exceptional cash costs of £36.8m and £30.0m growth in the gross customer loan book. After funding capital expenditure, finance costs, taxation and dividends, overall net debt increased by £73.7m to £420.5m (H1 FY18: £305.7m) compared to £346.8m as at 3 March 2018.

The group's defined benefit pension scheme has a surplus of £23.8m (H1 FY18: £8.7m surplus).

Unaudited condensed consolidated income statement
		26 weeks to		26 weeks to		26 weeks to		26 weeks to		26 weeks to		26 weeks to		52 weeks to
		01-Sep-18		01-Sep-18		01-Sep-18		02-Sep-17		02-Sep-17		02-Sep-17		03-Mar-18
		Before exceptional items		Exceptional items (note 5)		Total		Before exceptional items		Exceptional items (note 5)		Total		Total
Continuing operations	Note	£m		£m		£m		£m		£m		£m		£m
Revenue	4	457.8		-		457.8		453.4		-		453.4		922.2
Operating (loss) / profit	4, 5	37.1		(65.4)		(28.3)		36.1		(54.9)		(18.8)		33.6
Finance costs		(6.5)		-		(6.5)		(3.9)		-		(3.9)		(8.9)
(Loss) / Profit before taxation and fair value
adjustments to financial instruments		30.6		(65.4)		(34.8)		32.2		(54.9)		(22.7)		24.7
Fair value adjustments to financial instruments	6	7.7		-		7.7		(4.9)		-		(4.9)		(8.5)
(Loss) / Profit before taxation		38.3		(65.4)		(27.1)		27.3		(54.9)		(27.6)		16.2
Taxation	7	(8.3)		9.4		1.1		(6.3)		12.7		6.4		(3.7)
(Loss) / Profit for the period		30.0		(56.0)		(26.0)		21.0		(42.2)		(21.2)		12.5
(Loss) / Profit attributable to equity holders of		30.0		(56.0)		(26.0)		21.0		(42.2)		(21.2)		12.5
the parent
(Loss) / earnings per share	8
Basic						(9.14)	p					(7.50)	p	4.41	p
Diluted						(9.14)	p					(7.50)	p	4.40	p

Unaudited condensed consolidated statement
of comprehensive income
	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
(Loss) / profit for the period	(26.0)		(21.2)		12.5
Items that will not be reclassified subsequently to profit or loss
Actuarial gains on defined benefit pension schemes	3.7		0.1		10.5
Tax relating to items not reclassified	(0.6)		(0.1)		(1.8)
	3.1		-		8.7
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations	(0.2)		(0.6)		(0.2)
Total comprehensive (loss) / income for the period attributable
to equity holders of the parent	(23.1)		(21.8)		21.0

Unaudited condensed consolidated balance sheet
		01-Sep-18		02-Sep-17		03-Mar-18
	Note	£m		£m		£m
Non-current assets
Intangible assets	9	141.1		153.4		156.0
Property, plant & equipment	10	60.8		71.4		67.4
Retirement benefit surplus		23.8		8.7		19.3
Deferred tax assets		14.5		2.3		2.8
		240.2		235.8		245.5
Current assets
Inventories		98.3		104.7		110.6
Trade and other receivables	11	632.0		594.6		652.7
Current tax asset		-		1.5		-
Derivative financial instruments	6	1.7		-		-
Cash and cash equivalents		27.5		59.3		58.2
		759.5		760.1		821.5
Total assets		999.7		995.9		1,067.0
Current liabilities
Trade and other payables		(134.8)		(120.4)		(131.7)
Provisions	13	(46.9)		(37.2)		(43.8)
Derivative financial instruments	6	-		(2.4)		(6.0)
Bank loans		(3.0)		-		-
Current tax liability		(0.7)		-		(3.3)
		(185.4)		(160.0)		(184.8)
Net current assets		574.1		600.1		636.7
Non-current liabilities
Bank loans		(445.0)		(365.0)		(405.0)
Provisions	13	-		(29.7)		(5.4)
Deferred tax liabilities		(12.4)		(8.2)		(12.2)
		(457.4)		(402.9)		(422.6)
Total liabilities		(642.8)		(562.9)		(607.4)
Net assets		356.9		433.0		459.6
Equity
Share capital		31.4		31.3		31.4
Share premium account		11.0		11.0		11.0
Own shares		(0.2)		(0.1)		(0.2)
Foreign currency translation reserve		1.9		1.7		2.1
Retained earnings		312.8		389.1		415.3
Total equity		356.9		433.0		459.6

