RNS announcement

22 May 2018

Topps Tiles Plc

("Topps Tiles", "the Group" or "the Company")

UNAUDITED INTERIM REPORT FOR THE 26 WEEKS ENDED 31 MARCH 2018

Resilient performance in a more challenging retail market; continued strong cash generation; good progress being made with commercial market plans

HIGHLIGHTS

Topps Tiles Plc, the UK's largest tile specialist, announces its interim results for the 26 weeks ended 31 March 2018.

Adjusting items are detailed in the notes below.  These include trading losses from the Parkside business while we go through an initial two year phase of investing in growth plus other items the Board do not consider are representative of underlying business performance.  These include items which are either one off in nature or can fluctuate significantly from year to year (such as some property related items)

Financial Summary

Strategic & Operational Summary

Retail Business

Commercial Business

Current Trading and Outlook

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

"After a strong start to the year, market conditions became more challenging over the second quarter, when our like-for-like sales performance was also impacted by the adverse weather and the earlier timing of Easter.  Against this background, our clear strategic focus, coupled with strong promotional positioning, enabled us to outperform the overall UK tile market.

"We continue to strengthen our position as the UK's leading tile specialist.  Our entry into the commercial tile segment approximately doubles the size of our addressable market while staying within our core specialism of tiles.

"Trading in the first seven weeks of the second half has improved on Q2, with like-for-like sales down by 0.2%.  While we are retaining a cautious view of market conditions for the remainder of the year, we remain confident in our ability to continue to extend our market leading position."

Notes

¹ Net debt is defined as bank loans, before amortised issue costs (note 6) and less cash and cash equivalents.

² Adjusted revenues are defined as total Group revenues excluding Parkside

³ Like-for-like sales revenues are defined as sales from online and stores that have been trading for more than 52 weeks.

⁴ Adjusted gross margin is defined as Group gross margin excluding Parkside

⁵ Adjusted profit before tax excludes several items that we have incurred during the period in order to give users of the accounts additional  information around performance trends.  These are items which are either one off in nature or can fluctuate significantly from year to year (such as some property related items).  These are set out as follows:

⁶ Adjusted for the post tax effect of the above items

⁷ Free cash flow is defined as net cash generated from operating activities less investing activities

⁸ The current range of analyst expectations is £15.5 million to £16.5 million, with consensus at £15.9 million

For further information please contact:

A copy of this announcement can be found on our website www.toppstiles.co.uk

UNAUDITED INTERIM REPORT

Topps Tiles is the largest tile specialist in the UK.  Our primary focus is the retail market for the renovation, maintenance and improvement of UK homes, where the Group remains the clear market leader.  During 2017 the Group announced a more explicit focus on the commercial tile market - which represents approximately 45% of the overall UK market for tiles.  In August 2017 Topps acquired Parkside, a small business which specialises in the supply of tiles into the commercial segment and also distributes to independent kitchen and bathroom retailers, to form the nucleus of a new commercial division.  

Our entry into the commercial tile market via Parkside has approximately doubled the size of the Group's addressable market in the UK whilst staying within our core specialism of tiles.

Our well established and successful strategy of "Out Specialising the Specialists" remains at the heart of what we do within Topps Tiles and the retail segment of the market. This is focussed on offering customers outstanding value for money through an industry-leading product range, world class customer service and multichannel convenience.  The UK market continues to provide a challenging trading backdrop but we remain a strong business that is well positioned to exploit our market leadership position. 

The Board wishes to extend its gratitude to all of our teams across the business for their continued hard work and dedication.

Income Statement

Overall Group revenues for the first half increased by 3.7% to £110.5 million (2017: £106.6 million), with this increase including £1.0 million of revenues from the acquisition of the Parkside business. 

On an adjusted basis, Group revenues increased by 2.8% to £109.6 million with like-for-like revenues increasing by 0.6%.  We estimate the earlier Easter in 2018, combined with the specific period of disruption from adverse weather across the UK during the second quarter, had an impact on the first half trading results, decreasing like-for-like sales growth by c.0.8%, or £0.9 million.  The key macro indicators for the retail segment of our market are consumer confidence, house prices and housing transactions. These measures have been broadly stable in the first half when compared to the prior year and we believe the UK tile market has been in modest decline across this period.

Gross margin for the period was 60.3% (2017: 61.2%) which includes 20bps of dilution impact from the acquisition of the Parkside business.

On an adjusted basis, gross margin was 60.5% which is a 70bps reduction over the first half.  This reflects an increased focus on promotional activity which helped to drive a market beating sales performance.  We expect gross margin in the second half to benefit from our plans to continue to deliver underlying gains through sourcing benefits while also continuing to be promotionally strong and we expect the full year gross margin to be broadly flat year on year.

