Preliminary Results

RNS Number : 8441T

Shoe Zone PLC

11 January 2017

Shoe Zone plc

Preliminary Results

Shoe Zone plc ("Shoe Zone", the "Company" or the "Group"), a leading UK specialist value footwear retailer, is pleased to announce its Final Results for the 52 weeks ended 1 October 2016.

Financial Highlights

· Revenue reduced by 4.2% to £159.8m (2015: £166.8m) reflecting the planned closure of loss making stores and difficult trading conditions in H1 2016

· Product gross margin strengthened to 62.0% (2015: 61.5%)

· Profit before tax increased by 1.1% to £10.3m (2015: £10.1m)

· Earnings per share increased 4.3% to 16.9p (2015: 16.2p)

· Strong cash conversion with cash balance of £15.0m (2015: £14.2m)

· Board proposing two dividends to be paid:

o Final dividend of 6.8p per share

o Special dividend of 8.0p per share

Operational Highlights

· Product:

o Average transaction value improved by 5% during the year

o Footwear orders placed directly with overseas factories increased to 72.2% (2015: 62.1%)

o Non-footwear ranges continued to grow, up 26% on 2015

· Store portfolio:

o 17 new stores opened (including 10 relocations) and 41 refits completed

o Encouraging performance from 'Big Box' trial; two store openings during the period, one post period end

· E-commerce:

o Overall multichannel revenue increased by 11%

o Operations moved to a dedicated online distribution zone, improving efficiency

o Post year end, trading on Amazon marketplaces in France, Germany, Spain and Italy

· Appointed new Brands Manager to support development of branded ranges

Nick Davis, Chief Executive of Shoe Zone plc, said:

"I am pleased with the Group's performance in what was a challenging retail environment. The Group's new branding is resonating well with our customer base and we will continue to update the estate through our store rationalisation and refit programme. Our Big Box trial, which started in August 2016, is delivering encouraging results while attracting a broader customer demographic and we plan to open a further six new stores across the UK in 2017.

"We continue to make good progress on our strategic objectives and have traded in line with expectations for the first quarter of the year. The Board remains positive for the outlook of the Group and looks forward to updating shareholders on the progress of our Big Box trial."

There will be a meeting for analysts at 9:30am on 11 January 2017 at the offices of FTI Consulting, 200 Aldersgate, London, EC1A 4HD.

For further information please call:

Shoe Zone plc

Anthony Smith (Chairman)

Nick Davis (CEO)

Charles Smith (COO)

Jonathan Fearn (FD)

Tel: +44 (0) 116 222 3000

Numis Securities Limited (Nominated Adviser & Broker)

Oliver Cardigan

Mark Lander

Tel: +44 (0) 20 7260 1000

FTI Consulting (Financial PR)

Jonathon Brill

Alex Beagley

Eleanor Purdon

Tel: +44 (0) 20 3727 1000

Chief Executive's report

The 2016 financial year was a positive year for Shoe Zone given the challenging retail environment we faced. We have continued to make good progress on our core strategy while maintaining our robust cost control and effective property portfolio management.

The business delivered revenue of £159.8m (2016: £166.8m) and continues to generate cash effectively from a sound financial position and a debt free balance sheet. Profit before tax increased by 1.1% to £10.3m (2015: £10.1m) while earnings per share increased 4.3% to 16.9p (2015: 16.2p).

Dividends

Following another successful year of cash generation, the business closed with £15.0m of cash. As a result, the Board is proposing two dividends to be paid: a final dividend of 6.8p per share (2015: 6.5p), resulting in a total dividend for the year of 10.1p (2015: 9.7p) per share, and a special dividend of 8.0p per share (2015: 6.0p). The total distribution for the year of 18.1p (2015: 15.7p) represents an increase of 15.3% over the previous year.

The aim of the special dividend is to distribute any surplus cash back to shareholders. We continue to believe the business can operate on an opening/closing cash position of £11m and any excess above this level will be paid out to shareholders unless there is a change in business requirement.

The dividends will be paid to shareholders on the register on 24 February 2017, payable on 15 March 2017 if approved at the Annual General Meeting to be held on 2 March 2017. The shares will be ex-dividend on 23 February 2017.