Unaudited condensed consolidated cash flow statement
	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
Net cash from operating activities	(24.2)		35.3		32.2
Investing activities
Purchases of property, plant and equipment	(1.6)		(1.2)		(2.6)
Purchases of intangible assets	(16.3)		(20.6)		(36.6)
Net cash used in investing activities	(17.9)		(21.8)		(39.2)
Financing activities
Interest paid	(7.4)		(4.1)		(8.6)
Dividends paid	(24.2)		(24.2)		(40.3)
Increase in bank loans	43.0		10.0		50.0
Purchase of shares by ESOT	-		-		0.1
Proceeds on issue of shares held by ESOT	-		-		(0.1)
Net cash used in financing activities	11.4		(18.3)		1.1
Net decrease in cash and cash equivalents	(30.7)		(4.8)		(5.9)
Opening cash and cash equivalents	58.2		64.1		64.1
Closing cash and cash equivalents	27.5		59.3		58.2
Reconciliation of operating (loss) / profit to net cash from operating activities
	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
(Loss) / Profit for the period	(26.0)		(21.2)		12.5
Adjustments for:
Taxation (credit) / charge	(1.1)		(6.4)		3.7
Fair value adjustments to financial instruments	(7.7)		4.9		8.5
Finance costs	6.5		3.9		8.9
Depreciation of property, plant and equipment	2.6		2.8		5.7
Loss on disposal of store assets	5.7		-		-
Impairment charge	17.8		-		2.7
Amortisation of intangible assets	12.3		10.1		22.4
Share option charge	0.1		0.8		0.6
Operating cash flows before movements in working capital	10.2		(5.1)		65.0
Decrease/(increase) in inventories	12.3		0.8		(5.1)
Increase in trade and other receivables	(46.1)		(19.7)		(77.6)
Increase in trade and other payables	4.1		20.9		33.0
(Decrease) / increase in provisions	(2.3)		47.2		29.3
Pension obligation adjustment	(0.5)		(0.3)		(0.3)
Cash generated by operations	(22.3)		43.8		44.3
Taxation paid	(1.9)		(8.5)		(12.1)
Net cash from operating activities	(24.2)		35.3		32.2
Changes in liabilities from financing activities
Loans &
Borrowings
£m
Balance at 3 March 2018	405.0
Changes from financing cashflows
Proceeds from loans and borrowings	43.0
Repayment of borrowings	-
Total changes from financing cashflows	43.0
Balance at 1 September 2018	448.0

Unaudited condensed consolidated statement
of changes in equity
Foreign
currency
	Share		Share		Own		translation		Retained
	capital		premium		shares		reserve		earnings		Total
	£m		£m		£m		£m		£m		£m
Changes in equity for the 26 weeks to 1 September   2018
Balance at 3 March 2018	31.4		11.0		(0.2)		2.1		415.3		459.6
Adjustment on initial application of IFRS9 (net of Tax)	-		-		-		-		(55.5)		(55.5)
Balance at 3 March 2018 (restated)	31.4		11.0		(0.2)		2.1		359.8		404.1
Comprehensive income for the period
Loss for the period	-		-		-		-		(26.0)		(26.0)
Other items of comprehensive loss for the period	-		-		-		(0.2)		3.1		2.9
Total comprehensive loss for the period	-		-		-		(0.2)		(22.9)		(23.1)
Transactions with owners recorded directly in   equity
Equity dividends	-		-		-		-		(24.2)		(24.2)
Issue of own shares by ESOT	-		-		-		-		-		-
Share option charge	-		-		-		-		0.1		0.1
Tax on items recognised directly in equity	-		-		-		-		-		-
Total contributions by and distributions to owners	-		-		-		-		(24.1)		(24.1)
Balance at 1 September 2018	31.4		11.0		(0.2)		1.9		312.8		356.9
Changes in equity for the 26 weeks to 2 September   2017
Balance at 4 March 2017	31.3		11.0		(0.1)		2.3		433.7		478.2
Comprehensive income for the period
Loss for the period	-		-		-		-		(21.2)		(21.2)
Other items of comprehensive loss for the period	-		-		-		(0.6)		-		(0.6)
Total comprehensive loss for the period	-		-		-		(0.6)		(21.2)		(21.8)
Transactions with owners recorded directly in   equity
Equity dividends	-		-		-		-		(24.2)		(24.2)
Issue of own shares by ESOT	-		-		-		-		-		-
Share option charge	-		-		-		-		0.8		0.8
Tax on items recognised directly in equity	-		-		-		-		-		-
Total contributions by and distributions to owners	-		-		-		-		(23.4)		(23.4)
Balance at 2 September 2017	31.3		11.0		(0.1)		1.7		389.1		433.0
Changes in equity for the 52 weeks to 3 March   2018
Balance at 4 March 2017	31.3		11.0		(0.1)		2.3		433.7		478.2
Comprehensive income for the period
Profit for the period	-		-		-		-		12.5		12.5
Other items of comprehensive income for the   period	-		-		-		(0.2)		8.7		8.5
Total comprehensive income for the period	-		-		-		(0.2)		21.2		21.0
Transactions with owners recorded directly in   equity
Equity dividends	-		-		-		-		(40.3)		(40.3)
Issue of ordinary share capital	0.1		-		-		-		-		0.1
Issue of own shares by ESOT	-		-		(0.1)		-		-		(0.1)
Share option charge	-		-		-		-		0.6		0.6
Tax on items recognised directly in equity	-		-		-		-		0.1		0.1
Total contributions by and distributions to owners	0.1		-		(0.1)		-		(39.6)		(39.6)
Balance at 3 March 2018	31.4		11.0		(0.2)		2.1		415.3		459.6

Notes to the unaudited condensed consolidated financial statements

1. Basis of preparation

This condensed set of consolidated interim financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 3 March 2018. The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.

