Final Results
Ideal Shopping Direct PLC
05 March 2007
Ideal Shopping Direct Plc
5 March 2007
2006 Preliminary Results
Ideal Shopping Direct plc ("Ideal"), the UK's leading independent TV shopping
business, today reports preliminary results for 2006.
Highlights
2006 2005 % growth
Turnover £85.6m £79.2m 8.1%
Reported operating profit £5.6m £6.8m (18.3)%
Core business underlying operating profit £7.7m £7.5m 2.0%
Profit before tax £6.1m £7.2m (15.8)%
Earnings per share (basic) 14.4p 17.3p (16.8)%
Dividends declared per share 4.25p 3.0p 41.7%
Cash and deposits (net of borrowings) £15.4m £15.4m -
• Like for like sales growth of 7.3%, in spite of subdued trading in the run
up to Christmas
• Online sales grew to 21% of total (2005: 16%)
• 160% growth in Create & Craft Club membership contributing to 17% overall
growth in craft business
• Profit impacted by non-recurring costs, including the closure of loss
making Jewellery Vault channel
• Significant progress in securing future platforms:
• Freeview contract renegotiated and secured to 2018
• Extension of carriage onto Telewest cable agreed from February 2007
• Acquisition and integration of Superstore TV Ltd ("Superstore"), with
existing key contracts renewed and significant new business won
• 42% increase in annual proposed dividend
• Strong trading start to 2007
Jim Hodkinson, Chairman, commented: "After Ideal's dramatic growth in 2004 and
2005, last year was a year of consolidation, reflecting shifts in both external
and internal drivers of our business. As the TV shopping market continues to
mature, we are adopting a more flexible trading stance to keep pace with
customer needs and demands and to accelerate our multi-channel activity.
Internally we have increased our focus on organic growth and on building the
Group's infrastructure so that it can support a much larger business going
forward. We have refined our strategy and made excellent progress in its
delivery. I am pleased to say that the Group has made a positive start in 2007,
ahead of our expectations, and I look forward to updating shareholders more
fully at the time of our AGM in May."
Enquiries:
Ideal Shopping Direct Plc Tel: 08700 780704
Jim Hodkinson, Chairman
Reputation Inc Tel: 020 7758 2800
Tom Wyatt
Financial results
Sales
Turnover for the year was 8.1% ahead of last year at £85.6m. On a comparable
basis core business sales grew by 7.3% in the year, in spite of subdued trading
in the run up to Christmas. Our analysis of Ideal's 2006 sales, and knowledge of
our competitors' performance, suggests that the TV shopping market is maturing
and evolving. In response to this, we have been trialling a more aggressive
promotional stance in the New Year, with excellent initial results, and these
lessons are being taken forward into 2007.
Margin
Reported gross margin for the year was 41.3% (2005: 42.1%). Up until the end of
2006 margins have been adversely affected by the increasing commissions paid on
sales through our Freeview and online channels, the two strongest growing areas
of sales. Underlying product margins were weaker in the first half compared with
2005, but we were able to reverse this in the second half of the year. The
consolidation of Superstore's wholesale margin diluted Group margin by 0.1% in
the year. In 2007 the two dilutive commission arrangements will fall away.
Operating costs
Although relatively little of Ideal's cost base is directly variable with sales
volume, we have invested significantly over the last two years in upgrading the
capacity and capability of the business in the areas of logistics, buying,
e-commerce, direct marketing and compliance. This has been necessary both to
service a growing business and to meet our strategic ambitions for continued
growth. The annualisation of these investments has seen continuing core
operating costs increase by 7.5% over 2005.
Operating profit
We took the painful decision in May to close the loss making Jewellery Vault
channel, which had been launched in July 2005 but did not reach the critical
mass necessary to cover its operating costs. A combination of Jewellery Vault's
operating losses, the subsequent closure costs and other one time expenses
impacted reported profit in the year by £1.5m. We have also consolidated a small
operating loss in 2006 for Superstore, and have implemented a new accounting
standard for share based payments (FRS20). Before these items, underlying
operating profit for the core business was £7.7m, slightly ahead of the
equivalent figure for 2005 of £7.5m.