Product

We remain committed to offering our customers the best value possible and have maintained key price points for our Core Value Lines despite difficult currency headwinds. Along with our low prices we have increased the value proposition by extending the number of lines in multi-buy deals (e.g. '2 for £8'). This, along with range enhancements has improved average transaction value by 5% during the year. We have continued to increase our direct sourcing and as a result, footwear orders placed directly with overseas factories increased to 72.2% (2015; 62.1%) of total footwear orders. Working closely with our source of manufacture has helped maintain gross product margins as well as improving communication and control across the supply chain.

Non-footwear ranges including handbags, school bags, lunch boxes, purses and accessories continue to grow with sales from non-footwear up 26% on the previous year.

Our 'right price, first time' strategy which helps control the amount of markdown value as a percentage of turnover, continues to ensure we are industry leaders in driving low markdown. This year was no exception in achieving a level of 7.1%. (2015: 6.3%).

In July 2016 we appointed a new Brands Manager to develop a range of brands to complement the existing Shoe Zone range both online and in our new 'Big Box' stores.

Stores

We closed the year operating from 510 stores with 17 new store openings (including 10 relocations). We completed 41 refits during the year, at a total capital expenditure of £3.4m. We will continue to optimise our store portfolio and close loss making stores to drive profitability. We believe that approximately 500 stores is the right number for our standard Shoe Zone offering.

We continue to drive profitability by opening larger Grade 1 stores and closing smaller Grade 3 stores which is demonstrated in the following table.

	Stores at 1 October 2016	Stores at 3 October 2015	Stores at 4 October 2014
Big Box	2	-	-
Grade 1 (large)	284	231	203
Grade 2 (medium)	110	168	178
Grade 3 (small)	114	136	164
TOTAL	510	535	545

Our trend of falling rents continues (albeit at a slower pace) with rents at the lease renewal date in the 12 months falling by 17% (2015: 27.2%). We expect that rent reductions will continue to be realised and will be complemented with a reduction in rates payable following the government's review of business rates.

The business continues to benefit from a flexible portfolio with an average lease length of only 2.6 years. Our lease structure gives us significant opportunity to respond to changes in shopping habits in any retail location.

As part of our ongoing investment in updating our store portfolio we have developed new store branding with a more contemporary feel. The new modern logo will be rolled out with future store refits and has already been adopted in all instore and web marketing.

Project 'Big Box'

We have had a very encouraging start to the launch of our new trial Project 'Big Box'. During August and September we opened two stores, Launceston (Cornwall) and Durham, followed by Kirkstall Bridge (Leeds) post the period end in October. These stores on average are twice the size of a Grade 1 store and benefit from an enhanced branded product range, driving a higher average transaction value in a enhanced shopping environment. The three trial stores are all located out of town and therefore this concept creates significant opportunity for Shoe Zone in this space with all future openings being out of town location or in larger high street units. This new growth opportunity is a key strategic development for the business, broadening the reach of the Shoe Zone brand and enabling us to improve our market share.

E-commerce

In the summer of 2016, the Group's e-commerce operations were moved to a dedicated online distribution zone in the Leicester distribution centre. This segregated area now holds the majority of online stock with close links to online administration and customer services. This development has improved the customer focus creating a cleaner environment with stronger quality control, more accurate stock availability with faster processing times. It has also improved efficiency in the main distribution centre that can now focus on servicing the store network.

shoezone.com has had another successful year with a significant shift to selling through mobile devices. Mobile and tablet visits now represent 74.9% (2015: 66%) of all website visits.

Customer acquisition is a key strategic objective for our online team and our database has grown by 12% during the year even after a refining process was undertaken to concentrate on active users. We have capitalised on this by sending 12m more emails with greater relevance. Email campaign sales increased by 36% on the prior year and now account for 12% of site revenue.

Our conversion rates continue to increase across all devices and we achieved 4.29% over the full year (2015: 4.06%). Instilling a 'mobile first' design and implementation ethos has grown mobile conversion to 3.39% (2015: 2.88%). Conversion rates on mobile phones are always likely to be lower than desktops, but we believe we can continue to narrow the gap.

Our e-commerce strategy has always been based on driving profitability while not focusing on turnover growth. On this basis we have restricted the sale of lower price product on our Amazon and Ebay platforms that struggled to absorb postage and commission costs. This has slowed revenue growth across these channels but resulted in improved cash margin achieved. Overall multichannel revenue is up 11% on the prior year.