The comparative figures for the year ended 3 March 2018 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

New accounting standards, interpretations and amendments adopted by the Group

IFRS 15 Revenue from Contracts with Customers

IFRS 15 has been adopted by the Group in the period with no significant impact on the consolidated results or financial position of the Group.

IFRS 16 Leases

IFRS 16 will be applicable to the Group for the financial year end 29 February 2020 and has not been early adopted by the Group. IFRS 16 will affect the presentation of the Group financial statements with the Group recognising a right-of-use asset and a lease liability for all leases currently accounted for as operating leases, with exceptions for short period leases and low value leases. This will affect the Balance Sheet, Income Statement and disclosures to the financial statements.

Management have sought professional advice as part of initial investigations and held workshops to evaluate the impact on the group's results, financial position and budgets. Whilst this process is ongoing, and it is not yet practicable to fully quantity the effect of IFRS 16 on the financial statements of the Group, given the recent decision to close the remaining store portfolio the Directors do not expect adoption to have a material impact.

IFRIC 23 Uncertainty over Income Tax Treatments

IFRIC 23 will be applicable to the Group for the financial year end 29 February 2020 and has not been early adopted by the Group. IFRIC 23 requires the entity to provide for uncertain tax outcomes based upon a position HMRC would consider to be appropriate. It provides a choice of recognition, it can be applied retrospectively under IAS 8, or by adjusting equity upon initial application.

The Group have made initial assessments of the impact of IFRIC 23 on the financial statements and future periods, however this work is ongoing as at the half year ended 1 September 2018. Further disclosure will be provided in the year end annual report.

IFRS 9 Financial Instruments

During the period the Group has adopted IFRS9 Financial instruments for the first time. The standard sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.

i) Classification - financial assets

IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics.

IFRS 9 contains three principal classification categories for financial assets: measure at amortised cost, fair value through other comprehensive income ("FVOCI") and fair value through profit and loss ("FVTPL"). The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.

A financial asset will be measured at amortised cost if both the following conditions are met and it has not been designated as at FVTPL:

• the asset is held within a business model whose objective is to hold the asset to collect its contractual cash flows; and

• the contractual terms of the financial asset give rise to cash flows on specified dates that represent payments of solely principal and interest on the outstanding principal amount.

The Group's trade receivables that were classified as loans and receivables under IAS 39 are now classified at amortised cost. An increase of £67.2m in the allowance for impairment over these receivables was recognised in the opening retained earnings at 4 March 2018 on transition to IFRS  9.

The Group does not hold any financial instruments that would be classified as FVOCI or FVTPL.

ii) Impairment - Financial assets and contract assets

IFRS 9 replaces the 'incurred loss' model in IAS 39 with a forward-looking 'expected credit loss' (ECL) model.  The ECL model introduces the concept of staging.

Stage 1 - assets which have not demonstrated any significant increase in credit risk since origination.

Stage 2 - assets which have demonstrated a significant increase in credit risk since origination.

Stage 3 - assets which are credit impaired

Under IFRS 9, loss allowances are measured on either of the following bases:

• 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and

• lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument.

Notes to the unaudited condensed consolidated financial statements

1. Basis of preparation (continued)

IFRS 9 Financial Instruments (continued)

12 month ECLs are calculated for assets in Stage 1 and lifetime ECLs are calculated for assets in Stages 2 and 3. Assets can move from Stage 1 to Stage 2 if there is evidence of a significant increase in credit risk since origination.

Significant Increase in Credit Risk

The credit risk of a financial asset is considered to have experienced a significant increase in credit risk since initial recognition where there has been a significant increase in the remaining lifetime probability of default of the asset.

The credit risk of a financial asset may improve such that it is no longer considered to have experienced a significant increase in credit risk if there has been a significant decrease in the remaining lifetime probability of default of the asset.

Definition of default

At each reporting date, the Group assesses whether financial assets carried at amortised cost are credit impaired.

Evidence that a financial asset is credit impaired includes the following observable data:

• The account has been placed on a non-interest bearing payment arrangement; or

• Notification of bereavement.

In addition, a receivable that is 28 days or more past due (in respect of new customers) or 56 days or more past due (in respect of established customers) is considered credit impaired.