Comparable operating profit £m
2006 2005
Core J Vault Superstore Total Core J Vault Total
Underlying operating profit 7.7 (0.8) (0.2) 6.7 7.5 (0.5) 7.0
FRS20 (0.3) (0.3) (0.2) (0.2)
Closure costs (0.5) (0.5)
Project start up costs (0.2) (0.2)
Operating profit before 7.2 (1.3) (0.2) 5.7 7.3 (0.5) 6.8
goodwill amortisation
Goodwill amortisation (0.1) (0.1)
Reported operating profit 7.2 (1.3) (0.3) 5.6 7.3 (0.5) 6.8
Interest 0.6 (0.1) 0.5 0.4 0.4
Reported Profit before tax 7.8 (1.3) (0.4) 6.1 7.7 (0.5) 7.2
Cashflow
Operating cashflow was healthy through the year, enabling the business to fund
investments in infrastructure and growth. Capital expenditure of £1.05m (2005:
£1.75m) included £0.48m investment in the new systems platform.
We invested £1.6m in the acquisition of Superstore in June, and a further £1.1m
in working capital for the business to replace expensive manufacturing finance
and to fund the growing order pipeline. Superstore's business model requires an
early investment in stock at the point of shipment, several weeks ahead of
receiving payment.
Having exhausted brought forward losses in 2005 our cashflow suffered from tax
payments of £3.0m (2005: nil). Further, we not only settled our 2005 liability
but also started making payments on account for 2006. This pattern will
normalise in 2007. Net cash balances at the end of the year were level with 2005
at £15.4m.
2006 final dividend
The Board has proposed a final dividend of 2.75p per ordinary share (2005: 2p)
to add to the 1.5p paid at the interim (2005: 1p). Subject to the approval of
shareholders at the Annual General Meeting on 1 May 2007, the dividend will be
paid on 8 June 2007 to shareholders on the Register as of 11 May 2007.
Market developments
Data from OfCom shows that the growth of UK households with digital TV, now at
73% of the total, continues to be driven by Freeview, with over 14 million set
top boxes or integrated digital TVs in the market, of which 5 million are second
boxes. It is anticipated that the majority of households to be converted between
now and digital switchover in 2012 will do so via Freeview. Although OfCom
changed the basis of measurement during the year, their most recent report shows
annual growth of 12.4% in digital households.
There is no reliable third party measurement of the TV shopping market, but it
is evident that the rate of growth slowed in 2006, especially in the second
half. We estimate that market growth was significantly lower than in 2005 and
that our performance represented a small share gain. This change in our market
confirms our strategy of focusing on conversion of existing digital households
and on driving the value of our customer base. Competitor TV shopping channels
broadcasting on Sky continue to come and go, with 4 new channels in 2006 but 6
closures. 2007 has already seen one further channel closure, and one channel
revert to pre-recorded rather than live output, underlining the difficulty of
achieving critical mass.
The future of broadcasting across the world is evolving, and convergence between
TV and the internet, particularly via IPTV, will become increasingly important
over the next few years. Ideal's channels are already viewable on the internet,
and we are exploring the opportunities for TV shopping through broadband with
media and technology business partners.
Trading
Ideal World
The Ideal World channel, which is now available to over 99% of UK digital
households, continues to be our main source of new customers. The rate of new
customer acquisition slowed following the explosive growth of Freeview in 2004
and 2005, but we still welcomed more than 25,000 customers a month to Ideal
overall. Average basket size and average shopping frequency both moved forward:
these are measures of high focus for us in 2007. From the end of January 2007 we
have been pleased to start welcoming Telewest cable customers to Ideal World and
we look forward to sharing the "family, friendship and fun" of the channel with
many new customers through the year. We have also made healthy progress on
service performance. Consumer expectations on ease of ordering, stock
availability, accuracy and delivery times are rising continuously, and we are
investing to meet those needs as a part of our strategic infrastructure
development.
