RNS announcement



Topps Tiles Plc

Preliminary Results

Topps Tiles Plc ("Topps", "Topps Tiles" or "the Group"), the UK's largest tile and wood flooring specialist with 342 stores, announces its preliminary results for the 52 weeks ended 27 September 2008.

Financial Performance

• Total Group revenue grew 0.1% to £208.1m (2007:£207.9m)

• Like-for-like revenue declined 5.4% (2007: up 4.7%)

• Group gross margin 61.8% (2007: 62.8%)

• Operating profit of £34.6m (2007: £44.3m)*

• Profit before tax of £27.7m (2007: £37.8m)** 

• Basic Earnings per share of 9.56 pence (2007: 15.09 pence)

• Adjusted Basic Earnings per share of 11.16 pence (2007: 14.94 pence) ***

• No final dividend declared in order to accelerate reduction in net debt and improve financial flexibility (2007 : 6.95 pence per share)

• Net debt position of £92.0m (2007: £95.2m)

• Renegotiated loan facility, favourable relaxation of covenants and extension of the facility to January 2012

• Sale and leaseback of 4 freehold properties for £4m, with a profit on disposal of £0.9m (2007 : £0.3m)

* 2008 Operating profit includes a goodwill impairment charge (non-cash) of £1.2m (2007 : £nil)

** 2008 profit before tax includes the following non-recurring items in addition to the above note:

• £1.5m (non-cash) charge relating to the interest rate hedging the company has in place (per IAS39), (2007 : £0.5m)

• Property disposal gain of £0.9m (2007 : £0.3m)

*** Adjusted for post tax effect of non-recurring items highlighted above plus:

• £1.1m deferred tax charge relating to withdrawal of Industrial Buildings Allowances (2007 : £nil)

Operational Performance

• Net 19 new stores opened in the UK, now trading from 320 stores in the UK (2007: 301 stores)

• Holland - now trading from 22 stores (2007: 20 stores)

• First 7 weeks of the new financial period total Group revenue declined by 13.5% and Group like-for-like revenue declined by 18.3%

Commenting on the results, Matt Williams, Chief Executive said:

"This is a credible performance when taking into account that the retail trading environment has become increasingly challenging during the year and our results have been affected accordingly. We intend to capitalise on our market leading position - we have a resilient business model, and an outstanding customer service ethic which will enable us to progress through this downturn, and believe that we will benefit significantly when consumer confidence returns.

For further information please contact:

Topps Tiles Plc

Matt Williams, CEO

Barry Bester, Chairman

c/o Bell Pottinger Corporate & Financial                    020 7861 3232

Emma Kent / Laura Pope

Bell Pottinger Corporate & Financial                         020 7861 3232

Chairman's Statement

This has been a challenging year for the Topps business in a difficult trading environment.  However, we are facing these challenges and managing the business in a robust and prudent manner. We have delivered a credible financial performance in a tough operating environment.  I remain confident that our business will show resilience through this period and we will be well positioned to capitalise on the strong foundations of the company as the economic situation improves.

Financial Results

Total group revenue has been almost flat year on year at £208.1 million (2007: £207.9 million) with like-for-like revenue for the period showing a decline of 5.4% on last year. Operating profit for the period was £34.6 million (2007: £44.3 million) giving a profit before tax of £27.7 million (2007: £37.8 million). Basic earnings per share is 9.56 pence (2007: 15.09 pence). During the period our banking facilities were renegotiated with a relaxation of both covenants associated with the debt and the facility has been extended to 2012. There was a one-off arrangement fee of £0.5 million which will be amortised over the remaining period of the facility.  

Dividend

In order to reduce net debt and improve the Company's financial flexibility, the Board has decided not to pay a final dividend for this financial year.  We believe this is in the best interests of the business in the prevailing economic environment and we will continue to review the dividend policy on a bi-annual basis. 

Board Changes

In March this year we announced the appointment of Alan White, currently CEO of N Brown Group plc, to the Board as a non-executive director. His appointment was effective from 1 April 2008. In addition we also announced the resignation from the Board of Alan McIntosh with effect from 31 March 2008. I would like to thank Alan McIntosh for his support and contribution to the Company during his 10 years as non-executive director.