Employees and Charity

As previously announced, during 2016 Ian Filby stepped down as Non-Executive Chairman to enable Anthony Smith, the former CEO, to move to the role of Executive Chairman. Anthony has led Shoe Zone for 20 years through a series of acquisitions and the Company's IPO in 2014. Anthony will continue to have a hands-on role in the Company and will have particular responsibility for the property portfolio and strategy. Following Anthony's appointment, Nick Davis was appointed CEO. Nick has been with the business for 13 years and was the natural successor to drive the Company's growth plans. Jeremy Sharman became Non-Executive Deputy Chairman. Jeremy had been a Non-Executive Director since the IPO and will chair the Audit committee and sit on the Remuneration committee. Jonathan Fearn was appointed as Finance Director. Jonathan has extensive experience in strategic and commercial finance having worked for Celesio Group (UK) (formally LloydsPharmacy) since 2002.

We are incredibly proud of all of our team's effort that has gone in to achieve these results and want to thank them for their ongoing commitment and hard work. We are very thankful for all of the creativity and enthusiasm that has resulted in us collectively raising approximately £150,000 for our chosen charity BBC Children in Need.

Current trading and Outlook

The outlook for consumer spending looks challenging with the current difficult economic conditions likely to continue. Despite this, we are well positioned given our strong value proposition that has proven to be robust in challenging market conditions. We are exposed to fluctuations in the value of sterling but have put significant work into managing the risk through foreign currency hedging and re-sourcing. While we anticipate this pressure may be here for some time we expect to broadly maintain our gross margin percentages.

We have continued to manage the store portfolio having opened six new stores since the year end and refitted four. Early signs are that the changes we have made to store rebranding has been favourably received with customers. There are currently five new stores with provisional opening dates and a further 39 full refits planned for the remainder of the year.

We plan to open a further six Big Box stores in 2017 at various locations across the UK. These stores will be a mix of out of town and high street locations but will all operate with the new contemporary format, offering a good brand mix, extended product range and broad customer appeal. If the trial continues to be a success through 2017 we will look to accelerate the opening programme of these stores into 2018 and beyond.

We expect the business will continue to convert cash effectively but anticipate a small increase in both capital expenditure and contribution to defined benefit pension schemes. We anticipate spending an additional £1.0m more in 2017 on store opening, refits and head office improvements. We are currently contributing £600k to one of our pension schemes and are in discussions around the ongoing funding with the trustees of our two schemes.

Our multichannel offering has had some exciting developments since the year end and we are now trading on Amazon marketplaces in France, Germany, Spain and Italy. We plan to continue to grow into new international online marketplaces throughout 2017. Following a Google algorithm change in September we have experienced a step up in organic search on shoezone.com that is also very encouraging. Further online growth in 2017 will come from investment in 'Personalisation', implementing new technology to enable us to enhance our conversion rate optimisation, giving our customer a more personal shopping experience.

Shoe Zone has made a solid start to the year and trading is in line with expectations. We are making good progress against our strategic objectives and the board remains positive about the outlook for the Group for the remainder of the year.

Financial review

In the 52 weeks to 1 October 2016, Group profit before tax ('PBT') increased to £10.3m (2015: £10.1 m), an increase of 1.1% on last year. PBT margin also increased to 6.4% (2015: 6.1%).

Revenues of £159.8m (2015: £166.8m) declined by 4.2% due to the planned closure of loss making stores and as a result of difficult trading conditions in the first half. Store numbers reduced by a net 25 branches to 510 at the year end (2015: 10 branches closed leaving a total of 535).

Multi-channel revenues (excluding store orders) have continued to grow achieving 11.4% during the year (2015: 39.4%), and have developed to 3.9% of total sales (2015: 3.3%).

Product gross margin strengthened to 62.0% (2015: 61.5%) reflecting further increases in direct sourcing and management of write downs.

Operating expenses increased to £17.4m (2015: £17.0m). Administration expenses, which increased by £0.7m largely due to the impact of unhedged foreign exchange differences were, offset by continuing efficiencies in distribution costs.

The effective rate of corporation tax for the year was 21.8% on PBT (2015: 24.4%).

Earnings per share increased 4.3% to 16.9p (2015: 16.2p).

During the year we opened 17 new stores and completed 41 refits, spending £3.4m on capital expenditure.