The credit risk of financial assets that become credit impaired are not expected to improve such that they are no longer considered credit impaired.

Incorporation of forward looking data

The Group incorporates forward looking information into its measurement of expected credit loss.

This is achieved by developing three potential economic scenarios and modelling expected credit losses for each scenario. The outputs from each scenario are combined; using the estimated likelihood of each scenario occurring to derive a probability weighted expected credit loss.

Impact of the new impairment model

The Group has determined that the application of IFRS 9's impairment requirements at 4 March 2018 results in an additional impairment allowance as set out in note 11.

Exposures were segmented based on common credit risk characteristics such as behavioural score and age of relationship.

Actual credit loss experience was adjusted by scalar factors to reflect differences between economic conditions during the period over which the historical data was collected, current conditions and the Group's view of economic conditions over the expected lives of the receivables. Scalar factors were based on forecast unemployment rates and inflation adjusted average weekly earnings.

Transition

Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below:

The Group has taken an exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Differences in the carrying amounts of financial assets resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 4 March 2018. Accordingly, the information presented for the year ended 3 March 2018 does not generally reflect the requirements of IFRS 9 but rather those of IAS 39.

Notes to the unaudited condensed consolidated financial statements

2. Key risks and uncertainties

There are a number of potential risks and uncertainties which could have an impact on the Group's long-term performance. The directors routinely monitor all risks and uncertainties taking appropriate actions to mitigate where necessary. Whilst further detail is included in the Group's 2018 Annual Report, the risks which have been identified as potentially having a material impact on the performance of the Group are as follows: Taxation; Business change; Regulatory environment; Cyber-Security; IT Systems; Business Interruption; Competition, Consumer Confidence and Brexit.

The Group continues to pursue a number of open taxation positions and presented its case in relation to VAT in a tribunal during May 2018. The outcome of the tribunal is pending and any subsequent appeals by the Group or HMRC may be heard over the following three year period. The outcome of this process will crystallise assets and estimates for the Group's taxation liabilities built up over a number of years. Whilst the Group remains confident of a positive outcome, the potential impact remains unknown pending final resolution of the full appeals process.

The Group continues to drive change and improvements in technology and business processes across the business. With the approaching uncertainty of Brexit and the accelerating pace of competition in digital retail, the Group's continuous change program remains a key pillar of continued success. In particular, the Group's process simplification programme will continue to drive process efficiency and cost reductions over the next year.

Competing effectively across the key areas of Product, Financial Services and Customer Services remains a key driver of customer recruitment and retention. Potential consequences of the increasingly competitive market include; loss of market share, erosion of margins and a fall in customer satisfaction. Given the uncertain commercial climate post Brexit, remaining competitive across all three strands is necessary to deliver anticipated growth.

Consumer confidence in the retail and financial services sectors may further diminish post Brexit and the impact of interest rate rises and increasing consumer debt levels may further squeeze customer spending. In this context, it is important for the Group to understand and meet customer expectations for product quality and price as well as maintain current high quality customer service.

The regulatory environment remains a key consideration for the Group and continued focus is placed on meeting the expectations of the regulators in key areas such as GDPR and Financial Services. The increasing scrutiny of the FCA and ICO represent key risks for the Group.

Cyber Security remains a key area of focus within the Group as it continues to grow as a digital retailer. The successful completion of the Group's GDPR program has strengthened the Group's Cyber Security position and provides greater security over both new and existing cyber threats.

The Group continues to mitigate the risks associated with the use of remaining legacy IT systems as well as data security risk through outsourcing IT services to a specialist IT service provider. The replacement of the Groups legacy architecture is a key focus of the continuous change program and tactical solutions continue to be implemented to mitigate risks to agility arising from older systems.

Business interruption events remain a possibility for the Group and the Crisis Management Plan has been successfully tested in real world events over the last year. Further stress test testing through potential impact scenarios ensures that plans remain relevant and up to date.

The impact of Brexit on the Group remains a key consideration with risks ranging from increases in cost prices and decreased customer spending power to potential loss of personnel. Mitigations continue to be put in place where specific risks are identified. However, the high level of uncertainty in both the financial and political implications of Brexit makes the success of mitigation activities difficult to predict.

3. Going concern

In determining whether the Group's accounts can be prepared on a going concern basis, the directors considered the Group's business activities together with factors likely to affect its future development, performance and financial position including cash flows, liquidity position, borrowing facilities and the principal risks and uncertainties relating to its business activities.

The directors have considered carefully its cash flows and banking covenants for the next twelve months from the date of approval of the Group's preliminary results. Conservative assumptions for working capital performance have been used to determine the level of financial resources available to the Group and to assess liquidity risk.

To take advantage of strong debt market conditions and favourable pricing, in May 2018 the Directors completed documents for a new finance agreement involving a £500m securitisation and £125m RCF, which are committed until September 2021. In addition, the Group retained its existing £27m overdraft facility.