We are also announcing that Victor Watson will not seek re-election at the next AGM, after 10 very successful years on the Board Victor has decided to step down. I would like to thank Victor for all of his support and contribution to the Company.

People 

The Company's staff are fundamental to the continuing success of the business. Their ability to deliver exceptional customer service is a key factor in differentiating Topps from its competitors and will contribute to the future success of the business.  

I would like to extend the Board's thanks and gratitude to everyone in the Company for their continuing efforts and hard work.

Outlook

We have a very resilient business model and an extremely capable team who are managing the business prudently. The team have made significant progress during the year to ensure that the business is in the best possible condition for the year ahead. We have again tightened our cost base for the coming year, reviewed our plans for growth, focused our attention on cash management, and extended our banking facilities. The Board is confident that as a result of these actions the business can withstand a sustained period of weak consumer activity.

I am confident that we can capitalise on our position as market leader as we trade through the current economic cycle and expect to benefit significantly when consumer confidence returns.

Barry Bester

Chairman

Chief Executive's Statement

We have maintained our market leading position and expect to capitalise on this during the coming year. We will achieve this by continuing to focus on excellent customer service, outstanding value ranges and an anticipated contraction in the competition. We have delivered a credible performance and anticipate that our resilient business model will help us to create an even stronger business.

UK Store Development and Expansion

We are pleased to have achieved our store opening target with a net 19 new stores opened in the period. This now gives us an overall total of 320 trading outlets throughout the UK. For the coming year we will focus the majority of our attention on improvements to our existing estate. In the current economic climate we believe that a more cautious approach to expansion is appropriate. We anticipate that an easing of pressures in the property market should create opportunities for us to open a small number of new stores in strong trading locations.

Topps Tiles

We have opened a net 17 new stores and now have a total of 263 Topps outlets. This includes 24 new openings offset by 2 closures, 3 relocations and 2 rebrands to Tile Clearing House (TCH).  

Alongside our traditional retail channel we have, this year, launched our first online business. This offers a wide selection of our most popular ranges as well as some additional complementary products not found in our stores. These include bathrooms accessories and heated towel radiators. We have developed the online offer during the year and whilst this element of the business is still in its infancy we look forward to it increasing sales as it grows in popularity. Our online offer can be found at www.toppstiles.co.uk.

Tile Clearing House

Tile Clearing House remains focused on trade customers and jobbing builders, operating a "cash and carry" type format. We have opened a net 2 new stores under the Tile Clearing House brand and now have a total of 57 outlets.  

Holland

In Holland we have opened a further net 2 stores during the year taking the total to 22. This consisted of 3 new openings and 1 closure due to a relocation. The business has had to contend with a difficult trading environment and a number of other issues. Against this backdrop we have seen a decline in like for like revenues and the business has generated a loss for the year.  

We have also conducted a review of the goodwill that arose on acquisition of the Dutch business and decided that against the context of the current year's results and a more cautious outlook for the future it is appropriate to impair the goodwill and write it down by £1.2 million to £nil in the current year.  

Whilst we operate a tight cost base which is appropriate for a small business, the key issues which we are tackling are store sales density and gross profit margins. We have a new management team in place with a very clear agenda. They will be focused on driving sales and improving margins by upweighting the mix of tile sales. The year ahead is likely to be one of continued, measured progress with less focus on expansion than we have seen previously.

Marketing, Advertising and Sponsorship

Over the last year we ran both national and regional marketing and advertising campaigns. These included the launch of a new TV advertising campaign on ITV. The campaign featured works of art created entirely from our tiles and wooden flooring, with the adverts appearing on ITV three times a day straight after the national news. This campaign served us well through the year and we have achieved our goal of continuing to build consumer awareness of the brand. During the year ahead we expect to focus on targeted regional and local marketing where the business requires it.  Topps Tiles is Britain's biggest supporter of community youth football and we currently sponsor over 200 local teams nationwide.  