Ideal World recorded steady sales growth of 7% for the year. The Fashion &
Footwear category led our sales development in 2006, with growth of over 30%,
although it was slower in the final quarter. New additions to the range include
branded accessories and some own label clothing. We also experienced strong
sales development in Jewellery and Homewares. Within Leisure & Technology, sales
of satellite navigation systems, the "hot" technology product of 2005, were not
as strong last year, and we deliberately de-emphasised other technology sales
because of the dilutive effect on margin. Health & Beauty sales have continued
to suffer from the tightening of the advertising regulatory regime.
Craft
Our total craft business (including sales of craft on Ideal World and the
specialist Create & Craft channel) grew by 17% over the year. We have had
particular success with our innovative Create & Craft Club: members subscribe
for a bi-monthly online magazine which is packed with crafting ideas and video
demonstrations, and they also qualify for an online discount on their craft
shopping with us. We have taken the Club out to craft event days and shows,
increased access by developing a CD-Rom version for crafters who don't have
broadband, and developed our marketing via conventional craft magazines. Total
membership grew by over 160% across the year and is now in excess of 10,000.
Craft Club members are regular heavy purchasers and continue to be a key part of
our online sales growth.
Our multi-channel strategy for the craft market is progressing well. In addition
to craft sales through Ideal World, Create & Craft and online the Group is
wholesaling craft products to multiple retailers and in February of this year
launched a wholesale proposition for the independent retail trade. This approach
allows us to secure scale sourcing benefits and to cross promote the Create &
Craft brand.
Ideal Vitality
Ideal Vitality sales reduced by 26%, obstructed by increasingly strict ASA
regulation, which prevents us from airing previously strong selling products.
Nonetheless, the channel continues to make a positive contribution to profit. We
have taken steps to reposition this brand and to increase the emphasis on online
sales.
Online
Online sales continue to grow strongly in all categories, and represented 21% of
total product sales in the year (2005: 16%). We have improved site navigation
and added new features to the sites, and anticipate that this development will
accelerate in 2007 following replacement of the technical platform for the
sites.
Superstore
Superstore was acquired by the Group in June 2006 to enhance our direct sourcing
capability. The business won a contract to supply craft products to Asda just
prior to acquisition and has now secured a similar contract with Wilkinsons.
Superstore commenced sourcing products for Ideal (at enhanced margins) from
December 2006. The business is expected to make a significant contribution to
group profit in 2007 from both its third party wholesaling activity and intra
Group sourcing. Closure of the Manchester office of Superstore and transfer of
the operation to Peterborough was completed in January 2007, and the sourcing
office in China has been expanded to handle the growing volumes.
Strategic delivery
Our strategic goal at Ideal is to create a strongly profitable business capable
of sustained growth by leveraging the unique advantages of TV shopping across
distance selling channels, including the convergence of broadcast and online
channels.
Over the last two years we have placed considerable operational emphasis on
building the infrastructure of the business to support both current and future
volume growth. This has involved investment in people, systems, skills and
processes. Moving forward, our strategy is to:
• Develop and deliver to the wider UK TV shopping market a compelling broad
range proposition ("Ideal World")
• Establish and grow branded specialist retail franchises that leverage the
Ideal World base, for example Create & Craft
• Enhance and drive the efficiency of the business infrastructure
• Explore opportunities to widen our market to new customer groups
In the period under review we have passed some important milestones in the
delivery of this strategy, including:
• Conclusion of a new contract with National Grid Wireless for Freeview
carriage until 2018, and a 5 year agreement with ntl:Telewest (now Virgin
Media) for carriage on their cable network
• Acquisition of Superstore TV, facilitating entry into the craft wholesale
channel
• Commencement of direct Far East sourcing to secure margin gains
• Introduction of new customer service policies, with an immediate impact on
the quality of the customer experience and the efficiency of our call
centres
We look forward to accelerating the implementation of our strategy in 2007,
focusing particularly on:
• An expanded online product offer for Ideal World and Ideal Vitality
• Expansion into service products, including holidays and overseas property
• The development and launch of a Create & Craft branded range for
independent retailers
• Implementation of our new systems platform
• The renewal of our communications and online infrastructure
• Implementation of a medium term logistics expansion solution
• Collaboration with media and technology partners to develop TV shopping
for IPTV
Our strategy recognises that we must drive the relevance of our offering to
customers and the quality of our operational delivery with a much higher focus
on our customer proposition. We have made strong progress in the year in call
answering, delivery times and query resolution. These steps are indicative of
our determination to put in place the essential building blocks for long term
sustainable growth whilst maintaining a flexible and responsive trading stance.