After making appropriate enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence. Accordingly, they continue to adopt the going concern basis in the preparation of these financial statements.

Notes to the unaudited condensed consolidated financial statements
4. Business segments	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
Analysis of revenue - Home shopping
Product	311.4		323.5		652.6
Financial services	146.4		129.9		269.6
	457.8		453.4		922.2
Analysis of cost of sales - Home shopping
Product	(145.1)		(148.7)		(312.1)
Financial services	(64.4)		(56.4)		(104.5)
	(209.5)		(205.1)		(416.6)
Gross profit	248.3		248.3		505.6
Gross margin - Product	53.4%		54.0%		52.2%
Gross margin - Financial Services	56.0%		56.5%		61.2%
Warehouse & fulfilment	(42.4)		(42.5)		(85.8)
Marketing & production	(84.4)		(88.2)		(164.0)
Depreciation & amortisation	(14.9)		(12.9)		(28.1)
Other admin & payroll	(69.5)		(68.6)		(137.2)
Operating profit before exceptionals	37.1		36.1		90.5
Exceptional items (see note 5)	(65.4)		(54.9)		(56.9)
Segment result & operating (loss) / profit - Home shopping	(28.3)		(18.8)		33.6
Finance costs	(6.5)		(3.9)		(8.9)
Fair value adjustments to financial instruments	7.7		(4.9)		(8.5)
(Loss) / Profit before taxation	(27.1)		(27.6)		16.2

Notes to the unaudited condensed consolidated financial statements
4. Business segments (continued)
The Group has one reportable segment in accordance with IFRS8 - Operating Segments which is the Home Shopping segment.
The Group's board receives monthly financial information at this level and uses this information to monitor the performance of the Home Shopping segment,
allocate resources and make operational decisions. Internal reporting focuses on the Group as a whole and does not identify individual segments. To
increase transparency, the group has decided to include an additional voluntary disclosure analysing product revenue within the reportable segment, by
brand categorisation and product type categorisation.
	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
Analysis of product revenue by brand
JD Williams	78.6		81.1		163.4
Simply Be	68.0		64.5		132.8
Jacamo	33.4		33.5		68.6
Power brands	180.0		179.1		364.8
Traditional segment	60.5		68.1		138.6
Secondary brands	70.9		76.3		149.2
Total product revenue - Home shopping	311.4		323.5		652.6
Analysis of product revenue by category
Ladieswear	139.4		143.4		267.6
Menswear	43.4		44.9		89.2
Footwear and accessories	36.3		38.7		74.9
Home and gift	92.3		96.5		220.9
Total product revenue - Home shopping	311.4		323.5		652.6
The Group has one significant geographical segment, which is the United Kingdom.
Revenue derived from international markets amounted to £17.8m (H1 FY18, £18.9m). Operating losses from international markets amounted to £1.2m
(H1 FY18, £0.2m). All segment assets are located in the UK, Ireland and USA. The assets in USA and Ireland total £5.3m (H1 FY18, £6.1m).
5. Exceptional items
	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
External costs in relation to tax and other matters	2.7		1.1		3.1
Store closure costs	22.0		13.8		13.8
Customer redress	22.4		40.0		40.0
Impairment of intangible assets and brands	18.3		-		-
Items charged to (loss) / profit before tax	65.4		54.9		56.9
Taxation provision	3.0		-		-
External costs in relation to tax are in respect of on-going legal and professional fees which have been incurred as a result of the Group's on-going disputes with
HMRC regarding a number of historical tax positions. Of the amount charged in the period the Group has made related cash payments of £2.8m (FY18, £1.2m).
In line with our strategy of reshaping our retail offering, following a period of consultation with all staff involved in our store estate, the decision was made to close
all remaining retail outlets at end of Aug 2018. This review has resulted in an exceptional cost of £22.0m in respect of onerous lease provisions, other related store
closure costs and fixed asset write offs of £5.7m.
In FY18 a number of loss making retail stores were closed at a total cost of £13.8m.
The Plevin court ruling was made in November 2017, which meant that if more than 50% of a consumer's PPI payments were paid as commission and this was not
explained to them at the time, they could claim back payments plus interest. This, combined with an increase in marketing activity by the FCA, to raise awareness
of the August 2019 PPI deadline, appears to have had the effect of increasing the volume of claims across the industry. In the period to 1 September 2018, a charge
of £22.4m has been recognised to reflect an updated estimate following an increase in the volume of claims experienced and the latest assessment
of the expected uphold rate and average redress per claim.
Following an industry-wide request from the FCA that firms ensure that general insurance products and add-ons offer value for their customers, during the previous
year the Group identified flaws in certain insurance products which were provided by a third party insurance underwriter and sold by the Group to its customers
between 2006 and 2014, with the majority sold up to and including 2011. Following an assessment of the cost of potential customer redress, an exceptional charge
of £40.0m was recognised during FY18 in respect of the sale of these products.
In accordance with the requirements of IAS36 management have assessed the carrying value of goodwill held in respect of Figleaves and following this review have
written down the value of this goodwill in full. In addition, following this review the directors have also written off in full the remaining deferred tax asset of £3m in
relation to future unutilised tax losses. This has been presented as an exceptional item
During the period the Group also terminated an agreement with a third-party IT Financial Services provider, Welcom Digital Limited ("WDL").
Following a detailed review of Capitalised Development spend held in repect of this item a a non-cash impairment charge of £11.2m was made.