Staff Development and Customer Service

A core part of our strategy is to deliver outstanding customer service. In order to provide this we place the highest importance on the development of our staff to deliver an excellent standard of service. We are rigorous in our recruitment and retention of capable, ambitious people and are committed to the development and career progression of our employees. We have a sophisticated in store e-learning training system and additionally we incentivise our staff with competitive employee benefit packages. 

We continue to differentiate our business from the competition in a number of ways. All of our stores carry a wide range and supply of stock, we offer a loan-a-tile service, a free "How to" DVD, a tile cutting service and a buy-back service allowing customers to "sell back" undamaged tiles within 45 days of purchase. In addition, we have teamed up with traders local to each of our stores to provide customers with a Topps approved tile installation service. These services coupled with friendly and knowledgeable staff offering expert technical advice led to 98.2% of customers surveyed expressing levels of satisfaction as 'good to excellent' (2007: 97.6%).

Corporate Responsibility

The management team at Topps Tiles is committed to conducting the Company's business in a socially responsible manner, taking into consideration social, environmental and ethical matters, whilst at the same time ensuring the Company achieves its objectives. Our policy is published on our website at www.toppstiles.co.uk and more detail on our achievements can be found in this report. 

Topps Tiles is pleased to be a constituent member of the FTSE4Good UK Index.  

The Market

Topps continues to be the leading tile retailer in the UK with a market share in excess of 22%.

As consumers preferences continue to converge with European tastes the relatively low consumption of tiles per head in the UK compared with the rest of Europe (roughly one third of Northern Europe, source: MBD) provides significant opportunities. Consumers are continuing to refurbish the traditional tiling areas such as kitchens, bathrooms and conservatories and are also increasingly extending into general living areas, helped by the broad range of under flooring heating products now commonly available.

During the year we have also seen a reduction in customer choice as some consolidation in the retail market has taken place, particularly with smaller regional tile businesses.

Worldwide consumption for tiles, in particular in the more developed tile markets is likely to continue to weaken in the short term. This has begun to present some buying opportunities, with regard to both price and terms. With a dedicated tile distribution warehouse, Topps is well positioned to take advantage of these opportunities.

Current Trading and Outlook

In the first 7 weeks of the new financial period Group overall revenue decreased by 13.5% and like for like sales decreased by 18.3%.

At the half year we highlighted that the key driver of risk to the business was the general economic climate and since then the economy has continued to weaken. The business is well equipped to deal with the current economic cycle and we have made good progress in tightening our cost base for the coming year, focusing our attention on cash management and improving our financial flexibility by renegotiating our banking facilities.

We will continue to maintain our focus on tight cost control and prudent management of the business at the same time as delivering the service element that our customers expect. We intend to capitalise on our market leading position and believe that we will emerge from the current economic situation a stronger business and benefit significantly when consumer confidence returns.

Matthew Williams

Chief Executive Officer

BUSINESS REVIEW 

Cautionary statement

This Business Review has been prepared solely to provide additional information to shareholders to assess the company's strategies and the potential for those strategies to succeed. The Business Review should not be relied on by any other party or for any other purpose.

The Business Review contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

Nature, Objectives and Strategies of the Business

Topps Tiles is a specialist tile & wood flooring retailer with 342 outlets across the UK and Holland.  In the UK, we are the country's largest retailer of our kind with a total of 320 stores and a 22% market share. We operate two retail brands, Topps Tiles and Tile Clearing House. Topps is the UK's leading branded tile retailer with 263 stores offering wall and floor tiles, natural stone, laminate, solid wood flooring and a comprehensive range of associated products such as underfloor heating, adhesives and grouts. Tile Clearing House is the biggest clearance tile retailer in the UK with 57 stores nationwide focusing on a mini warehouse type format and a "when it's gone it's gone" style customer offer.

Our European operation in Holland provides a similar style of customer offer to the UK Topps Tiles stores and currently trades from 22 stores.

The Topps' strategy is focused on delivering outstanding value to our customers. This has enabled us to retain our competitive advantage built upon the strong foundations of customer service, store locations, store layout, product choice and availability. We believe that this strategy will continue to serve the company and its many stakeholders well and will see us through the current economic downturn.