Prospects
We have put in place the foundations for sustained future growth. The renewal of
our Freeview contract and the extension on to Telewest cable have secured our
position in a market which continues to grow and evolve, but has also meant
accepting a step up in our cost base in 2007. We expect our cash margin growth
to offset and exceed this over the year. Key actions to achieve this include:
• Improved sourcing using Superstore's Far East supply chain
• Extending our craft offer into new channels
• Implementing more efficient systems and ways of working
• Enhancing and extending our core Ideal World proposition
These opportunities give us confidence in the future, but we recognise that the
rapid evolution of our market requires us to maintain a high level of
flexibility in both our tactical and strategic approach. We are pleased with
customer response to a more promotion led trading stance in the early weeks of
the new year, which has delivered comparable sales growth of 20% and cash margin
growth of 12% in the first two months of 2007 compared with the same months last
year. While this cannot be taken as a full year performance indicator, we look
forward to making further progress in 2007.
Consolidated Profit and Loss Account
For the Year ended 31 December 2006
Note 2006 2005
£'000 £'000
Restated
Turnover 85,638 79,191
Cost of sales (50,255) (45,822)
Gross profit 35,383 33,369
Net operating expenses (29,829) (26,569)
Operating profit 5,554 6,800
Net interest 497 389
Profit on ordinary activities
before taxation 6,051 7,189
Tax on profit on ordinary activities 3 (1,812) (2,114)
Profit transferred to reserves 4,239 5,075
Basic earnings per share 5 14.4p 17.3p
Diluted earnings per share 5 14.2p 17.0p
All of the above relates to continuing operations. Acquisitions in the year are
not material to the consolidated profit and loss account and are not separately
disclosed on the face of the profit and loss account.
Consolidated Balance Sheet
As at 31 December
Note 2006 2006 2005 2005
£'000 £'000 £'000 £'000
Restated Restated
Fixed assets
Intangible assets 6 1,434 -
Tangible assets 9,112 8,794
10,546 8,794
Current assets
Stocks 5,310 5,254
Debtors 2,595 2,208
Current asset investment 10,000 -
Cash 8,684 19,557
26,589 27,019
Creditors: amounts falling due
within one year (16,105) (17,175)
Net current assets 10,484 9,844
Total assets less current liabilities 21,030 18,638
Creditors: amounts falling due
after more than one year (2,462) (3,294)
Provisions for liabilities (460) (741)
18,108 14,603
Capital and reserves
Called up share capital 888 887
Share premium 193 180
Share option reserve 522 244
Profit and loss account 16,505 13,292
Shareholders' funds 18,108 14,603
Consolidated Cash Flow Statement
For the Year ended 31 December 2006
Note 2006 2005
£'000 £'000
Restated
Net cash inflow from operating activities 7 6,334 6,913
Returns on investments and servicing of finance
Interest received 593 506
Interest paid (14) -
Finance lease interest paid (83) (117)
Net cash inflow from returns on investments and servicing of 496 389
finance
Taxation (3,026) -
Capital expenditure and financial investment
Purchase of tangible fixed assets (1,061) (897)
Sale of tangible fixed assets - 5
Net cash outflow from capital expenditure and financial (1,061) (892)
investment
Net cash outflow from acquisitions - purchase of subsidiary 6 (1,720) -
undertaking
Dividends paid (1,030) (586)
Financing
Issue of shares 14 101
Repayment of borrowings (337) (339)
Capital element of finance lease payments (543) (546)
Net cash outflow from financing (866) (784)
Management of liquid resources - purchase of short term deposits (10,000) -
(Decrease)/increase in cash (after purchase of short term (10,873) 5,040
deposits)
Statement of total recognised gains and losses
For the year ended 31 December 2006
2006 2005
£'000 £'000
Restated
Profit for the financial year 4,239 5,075
Prior year adjustments 135 -
Total gains and losses recognised since last financial 4,374 5,075
statements
Notes
1 Basis of preparation
The financial information set out above in respect of 31 December 2006 does not
constitute statutory accounts as defined in Section 240 of the Companies Act
1985. The financial information contained in this announcement has been
extracted from the 2006 financial statements upon which the auditor's opinion is
unqualified and does not include any statement under Section 237 of the
Companies Act 1985.