Notes to the unaudited condensed consolidated financial statements
6. Derivative financial instruments
At the balance sheet date, details of outstanding forward foreign exchange contracts that the group has committed to are as follows:
	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
Notional Amount - Sterling contract value	161.8		148.5		113.9
Fair value of asset recognised	1.7		-		-
Fair value of liability recognised	-		(2.4)		(6.0)
Changes in the fair value of assets / (liabilities) recognised, being non-hedging currency derivatives, amounted to a credit of £7.7m
(H1 FY18, charge of £4.9m) to income in the period.
The fair value of foreign currency derivatives contracts is their market value at the balance sheet date. Market values are based on the
duration of the derivative instrument together with the quoted market data including interest rates, foreign exchange rates and market
volatility at the balance sheet date.
The financial instruments that are measured subsequent to initial recognition at fair value are all grouped into Level 2 (H1 FY18, same).
Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for
the asset or the liability, either directly (ie as prices) or indirectly (ie derived from prices). There were no transfers between Level 1 and
Level 2 during the period (H1 FY18, same).
7. Taxation
The taxation credit for the 26 weeks ended 1 September 2018 is based on the underlying estimated effective tax rate for the full year of 21.8%,
including a provision for potential future corporation tax charges and the impact of exceptional items. The total effective tax rate for
the 6 months period is 4.1% (H1 FY18, 23.2%).
The Group is in on-going discussions with HMRC in respect of a number of Corporation tax positions. The calculation of the
Group's potential liabilities or assets in relation to these involves a degree of estimation and judgement in respect of items whose tax
treatment cannot be finally determined until resolution has been reached with HMRC or, as appropriate, through legal processes. Issues
can, and often do, take a number of years to resolve.
In respect of Corporation tax, as at 1 September 2018 the Group has provided a total of £8.8m (HYE FY18: £3.6m) for potential corporation tax
future charges based upon the Group's best estimation and judgement.
The inherent uncertainty regarding the outcome of these positions means the eventual realisation could differ from the accounting estimates
and therefore, impact the Group's future results and cash flows. Based upon the amounts reflected in the balance sheet as at 1 September 2018,
the Directors estimate that the unfavourable settlement of these cases could result in a charge to the income statement of up to £nil and a
cash payment to HMRC of up to £8.9m.
The favourable settlement of these cases would result in a repayment of tax of up to £19.8m and an associated credit to the income statement
of £23.5m.

Notes to the unaudited condensed consolidated financial statements
8. (Loss) / Earnings per share
Earnings	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
Total net (loss) / profit attributable to equity holders of the parent for the purpose of basic
and diluted earnings per share	(26.0)		(21.2)		12.5
Fair value adjustment to financial instruments (net of tax)	(6.2)		3.8		6.9
Exceptional items (net of tax)	56.0		42.2		46.0
Total net profit attributable to equity holders of the parent for the purpose of basic
and diluted adjusted earnings per share	23.8		24.8		65.4
Number of shares	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	No. ('000s)		No. ('000s)		No. ('000s)
Weighted average number of shares in issue for the purpose
of basic earnings per share	284,373		282,795		283,614
Effect of dilutive potential ordinary shares:
Share options	440		502		542
Weighted average number of shares in issue for the purpose
of diluted earnings per share	284,813		283,297		284,156
(Loss) / earnings per share
Basic	(9.14)	p	(7.50)	p	4.41	p
Diluted	(9.14)	p	(7.50)	p	4.40	p
Adjusted earnings per share
Basic	8.37	p	8.77	p	23.06	p
Diluted	8.36	p	8.77	p	23.02	p