Key Operational objectives:

• Deliver customers outstanding value for money to ensure they always "return and recommend"

• Maintain our brand leading position in the market

• Grow the store estate where excellent property opportunities arise

• Continue to develop our in store customer offer to maintain our competitive advantage

• Build an increased online presence and establish the brand as the market leader 

• Continued measured progress in Holland towards a return to profitability

• Ongoing review of the store portfolio to ensure our estate is keeping track with consumer shopping patterns and our cost base is as efficient as possible

Financial objectives:

• Maintaining an appropriate capital structure will continue to be a key financial objective for the group.  

• Continued management of the business with a priority on revenues, cost control and cash generation.

• Review our dividend policy on a bi-annual basis.

• Supplier tendering & benchmarking for non stock suppliers has continued through the year and has seen a change in a number of key suppliers. This will continue to contribute towards our focus on cost control and ensuring that we are as efficient as possible.

• Manage the Group's exposure to fluctuations in foreign exchange rates.

Key Performance Indicators (KPIs)

The Directors monitor a number of financial and non financial metrics and KPIs for the Group and by individual store, including:

The Directors receive regular information on these and other metrics and KPIs for the Group as a whole. These KPIs are reviewed and updated as the Directors feel is required.

Risks and Uncertainties

The key risks to the business continue to be its relationship with key suppliers, the potential threat of competitors, the risk that key information technology or EPOS systems could fail, the loss of key personnel, the risk of a prolonged economic downturn, the impact of foreign exchange rates and the development of substitute products.  

Following a modest weakening of results in the first half we highlighted at that time that the key risk for the second half was the general economic climate. The deterioration in the economy has been more pronounced during the second half of the year and when reviewing risks and uncertainties this is currently accounting for the majority of the Board's focus.

The business has responded to these risks by taking the appropriate action as described in this report. Specifically, we have tightened our cost base, reviewed our plans for growth, focused our attention on cash management, and renegotiated and extended our banking facilities. We are also seeking to enhance and improve our retail operations where possible by reviewing our product offer, customer service and marketing strategies.

We also highlighted at the half year point that an appreciation in the Euro had put pressure on gross margins as a result of our overseas sourcing. The US Dollar has also strengthened over the course of the second half of the year. The current general weakness of the Pound will put further pressure on margins for the coming year but we are addressing this risk by constantly reviewing our sourcing opportunities. During the year approximately 20% of purchases were sourced from overseas.

Post the end of the financial reporting period there have been significant reductions in interest rates. The Group will see a small amount of direct benefit from this via our cash interest charge, however, a more significant benefit would be the potential improvement in consumer confidence.

There are currently a number of risks and uncertainties that the Group is managing. If sales performance continues at the current levels we will need to manage costs and cash even more tightly, however, the Board remains confident the business will continue in its ability to generate positive returns and meet all of its financial commitments in full.

The Directors will continue to routinely monitor of all of these risks and uncertainties and the Board will take appropriate actions to mitigate the risks and/or their potential outcomes.  

We have conducted a review of existing contractual relationships and have concluded that there are none which are essential to the business.

  FINANCIAL REVIEW

PROFIT AND LOSS ACCOUNT

Revenue

Revenue for the period ended 27 September 2008 increased by 0.1% to £208.1 million (2007: £207.9 million). Like-for-like store sales declined by 5.4% across the year, falling by 0.9% in the first half and 9.8% in the second half of the year. The deterioration in performance reflects the tightening in the economy and the impact that this has had on both the financial and consumer sector.

Gross margin

Overall gross margin was 61.8% compared with 62.8% last year. At the interim stage of this period gross margin was 62.7%. In the second half of the period we have generated a gross margin of 60.8%. Erosion of gross margin reflects exchange rate impacts and also the pressure of the current trading environment. However, the relatively small deterioration in gross margin reflects the company's strong brand and business model as we are able to invest margin in a controlled way to drive transactions.

Operating expenses

Total operating costs have increased from £86.2 million to £93.9 million, an increase of 8.9%. 

Costs as a percentage of sales were 45.1% compared to 41.4% last year.

The increase in costs has been mainly driven by our enlarged store estate. The average number of stores trading during the financial period was 329 (2007 : 303). This has generated an increase in our total operating expenses of 7.3%.