The Group supports two defined benefit schemes. The accounting valuation as at 1 October 2016 indicates a deterioration of £7.9m within the year (before deferred tax). This reflects an increase in the fair value of assets by £7.1m offset by an increase in the present value of the funded obligations of £15.0m which is due to significant falls in corporate bond yields over the year resulting in a higher value being placed on the liabilities of the scheme. The actuarial valuations for the schemes are currently in progress and the company is in discussions with the trustees on the options for the future funding of these schemes.

The Company continues to utilise a formal financial derivative hedging policy. The Group uses derivative financial instruments, typically forward exchange contracts, to hedge the risk of future foreign currency fluctuations. The hedging policy enables the effective portion of changes in the fair value of designated derivatives to be recognised in other comprehensive income. Historically these movements would have been recognised in the income statement. Further information can be seen in accounting policies note 1 of the financial statements. The Group closed the year with a derivative financial asset of £0.7m; all of which has been involved in a formally designated hedge.

The business has a debt free financial structure and generated £13.9m cash from operations, a year on year increase of £2.3m resulting in a net cash position of £15.0m (2015: £14.2m) at the year end, underpinning a strong balance sheet. The Group's current bank facilities consist of an on demand overdraft facility of £5.0m with HSBC. This facility has not been used within the year.

The Board is proposing two dividends to be paid; a final dividend of 6.8p (2015: 6.5p) per share and a special dividend of 8.0p (2015: 6.0p) per share. The special dividend is being proposed as the business has £4.1m of excess cash, £11m is currently deemed to be the maximum cash the business requires to operate effectively. The dividends will be paid to shareholders on the register on 24 February 2017, payable on 16 March 2017 if approved at the Annual General Meeting to be held on 2 March 2017.

Consolidated income statement for the 52 weeks ended 1 October 2016

	Note
		52 weeks ended 1 October 2016	52 weeks ended 3 October 2015
		£'000	£'000

Revenue	1, 2	159,834	166,819
Cost of sales		(132,022)	(139,503)
Gross profit		27,812	27,316
Administration expenses		(11,657)	(10,939)
Distribution costs		(5,769)	(6,095)
Profit from operations		10,386	10,282
Finance income		56	44
Finance expense		(190)	(186)
Profit before taxation		10,252	10,140
Taxation		(1,801)	(2,039)
Profit attributable to equity holders of the parent		8,451	8,101

Earnings per share - basic and diluted	6	16.90p	16.20p

Consolidated statement of total comprehensive income for the 52 weeks ended 1 October 2016

	Note	52 weeks ended 1 October 2016	52 weeks ended 3 October 2015
		£'000	£'000
Profit for the period		8,451	8,101
Items that will not be reclassified subsequently to the income statement
Remeasurement losses on defined benefit pension scheme		(8,190)	(499)
Movement in deferred tax on pension schemes		1,474	100
Effect of change in deferred tax rate on opening liability		(362)	-
Items that will be reclassified subsequently to the income statement
Fair value movements on cash flow hedges		1,683	314
Cash flow hedges recognised in inventories		(1,667)	-
Tax on cash flow hedges		(3)	(63)
Effect of change in deferred tax rate on opening liability		6	-
Other comprehensive expense for the period		(7,059)	(148)
Total comprehensive income for the period attributable to equity holders of the parent		1,392	7,953

Consolidated statement of financial position as at 1 October 2016

	Note	52 weeks ended 1 October 2016	52 weeks ended 3 October 2015
		£'000	£'000

Assets
Non-current assets
Property, plant and equipment		18,661	18,688
Deferred tax asset		1,441	-
Total non-current assets		20,102	18,688
Current assets
Inventories		30,075	29,172
Trade and other receivables		7,204	8,148
Derivative financial assets		651	553
Cash and cash equivalents		15,046	14,221
Total current assets		52,976	52,094
Total assets		73,078	70,782
Current liabilities
Trade and other payables		(25,348)	(23,649)
Provisions		(922)	(802)
Corporation tax liability		(1,583)	(1,373)
Total current liabilities		(27,853)	(25,824)
Non-current liabilities
Trade and other payables		(2,316)	(3,037)
Provisions		(75)	(363)
Employee benefit liability		(13,058)	(5,150)
Deferred tax liability		-	(124)
Total non-current liabilities		(15,449)	(8,674)
Total liabilities		(43,302)	(34,498)
Net assets		29,776	36,284
Equity attributable to equity holders of the company
Called up share capital	5	500	500
Merger reserve		2,662	2,662
Cash flow hedge reserve		270	251
Retained earnings		26,344	32,871
Total equity and reserves		29,776	36,284