Notes to the unaudited condensed consolidated financial statements
9. Intangible assets
Customer
	Brands	Software	database	Total
	£m	£m	£m	£m
Cost
At 4 March 2017	16.9	294.4	1.9	313.2
Additions	-	21.6	-	21.6
At 2 September 2017	16.9	316.0	1.9	334.8
Additions	-	14.9	-	14.9
At 3 March 2018	16.9	330.9	1.9	349.7
Additions	-	15.9	-	15.9
Disposals	-	(2.4)	-	(2.4)
At 1 September 2018	16.9	344.4	1.9	363.2
Amortisation
At 4 March 2017	8.0	161.4	1.9	171.3
Charge for the period	-	10.1	-	10.1
At 2 September 2017	8.0	171.5	1.9	181.4
Charge for the period	-	12.3	-	12.3
At 3 March 2018	8.0	183.8	1.9	193.7
Charge for the period	-	12.3	-	12.3
Disposals	-	(1.7)	-	(1.7)
Impairment charge	7.1	10.7	-	17.8
At 1 September 2018	15.1	205.1	1.9	222.1
Carrying amounts
At 1 September 2018	1.8	139.3	-	141.1
At 3 March 2018	8.9	147.1	-	156.0
At 2 September 2017	8.9	144.5	-	153.4
Assets in the course of construction included in intangible assets at H1 FY19 total £27.1m (H1 FY18, £106.1m).
No amortisation is charged on these assets until they are available for use.
As at 1 September 2018, the Group had entered into contractual commitments for the further development of intangible
assets of £2.4m (FY18: £2.0m) of which £1.0m (FY18: £1.0m) is due to be paid within 1 year.
10. Property, plant and equipment
Additions to tangible fixed assets during the period of £1.0m (H1 FY18, £0.6m) primarily relate to warehousing.
Depreciation of £2.6m (H1 FY18, £2.8m) was charged during the period.
Disposals relate to assets written off as a result of store closures. A loss of £5.0m was recorded.
Assets in the course of construction included in fixtures and equipment at H1 FY19 total £2.2m (H1 FY18, £0.4m),
and in land and buildings total £nil (H1 FY18, £nil). No depreciation is charged on these assets until they are
available for commercial use.

Notes to the unaudited condensed consolidated financial statements
11. Trade and other receivables
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
Amount receivable for the sale of goods and services	677.6		611.5		647.6
Allowance for doubtful debts	(111.9)		(62.8)		(48.8)
	565.7		548.7		598.8
Other debtors and prepayments	66.3		45.9		53.9
	632.0		594.6		652.7
Movement in the allowance for doubtful debts
Balance at the beginning of the period (originally reported)	48.8		64.7		64.7
Adjustment on initial application of IFRS9	67.2		-		-
Balance at the beginning of the period (restated)	116.0		64.7		64.7
Amounts charged to the income statement	62.5		54.3		99.5
Amounts written off	(66.6)		(56.2)		(115.4)
Balance at the end of the period	111.9		62.8		48.8
Impact of the new impairment model
The Group has determined that the application of IFRS 9's impairment requirements at 4 March 2018 results in an additional impairment allowance as follows:
£m
Loss allowance as at 3 March 2018 under IAS39			48.8
Additional impairment recognised at 5 March 2018 on trade recievables as at 4 March 2018			67.2
Loss allowance as at 4 March 2018 under IFRS9			116.0
Exposures were segmented based on common credit risk characteristics such as behavioural score and age of relationship.
Actual credit loss experience was adjusted by scalar factors to reflect differences between economic conditions during the period over which the historical data was collected,
current conditions and the Group's view of economic conditions over the expected lives of the receivables. Scalar factors were based on forecast unemployment
rates and inflation adjusted average weekly earnings.
Other debtors and prepayments
'Other debtors and prepayments' includes a net VAT debtor, comprising the VAT liability which arises from day to day trading, together with amounts in relation to matters
which are in dispute with HMRC. The Group has on-going discussions with HMRC in respect of a number of VAT positions. The calculation of the Group's potential liabilities
or assets in respect of these involves a degree of estimation and judgement in respect of items whose tax treatment cannot be finally determined until resolution has been
reached with HMRC or, as appropriate, through legal processes. Issues can, and often do, take a number of years to resolve.
In respect of VAT, the Group has provided a total of £3.1m (H1 FY18: £5.4m) in respect of future payments which the Directors' have a reasonable expectation of making in
settlement of these historical positions.
In addition and separate to the above positions, the Group continues to be in discussion with HMRC in relation to the VAT consequences of the allocation of certain costs
between our retail and credit businesses. At this stage it is not possible to determine how the matter will be resolved.
Within our half year end VAT debtor is an asset of £42.8m (H1 FY18: £36.0m) which has arisen as a result of cash payments made under protective assessments raised by
HMRC and the Group estimates that a further £5.5m could be paid under this assessment in the forthcoming year. Based on the advice of external tax advisors, together with
legal counsel's opinion on certain elements of the cost allocation, we believe that we will recover this amount in full from HMRC and we are engaged in a legal process to do so.
The inherent uncertainty regarding the outcome of these positions means the eventual realisation could differ from the accounting estimates and therefore impact the
Group's future results and cash flows. Based upon the amounts reflected in the balance sheet as at 1 September 2018, the Directors estimate that the unfavourable settlement
of these cases could result in a charge to the income statement of up to £53.1m (including the full write off of the VAT debtor noted above) and a cash payment to HMRC of up
to £10.3m, with an ongoing charge to the income statement of up to £12.3m per financial year.
The favourable settlement of these cases would result in a repayment of tax and associated interest of up to £41.2m and an associated credit to the income statement of £nil.