Further to this there have been several non-recurring items as follows:

We have spent an additional £1.5 million on group marketing activities, in particular a nationwide ITV1 television campaign.

We have incurred a £1.2 million (non cash) charge for goodwill impairment in relation to the acquisition of the Dutch joint venture. This reflects the Boards more cautious outlook for the Dutch business as described in the Business Review section of this report.

Offsetting these additional charges, in part, is a saving of £1.1 million on management bonuses compared to the previous financial period. This saving was due to management bonus targets not being met during the period.

When taking these items into account, the underlying cost base has reduced by 0.2% for the year as a whole.

Operating Profit

Operating profit for the period was £34.6 million (2007 : £44.3 million).

Operating profit as a percentage of sales was 16.6% (2007: 21.3%).

Underlying operating profit, excluding the non cash goodwill impairment highlighted above was £35.8 million (2007 : £44.3 million). 

Other gains and losses

Other gains & losses include the impact of property disposals. During the period we completed the sale and leaseback of 4 freehold properties for £4.0 million, which generated a £0.9 million profit on disposal (2007: £0.3 million).

Financing

The cash interest charge for the year was £6.3 million (2007: £6.3 million), excluding the impact of IAS39 revaluations. Despite higher interest rates we have maintained the interest charge at the same level of the prior year through a combination of reducing net debt and also the economic benefit we have received from the interest rate derivatives we have in place.

The interest rate derivatives give rise to a "marked to market" revaluation per the requirements of IAS39 "Financial Instruments; Recognition and Measurement". This revaluation has generated a fair value (non cash) charge of £1.5 million (2007: £0.5 million). Due to the nature of the underlying financial instrument, IAS39 does not allow hedge accounting to be applied to these losses and hence this charge is being applied direct to the income statement rather than offset against balance sheet reserves.

Net interest cover was 6.4 times based on earnings before interest, tax and depreciation, excluding the impact of IAS39 in finance charges.

Profit before tax

Reported profit before tax is £27.7 million (2007: £37.8 million).  

Group profit before tax margin was 13.3% (2007 : 18.2%)

Tax

The effective rate of Corporation Tax was 41.0% (2007 : 32.0%). 

There are a series of key items affecting the tax rate during the year, as follows:

The withdrawal of Industrial Buildings Allowances has resulted in a one off deferred tax charge of £1.1m, accounting for 4.1% of the effective tax rate.

Changes to the capital allowances regime and prior year adjustments have impacted the tax charge by £1.2m, accounting for 4.4% of the effective tax rate.

The impairment of goodwill described under "Operating Expenses" does not qualify for corporation tax relief, thereby increasing the effective tax rate by a further 1.2%.

The underlying tax rate, excluding the above items, was 31.3% (2007 : 30.8%).

Earnings per Share

Basic earnings per share were 9.56 pence (2007 : 15.09 pence).

Diluted earnings per share were 9.55 pence (2007 : 15.02 pence). 

Dividend and dividend policy

In order to reduce net debt and improve the Company's financial flexibility, the Board has decided not to pay a final dividend for this financial year.  We believe this is in the best interests of the business in the prevailing economic environment and we will continue to review the dividend policy on a bi-annual basis.

BALANCE SHEET

Capital Expenditure

Capital expenditure in the period amounted to £6.6 million (2007: £9.7 million). This includes the cost of developing 2 freehold sites for £1.2 million. In addition we have opened 33 new outlets at a cost of £3.8 million, refitted 11 existing sites at a cost of £0.6 million, plus a further £1.0 million on other associated activities.

At the period end the Group owned 8 freehold or long leasehold sites including 2 warehouse and distribution facilities with a total net book value of £15.6 million (2007: £17.7 million).

Stock

Stock at the period end represents 140 days turnover compared with 146 days for the same period last year.  

Capital Structure and Treasury

Cash and cash equivalents at the period end were £14.0 million (2007: £15.8 million) with repayable borrowings at £106.0 million (2007: £111.0 million). 

This gives the Group a net debt position of £92.0 million compared to £95.2 million as at 1 October 2007.