The preliminary announcement has been prepared in accordance with applicable
accounting standards and under the historical cost convention.
The principal accounting policies of the Group are set out in the Group's 2005
annual report and financial statements. The policies in this preliminary
announcement have remained unchanged from the 2005 financial statements, with
the exception of the policy relating to the treatment share based payments which
has been changed in accordance with the provisions of FRS 20 as set out in note
2 below.
2 Prior year adjustment
During the period the Group adopted FRS20. Under the new standard, share options
are expensed during the vesting period, and this has resulted in a restatement
of comparative figures. In the current period, £278,602 has been expensed to
operating profit. The comparative figure for the period ended 31 December 2005
was £214,577. The comparative year tax charge has been reduced by £135,000 in
respect of this change. Opening profit and loss reserves in the comparative year
have been reduced by £29,988.
3 Taxation on profit on ordinary activities
The tax charge represents:
2006 2005
£'000 £'000
Restated
Corporation tax at 30% (2005: 30%) 1,860 1,574
Adjustment for prior year tax (86) -
Total current tax 1,774 1,574
Deferred tax:
Origination and reversal of timing differences 38 540
Tax on profit on ordinary activities 1,812 2,114
4 Dividends
2006 2005
Dividends on ordinary shares £'000 £'000
Paid during the year
- 2005 final 588 292
- 2006 interim 442 294
1,030 586
Proposed after the year-end (not recognised as a liability) 810 586
5 Earnings per share
The calculation of the basic earnings per share is based on the earnings
attributable to ordinary shareholders divided by the weighted average number of
shares in issue during the year.
The calculation of diluted earnings per share is based on the basic earnings per
share adjusted to allow for the issue of shares on the assumed conversion of
dilutive options.
Reconciliation of the earnings and weighted average number of shares used in the
calculations are set out below:
2006
Earnings Weighted Per share
average number amount
£ of Shares Pence
Earnings attributable to ordinary shareholders 4,239,000 29,431,917 14.4
Dilutive effect of securities:
Options 406,035 (0.2)
Diluted earnings per share 4,239,000 29,837,952 14.2
2005
Earnings Weighted Per share
average number amount
£ of Shares Pence
Restated
Earnings attributable to ordinary shareholders 5,075,000 29,315,219 17.3
Dilutive effect of securities:
Options 535,381 (0.3)
Diluted earnings per share 5,075,000 29,850,600 17.0
6 Acquisition
On 1 June 2006 the Group acquired the entire issued share capital of Superstore
TV Limited, an importer and wholesaler of consumer goods. Total consideration
for the acquisition was £1.6m, of which £1.1m was satisfied by the repayment of
parent company loans. The purchase has been accounted for by the acquisition
method of accounting. Goodwill of £1.5m arising on acquisition has been
capitalised and is being amortised over 10 years.
7 Net cash inflow from operating activities
2006 2005
£'000 £'000
Operating profit 5,554 6,800
Depreciation 752 861
Amortisation of goodwill 89 -
Share based payments 278 215
(Increase)/decrease in stocks 159 (1,425)
(Increase)/decrease in debtors 191 (1,132)
Increase/(decrease) in creditors (689) 1,594
Net cash inflow from operating activities 6,334 6,913
8 Report and accounts
Copies of Company's annual report and accounts will be posted to the
shareholders shortly.
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