Consolidated statement of changes in equity for the 52 weeks ended 1 October 2016

	Share capital	Merger reserve	Cash flow hedge reserve	Retained earnings	Total
	£'000	£'000	£'000	£'000	£'000
At 4 October 2014	500	2,662	-	28,569	31,731
Profit for the period	-	-	-	8,101	8,101
Other comprehensive expense	-	-	251	(399)	(148)
Total comprehensive income for the period	-	-	251	7,702	7,953
Dividends paid during the year (note 3)	-	-	-	(3,400)	(3,400)
Total contributions by and distributions to owners	-	-	-	(3,400)	(3,400)
At 3 October 2015	500	2,662	251	32,871	36,284
Profit for the period	-	-	-	8,451	8,451
Other comprehensive income	-	-	19	(7,078)	(7,059)
Total comprehensive income for the period	-	-	19	1,373	1,392
Dividends paid during the year (note 3)	-	-	-	(7,900)	(7,900)
Total contributions by and distributions to owners	-	-	-	(7,900)	(7,900)
At 1 October 2016	500	2,662	270	26,344	29,776

Share capital comprises nominal value of shares subscribed for.

The merger reserve has arisen as a result of the application of merger accounting to the group reorganisation of 26 March 2014.

The cash flow hedge reserve comprises of gains/losses arising on the effective portion of hedging instruments and is carried at fair value in a qualifying cash flow hedge.

Retained earnings are all other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.

Consolidated statement of cash flows for the 52 weeks ended 1 October 2016

	Note	52 weeks ended 1 October 2016	52 weeks ended 3 October 2015
		£'000	£'000
Operating activities
Profit after taxation		8,451	8,101
Corporation tax		1,801	2,039
Finance income		(56)	(44)
Finance expense		190	186
Depreciation of property, plant and equipment		3,153	3,713
Impairment of property, plant and equipment		-	459
Loss on disposal of property, plant and equipment		309	46
Pension contributions paid		(472)	(300)
		13,376	14,200
Decrease in trade and other receivables		861	303
Decrease in foreign exchange contract		239	501
(Increase)/Decrease in inventories		(1,224)	9
Increase/(Decrease) in trade and other payables		821	(3,148)
Decrease in provisions		(168)	(264)
		529	(2,599)
Cash generated from operations		13,905	11,601
Income taxes paid		(2,041)	(1,538)
Net cash flows from operating activities		11,864	10,063
Investing activities
Purchase of property, plant and equipment		(3,195)	(1,879)
Sale of property, plant and equipment		-	280
Interest received		56	44
Net cash used in investing activities		(3,139)	(1,555)
Financing activities
Dividends paid during the year	3	(7,900)	(3,400)
Interest paid		-	(1)
Net cash used in financing activities		(7,900)	(3,401)
Net increase in cash and cash equivalents		825	5,107
Cash and cash equivalents at beginning of period		14,221	9,114
Cash and cash equivalents at end of period		15,046	14,221

1 Accounting policies

General information

Shoe Zone plc (the 'Company') is a public company incorporated and domiciled in England and Wales. The registered office is at Haramead Business Centre, Humberstone Road, Leicester, LE1 2LH. The company registered number of the Company is 8961190.

The Company and its subsidiaries' (collectively the Group) principal activity is a footwear retailer in the United Kingdom and the Republic of Ireland.

Basis of preparation

The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied for the 52 weeks ended 1 October 2016.

The announcement of results for the Group for the 52 weeks ended 1 October 2016 was authorised for issue in accordance with a resolution of the directors on 10 January 2017.

The Group financial statements for the 52 weeks ended 1 October 2016 included in this report do not constitute the Group's statutory accounts for the 52 weeks ended 1 October 2016, or the 52 weeks ended 3 October 2015 but is derived from those accounts. The auditor has reported on these accounts; their report was unqualified, did not draw any matters by way of emphasis without qualifying their report and did not contain statements under s498 (2) or (3) Companies Act 2006 or equivalent preceding legislation. The statutory accounts for the 52 weeks ended 3 October 2015 have been filed with the Registrar of Companies.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs.

Basis of consolidation

The consolidated financial statements incorporating the financial statements of Shoe Zone plc and its subsidiary undertakings are all made up to 1 October 2016. The results for all subsidiary companies are consolidated using the acquisition method of accounting.

Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

De-facto control exists in situations where the company has the practical ability to direct the relevant activities of the investee without holding the majority of the voting rights. In determining whether de-facto control exists the company considers all relevant facts and circumstances, including:

· The size of the company's voting rights relative to both the size and dispersion of other parties who hold voting rights

· Substantive potential voting rights held by the company and by other parties

· Other contractual arrangements

· Historic patterns in voting attendance.

The consolidated financial statements present the results of the company and its subsidiaries ('the Group') as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

Changes in accounting policies

The Group has not early adopted the following new standards, amendments or interpretations that have been issued but are not yet effective. The Directors anticipate that the adoption of these standards will not result in significant changes to the Group's accounting policies. The Group has commenced its assessment of the impact of these standards but is not yet in a position to state whether these standards would have a material impact on its results of operations and financial position.

There were no significant standards or interpretations effective for the first time for periods beginning on or after 4 October 2015. None of the amendments to Standards that are effective from that date had a significant effect on the Group's financial statements.

· Annual Improvements to IFRSs 2012-2014 Cycle

· IFRS 15 Revenue from Contracts with Customers

· IFRS 9 Financial Instruments

· IFRS 16 Leases

Revenue

Revenue is measured at the fair value of consideration received or receivable net of discounts, returns and VAT. Revenue from the sale of footwear is recognised when the company has transferred the significant risks and rewards of ownership to the buyer at the point of sale in the shop. At the point of sale a provision is made for the level of expected returns based on previous experience.

Internet sales are recognised when the goods have been paid for, despatched and received by the customer.

Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as purchase price, cost includes directly attributable costs.

Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over the expected useful economic lives. It is provided at the following rates:

Leasehold improvements	-	5-10 years on a straight line basis
Fixtures and fittings	-	5-10 years on a straight line basis
Motor vehicles	-	3-5 years on a straight line basis

No depreciation is provided against freehold land. Depreciation is provided against freehold shop properties writing off the original cost less estimated residual value over the useful economic life of the property which is estimated to be 50 years.

Leased assets

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Shoe Zone plc Group (a 'finance lease'), the asset is treated as if it had been purchased outright.

The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between interest and capital. The interest element is charged to the consolidated income statement over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an 'operating lease'), the total rentals payable under the lease are charged to the consolidated income statement on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.

Impairment of non-financial assets

The carrying values of non-financial assets are reviewed for impairment when there is an indication that assets might be impaired. When the carrying value of an asset exceeds its recoverable amount, the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's cash generating unit (i.e. the smallest group of assets in which the asset belongs for which there are separable identifiable cash flows).

Impairment charges are included in the consolidated income statement in cost of sales, except to the extent they reverse previous gains recognised in the consolidated statement of comprehensive income.

Inventories

Inventories are initially recognised at cost on a first in first out basis, and subsequently at the lower of cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Financial assets

The Group classified its financial assets into the categories, discussed below, due to the purpose for which the asset was acquired. The Group has not classified any of its financial assets as held to maturity.

Derivative financial instruments and hedging activities

The Group uses derivative financial instruments such as forward foreign exchange contracts to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are initially measured at fair value and subsequently remeasured at fair value. The fair value of forward foreign exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in cost of sales in the income statement.

Amounts accumulated in equity are reclassified to inventories in the period when the purchase occurs, matching the hedged transaction. The cash flows are expected to occur and impact on profit and loss within 12 months from the year end.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss previously recognised in equity is retained in equity and is recognised when the forecast transaction is ultimately recognised in cost of sales in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Loans and receivables

Loans and receivable assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

The Group's loans and receivables comprise trade and other receivables and cash and cash equivalents included within the consolidated statement of financial position.

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the consolidated income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

Financial liabilities

The Group classified its financial liabilities as other financial liabilities which include the following:

· bank loans which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost ensuring the interest element of the borrowing is expensed over the repayment period at a constant rate; and

· trade payables, other borrowings and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the statement of financial position differs from its tax base.

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted.

Deferred tax assets are offset when the Group has legally enforceable rights to set off current tax assets against current tax liabilities and the deferred tax liabilities relate to taxes levied by the same tax authority on either:

· the same taxable group company; or

· different company entities which intend to either settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets and liabilities are expected to be settled or recovered.