During the period we renegotiated our current loan facility, securing a favourable relaxation of the covenants associated with our debt and an extension of the facility to January 2012. There is an associated one off fee of £0.5 million which will be amortised over the remaining period of the facility.

Cashflow 

Cash generated by operations was £38.7 million, compared to £49.8 million last year.

Directors' Responsibility Statement

We confirm to the best of our knowledge :

• the Group's financial statements, prepared in accordance with IFRS, and the Company's financial statements, prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

• the management report, which is incorporated into the Directors' Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

After making enquiries, the Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.

ANNUAL GENERAL MEETING

The Annual General Meeting for the period to 27 September 2008 will be held on 13th January 2009 at 10.30am at Topps Tiles Plc, Thorpe Way, Grove Park, Enderby, Leicestershire LE19 1SU.

Matt Williams                                       Rob Parker

Chief Executive Officer                            Finance Director

24 November 2008

All of the above results relate to continuing operations.

Consolidated Statement of Recognised Income and Expense

For the 52 weeks ended 27 September 2008

.

The accompanying notes are an integral part of these financial statements.

The financial statements on pages 34 to 57 of the Annual Report were approved by the Board of Birectors on 24 November 2008 and signed on its behalf by:

M Williams

R Parker

Directors

Consolidated Cash Flow Statement

For the 52 weeks ended 27 September 2008

Notes to the Financial Statements

For the 52 week period ending 27 September 2008

1     General Information

Topps Tiles Plc is a company incorporated in the United Kingdom under the Companies Act 1985. The address of the registered office is given on page 22 of the Annual Report. The nature of the Group's operations and its principal activity is set out in the Directors' Report on page 24 of the Annual Report.

These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies set out in note 2j.

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:

Standards and interpretations in issue but not yet effective 

IFRS 8    Operating Segments

IAS 23      Amendment 'Borrowing Costs'

IFRS 3    Revised 'Business Combinations'

IAS 27    Amendment 'Consolidated and Separate Financial Statements'

IFRS 2    Amendment 'Share Based Payment'

IFRIC 12    Service Concession Arrangements

IFRIC 13    Customer Loyalty Programmes

IFRIC 14    IAS19 - The Limit on a Deferred Benefit Asset, Minimum Funding Requirements and their Interaction

IFRIC 15     Agreements for the Construction of Real Estate

IFRIC 16     Hedges of a Net Investment in a Foreign Operation

The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group.

Adoption of new and revised Standards

In the current year, the Group has adopted IFRS 7 Financial Instruments: Disclosures which is effective for annual reporting periods beginning on or after 1 January 2007 and the related amendment to IAS 1: Presentation of Financial Statements. The impact of the adoption of IFRS 7 and changes to IAS 1 has been to expand the disclosures provided in these financial statements regarding the Group's financial instruments and management of capital (see notes 2o, 15,17 and 19).

2    Accounting policies

a)    Basis of accounting

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The financial statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore the Group financial statements comply with Article 4 of the EU IAS regulation. The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. The principal accounting policies adopted are set out below.

b)    Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to the Saturday nearest to the 30 September each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee so as to obtain benefits from its activities.

The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which control passed. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

c)    Financial period

The accounting period ends on the Saturday which falls closest to 30 September, resulting in financial periods of either 52 or 53 weeks.

Throughout the financial statements, directors' report and financial review, references to 2008 mean at 27 September 2008 or the 52 weeks then ended; references to 2007 mean at 29 September 2007 or the 52 weeks then ended.

d)     Business Combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date, except for non-current assets (or disposal Groups) that are classified as held for sale in accordance with IFRS 5: Non Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised.

e)    Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed.

For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

Goodwill arising on acquisitions before the date of transition to IFRSs has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill of £15,080,000 written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.

f)    Revenue Recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes. Sales of goods are recognised when title has passed. Sales returns are provided for based on past experience and deducted from income.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount.

Dividend income from investments is recognised when the shareholders' rights to receive payment have been established.

g)    Property, plant & equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss.