Notes to the unaudited condensed consolidated financial statements
12. Dividends
The directors have declared and approved an interim dividend of 2.83 pence per share (H1 FY18 5.67p).
This will be paid on 11 January 2019 to shareholders on the register at the close of business on 14 December 2018.
During H1 FY19 dividends of £24.2m relating to FY18 were paid.
13. Provisions
	Customer Redress		Store Closures		Total
	£m		£m		£m
Balance at 4 March 2017	19.9		-		19.9
Provisions made during the period	40.0		13.8		53.8
Provisions used during the period	(6.5)		(0.3)		(6.8)
Provisions reversed through the period	-		-		-
Balance at 2 September 2017	53.4		13.5		66.9
Provisions made during the period	-		(2.7)		(2.7)
Provisions used during the period	(10.6)		(3.9)		(14.5)
Provisions reversed through the period	-		(0.5)		(0.5)
Balance at 3 March 2018	42.8		6.4		49.2
Provisions made during the period	22.4		11.0		33.4
Provisions used during the period	(32.2)		(3.5)		(35.7)
Provisions reversed through the period	-		-		-
Balance at 1 September 2018	33.0		13.9		46.9
Non Current	-		-		-
Current	33.0		13.9		46.9
Balance at 1 September 2018	33.0		13.9		46.9
Store Closures
At the end of H1 FY19, the decision was made to close all stores, and these were subsequently closed in August 2018.
The costs have been treated as an exceptional item and detailed separately on the income statement as per note 5. The provision is made in
respect of onerous lease obligations and other related store closure costs. It is expected that the majority of these costs will have been settled
by the year end other than the onerous lease provision which will run to the earlier of the break clause or lease expiry for all stores. The provision
brought forward is net of an estimate of potential sub- letting income.
Customer redress
The provision relates to the Group's liabilities in respect of costs expected to be incurred in respect of payments for historic financial   services
customer redress, which represents the best estimate of the known regulatory obligations, taking into account factors including risk and uncertainty.
As at 1 September 2018 the Group holds a provision of £33.0m (H1 FY18, £53.4m) in respect of the anticipated costs of historic financial services
customer redress. Of this amount £18.8m relates to certain insurance products where management have identified flaws in the product design, the
remaining £14.2m relates to historical customer redress. These amounts include a provision of £0.4m (H1 FY18, £2.1m) in relation to administration
expenses.
The Plevin court ruling was made in November 2017, which meant that if more than 50% of a consumer's PPI payments were paid as commission
and this was not explained to them at the time, they could claim back payments plus interest. This, combined with an increase in marketing activity by
the FCA, to raise awareness of the August 2019 PPI deadline, appears to have had the effect of increasing the volume of claims across the industry.  In
the period to 1 September 2018, a charge of £22.4m has been recognised to reflect an updated estimate following an increase in the volume of claims
experienced and the latest assessment of the expected uphold rate and average redress per claim.
The principal sensitivities in the customer redress calculation are: volumes of policies affected, claim rate, uphold rate and average redress amount.
	26 weeks to		26 weeks to		52 weeks to
	01-Sep-18		02-Sep-17		03-Mar-18
	£m		£m		£m
+/- 10% in claims volumes	+/- 2.0		+/- 0.7		+/- 9.9
+/- 5% (FY18, 10%) in uphold rate	+/- 0.1		+/- 0.5		+/- 4.4
+/- 10% in average redress amount	+/- 0.6		+/- 0.7		+/- 9.9

Notes to the unaudited condensed consolidated financial statements
Responsibility statement of the directors in respect of the half-yearly financial report
We confirm that to the best of our knowledge:
• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted
by the EU
• the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred
during the first 26 weeks of the financial year and their impact on the condensed set of financial statements; and a description of
the principal risks and uncertainties for the remaining 26 weeks of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the
first 26 weeks of the current financial year and that have materially affected the financial position or performance of the
entity during that period; and any changes in the related party transactions described in the last annual report that could do so.
This report was approved by the Board of Directors on 11 October 2018.
Stephen Johnson	Craig Lovelace
Interim Chief Executive	Chief Financial Officer

Independent review report to N Brown Group plc

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the 26 weeks ended 1 September 2018 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated cash flow statement, the condensed consolidated statement of changes in equity and related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the 26 weeks ended 1 September 2018 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other  review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half- yearly financial report in accordance with the DTR of the UK FCA

As disclosed in note1, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Stuart Burdass

for and behalf of KPMG LLP

Chartered Accountants

1 St Peter's Square

Manchester

M2 3AE

11 October 2018

 

END

 

 

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