Provisions

Provision for dilapidations is made at the best estimate of the expenditure required to settle the obligation at the reporting date, where material, discounted at the pre-tax rate reflecting current market assessments of the time value of money and risks specific to the liability. A dilapidation provision is only recognised on those properties which are likely to be exited. Where such property is identified the full costs expected are recognised. This provision relates to the liability of wear and tear incurred on the leasehold properties and does not include any removal of shop refits as experience indicates that liabilities do not arise for removal of shop refits.

Foreign exchange

Transactions entered into the Group entities in a currency other than the functional currency are recorded at the average rate prevailing during the period. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date.

Retirement benefits - defined contribution and benefit schemes

The Group operates both defined benefit and defined contribution funded pension schemes. The schemes are administered by trustees and are independent of the Group.

Contributions to defined contribution schemes are charged to the consolidated statement of comprehensive income in the year to which they relate.

Defined benefit scheme surpluses and deficits are measured at:

· the fair value of plan assets at the reporting date; less

· plan liabilities calculated using the projected unit credit method discounted to its present value using yields available on high quality corporate bonds that have maturity dates approximating to the terms of the liabilities; plus

· unrecognised past service costs; less

· the effect of minimum funding requirements agreed with scheme trustees.

Re-measurements of the net defined obligation are recognised directly within equity. These include actuarial gains and losses, return on plan assets (interest exclusive), and any asset ceilings (interest exclusive).

Service costs are recognised in the income statement, and include current and past service costs as well as gains and losses on curtailments.

Net interest expense (income) is recognised in profit or loss, and is calculated by applying the discount rate used to measure the defined benefit obligation (asset) at the beginning of the annual period to the balance of the net defined benefit obligation (asset), considering the effects of contributions and benefit payments during the period.

Gains or losses arising from changes to scheme benefits or scheme curtailment are recognised immediately in profit or loss.

Settlements of defined benefit schemes are recognised in the period in which the settlement occurs.

2 Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the management team including the Chairman, Chief Executive Officer and Chief Operating Officer.

The Board considers that each store is an operating segment but there is only one reporting segment as the stores qualify for aggregation, as defined under IFRS 8. Management reviews the performance of the Group by reference to total results against budget. The total profit measures are operating profit and profit for the year, both disclosed on the face of the consolidated income statement. No differences exist between the basis of preparation of the performance measures used by management and the figures in the Group financial statements.

	52 weeks ended 1 October 2016	52 weeks ended 3 October 2015
	£'000	£'000
External revenue by location of customers:
United Kingdom	154,463	161,761
Republic of Ireland	5,371	5,058
	159,834	166,819

There are no customers with turnover in excess of 10% or more of total turnover.

	52 weeks ended 1 October 2016	52 weeks ended 3 October 2015
	£'000	£'000
Non-current assets by location:
United Kingdom	18,661	18,688

Non-current assets held in the Republic of Ireland are not disclosed on the grounds of materiality.

3 Dividends

52 weeks

ended 1 October 2016

52 weeks
ended 3 October 2015

£'000

Dividends paid during the year at 15.8p (2015: 6.8p) per share

7,900

3,400

A final dividend of 6.8p (2015: 6.5p) per share is proposed for shareholders on the register on 24 February 2017 payable on 17 March 2017 following approval at the Annual General Meeting on 2 March 2017.

A special dividend of 8.0p (2015: 6.0p) per share is proposed for shareholders on the register on 24 February 2017 payable on 17 March 2017 following approval at the Annual General Meeting on 2 March 2017.

4 Contingent liabilities

The Shoe Zone plc Group and subsidiary undertakings have given a duty deferment guarantee in favour of HM Revenue and Customs amounting to £800,000 (3 October 2015: £800,000).

5 Share Capital

	1 October 2016	3 October 2015
	£'000	£'000
Share capital issued and fully paid
50,000,000 ordinary shares of 1p each	500	500
	500	500

Ordinary shares carry the right to one vote per share at general meetings of the company and the rights to share in any distribution of profits or returns of capital and to share in any residual assets available for distribution in the event of a winding up.

6 Earnings per share

Earnings per share is calculated by dividing profit for the year by the weighted average number of shares outstanding during the year.

	52 weeks ended 1 October 2016	52 weeks ended 3 October 2015
	£'000	£'000
Numerator
Profit for the year and earnings used in basic and diluted EPS	8,451	8,101