Depreciation is charged so as to write off the cost of assets, less estimated residual value, over their estimated useful lives, on the following bases:

Freehold buildings - 2% per annum on cost on a straight-line basis

Short leasehold land and buildings - over the period of the lease, up to 25 years on a straight line basis

Fixtures and fittings - over 10 years or at 25% per annum on reducing balance basis as appropriate

Motor vehicles - 25% per annum on reducing balance

Freehold land is not depreciated.

Residual value is calculated on prices prevailing at the date of acquisition.

h)    Inventories

Inventories are stated at the lower of cost and net realisable value and relate solely to finished goods for resale. Cost comprises purchase price of materials and an attributable proportion of distribution overheads based on normal levels of activity and is valued at standard cost. Net realisable value is based on estimated selling price, less further costs expected to be incurred to completion and costs to be incurred - marketing, selling and distribution.  Provision is made for those items of inventory where the net realisable value is estimated to be lower than cost. 

i)    Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, and interests in jointly controlled entities, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

j)    Foreign currency

Transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of transactions. At each period end, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operation are translated at exchange rates prevailing at period end dates. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the dates of transactions are used. Exchange differences arising are classified as equity and transferred to the Group's translation reserve. Such differences are recognised as income or expense in the period in which the operation is disposed of.

k)    Leases

Rentals under operating leases are charged on a straight line basis over the lease term, even if the payments are not made on such a basis. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight-line basis over the lease term.

l)    Investments

Fixed asset investments are shown at cost less provision for impairment.

m)    Retirement Benefit costs

For defined contribution schemes, the amount charged to the income statement in respect of pension costs is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet.

n)    Finance costs

Finance costs which are directly attributable to the construction of tangible fixed assets are capitalised as part of the cost of those assets. The commencement of capitalisation begins when both finance costs and expenditures for the asset are being incurred and activities that are necessary to get the asset ready for use are in progress. Capitalisation ceases when substantially all the activities that are necessary to get the asset ready for use are complete.

All other finance costs of debt are recognised in the income statement over the term of the debt at a constant rate on the carrying amount

o)     Financial instruments

Financial assets and financial liabilities are recognised in the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Financial assets are classified into the following specified categories: financial assets 'at fair value through profit or loss' (FVTPL, 'held-to-maturity' investments, 'available-for-sale' (AFS) financial assets and 'loans and receivables'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Financial assets at FVTPL

Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL. The Group has no designated FVTPL financial assets.

A Financial asset is classified as held for trading if:

• it has been acquired principally for the purpose of selling in the near future; or

• it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or

• it is a deivative that is not designated and effective as a hedging instrument.

Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset. Fair value is determined in the manner described in note 2t.

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 94 days, as well as observable changes in national or local economic conditions that correlate with default on receivables.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Cash and cash equivalents 

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash within three months and are subject to an insignificant risk of changes in value.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities, Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Financial liabilities are classified as at FVTPL where the financial liability is either held for trading or it is designated as at FVTPL. The Group does not have any designated FVTPL liabilities.

A financial liability is classified as held for trading if:

• it has been incurred principally for the purpose of disposal in the near future; or 

• it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit taking; or

• it is a derivative that is not designated and effective as a hedging instrument.

Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability. Fair value is determined in the manner described in note 2t.

Other financial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Derecognition of financial liabilties

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire.

Derivative financial instruments

The Group's activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates.

The Group uses foreign exchange forward contracts and interest rate swap contracts to manage these exposures. The Group does not hold or issue derivative financial instruments for speculative purposes.

The use of financial derivatives is governed by the Group's policies approved by the board of directors, on the use of financial derivatives.

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately.

A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss.

p)     Share-based payments

The Group has applied the requirements of IFRS 2 Share-based Payments. In accordance with the transitional provisions, IFRS 2 will be applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 October 2005.

The Group issues equity settled share based payments to certain employees. Equity settled share based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the share based payment is expensed on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. Fair value is measured by use of the Black Scholes model. 

The Group provides employees with the ability to purchase the Group's ordinary shares at 80% of the current market value through the operation of its share save scheme. The Group records an expense, based on its estimate of the 20% discount related to shares expected to vest on a straight line basis over the vesting period.

q)    Trade Payables

Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method.

r)    Profit from operations

Profit from operations is stated after charging restructuring costs but before property disposals, investment income and finance costs.

s)    Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors' best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.

t)    Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, which are described above, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in financial statements.

Management consider the detailed criteria for the recognition of revenue from the sale of goods set out in IAS 18 Revenue and, in particular, whether the Group has transferred to the buyer the significant risks and rewards of ownership of the goods and only recognise revenue where this is the case.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and to discount by a suitable discount rate in order to calculate the present value. The carrying amount of goodwill at the balance sheet date is £0.2 million. During the period the Group has incurred an impairment charge of £1.2 million. (Details of the impairment charge calculation are provided in note 12).

Fair value of derivatives and other financial instruments

As described above the directors' use their judgement in selecting an appropriate valuation technique for financial instruments not quoted in an active market. Valuation techniques commonly used by market practitioners are applied, such as discounted cash flows and assumptions regarding market volatility.

Tax

The directors are aware of the material impact that corporation tax has on the Group accounts and therefore they ensure that the Group continues to provide at a sufficient level for both current and deferred tax liabilities.

3    Revenue 

An analysis for the 52 week period of revenue is as follows:

Interest receivable represents gains on loans and receivables. There are no other gains recognised in respect of loans and receivables.

4    Business Segments

The Group is currently organised into three retail operating divisions; Topps Tiles (Topps) and Tile Clearing House (TCH), both based in the UK, and Topps Floorstore (Holland). These divisions are the basis on which the Group reports its primary segment information.

Segmental revenue and profit before taxation by business activity were as follows:

Other information

Other information

5    Profit before taxation

Profit before taxation for the period has been arrived at after charging/(crediting):

Analysis of auditors' remuneration is provided below:

A description of the work of the audit committee is set out on page 28 of the Annual Report and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors.

6    Staff costs

The average monthly number of employees (including executive directors) was:

Details of director's emoluments are disclosed on page 31 of the Annual Report.

Employee profit sharing of £6.5 million (2007: £7.9 million) is included in the above and comprises sales commission and bonuses.

7    Other gains and losses

Other gains and losses in 2008 relates to the sale of 4 freehold properties and in 2007 to the sale of a long leasehold property.

8. Investment revenue and finance costs

No finance costs are appropriate to be capitalised in the period. In the prior period finance costs in respect of development sites were capitalised based on a capitalisation rate of 5.1% last year, which was the weighted average of rates applicable to the Group's general borrowings outstanding during the period.

Interest on bank loans and overdrafts represent gains and losses on financial liabilities measured at amortised cost. There are no other gains or losses recognised in respect of financial liabilities measured at amortised cost.  Total losses from the movement in fair value on held for trading on assets and liabilities (derivative instruments) were £1,464,000 (2007: £480,000). Included within bank interest and similar income is £347,000 (2007: £165,000) being interest received on interest rate swaps.

9. Tax

Corporation tax in the UK is calculated at 29% (2007: 30%) of the estimated assessable profit for the year.

Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

The charge for the year can be reconciled to the profit per the income statement as follows:

10         Dividends

11    Earnings per share

The calculation of earnings per share is based on the earnings for the financial period attributable to equity shareholders and the weighted average number of ordinary shares as follows:

12       Goodwill

The balance of goodwill remaining is the carrying value that arose on the acquisition of Surface Coatings Ltd in 1998.

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.

The recoverable amounts are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates based on the Groups weighted average cost of capital. The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. Discounted cashflows are calculated using a post tax rate of 5.8% (2007: 7.5%).

The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next five years and extrapolates cash flows for the following five years based on an estimated growth rate of 2 per cent. This rate does not exceed the average long-term growth rate for the relevant markets.

As a result of the annual test of impairment of goodwill, the Directors have decided that an impairment of the goodwill relating to the Dutch operation is prudent at this stage. The review of the business valuation has taken into account the operating loss in the period of £758,000 and local managements internal budgets and expectations for the next 5 years. As a result of this, it is considered that a business valuation can support the carrying value of the current tangible fixed assets, but not the goodwill that arose on acquisition. Therefore the Group has impaired the full carrying value of goodwill relating to the acquisition of Topps Holding BV. 

13. Property, plant and equipment