Operating costs were £59.8 million, compared to £55.2 million over the same period in the prior year.  On an adjusted basis (excluding items as defined in the highlights section) operating costs were £58.7 million, compared to £54.6 million in the prior year.  The principal drivers of the increased costs are as follows:

We anticipate adjusted operating costs for the full year will be in the range of £115.5 million to £116.0 million.

During the period we disposed of one freehold property and recognised a gain of £0.2 million.  In the prior period we did not dispose of any property.

The net interest charge for the Group was £0.5 million (2017: £0.5 million). 

Adjusted profit before tax was £7.2 million (2017: £10.1 million), representing a decrease of 28.7% year-on-year.

When adjusting items are included, the statutory measure of profit before tax for the Group was £6.4 million (2017: £9.5 million), representing a decrease of 32.6% year-on-year.                                                                                                                                                   

The effective tax rate for the 26 weeks to 31 March 2018 was 19.1% (2017: 21.9%). The full year effective tax rate is expected to be similar to the interim tax rate (2017: full year 21.0%). 

Basic earnings per share were 2.67p (2017: 3.86p).  Adjusting for the post tax impact of the items detailed in note 5 in the highlights section the adjusted basic earnings per share were 3.01p (2017: 4.11p), a decrease of 26.8%.

Financial Position

Capital expenditure in the period amounted to £2.0 million (2017: £4.1 million).  The majority of this expenditure in the period relates to six new store openings and all store improvements in 44 stores.  Our plans for the second half of our financial year will include a greater level of expenditure as we continue our programme of all store improvements and commence a programme of investment at our central office and warehouse site in Leicester to update certain facilities and accommodate the new commercial operation.  We anticipate full year capital expenditure of c.£6.0 million.

During the period we disposed of one freehold property for proceeds of £1.0 million (2017: nil).

The Group currently owns eight freehold or long leasehold sites (2017: nine), including one warehouse and distribution facility, with a total net book value of £15.5 million (2017: £15.9 million).

Net cash generated from operating activities over the period was £7.8 million, compared to £7.1 million in the prior year period, an increase of £0.7 million.  The increase was partly driven by a lower level of tax and interest payments due to a settlement of historic tax and interest payments in the prior year.

The business has invested £2.0 million (2017: £4.1 million) in capital expenditure and received income of £1.0 million (2017: nil) from the disposal of one freehold.

Free cash flow was £6.8 million (2017: £3.0 million), an increase of 127% year on year.

At the period end cash and cash equivalents for the Group were £9.9 million (2017: £13.4 million) and borrowings were £35.0 million (2017: £40.0 million), giving a net debt position of £25.1 million (2017: £26.6 million).

The Group has £50.0 million (2017: £50.0 million) of loan facilities in place which are non-amortising and committed to May 2019.  The intention is to refinance the existing loan facility over the course of the second half of the year.

At the period end the Group had £31.2 million of inventories (2017: £26.9 million) which represented 135 days cover (2017: 121 days).  The increase in inventory over the first half relates to additional stores, the acquisition of Parkside in August 2017, and additional densities of key promotional lines.  The business expects to deliver a reduction in inventory in the second half.

Key Performance Indicators

As set out in our most recent annual report, we monitor our performance in implementing our strategy with reference to a clearly defined set of key performance indicators ("KPIs").  These KPIs are applied on a Group-wide basis.  Our performance in the 26 weeks ended 31 March 2018 is set out in the table below.  The source of data and calculation methods are consistent with those used in the 2017 annual report.

Results for the 26 weeks ended 31 March 2018

Highlights

Note - market share is calculated on an annual basis so there is no update at the interim stage.  As at year end 30 September 2017 the share of the overall UK tile market (retail & commercial sectors) was estimated at 18%.

* As explained on page 2 in notes 1-6

** Net Promoter Score is calculated based on customer feedback to the question of how likely they are to recommend Topps Tiles to friends or colleagues.  The scores are based on a numerical scale from 0-10 which allows customer to be split into promoters (9 -10), passives (7-8) and detractors (0-6).  The final score is based on the percentage of promoters minus the percentage of detractors.

Dividend

The Board is pleased to declare an interim dividend of 1.1 pence per share (2017: 1.1 pence per share).  The shares will trade ex-dividend on 7 June 2018 and the dividend will be paid on 13 July 2018 to shareholders on the register at 8 June 2018.  The company previously indicated a target of two times dividend cover and expects to achieve this for the current financial year.

Strategic & Operational Review

The primary goal for the business is to generate profitable sales growth for shareholders and our strategy to achieve this within the retail segment of our market is to "Out Specialise the Specialists".  This recognises that the other specialist tile retailers in our market are often our strongest competitors and by ensuring we are more competitive than them we will continue to take market share from all competitors. 

In the prior financial year we expanded our reach into the commercial segment of the UK tile market through our acquisition of Parkside - a business which specialises in supply to the commercial tile market.  This diversification has allowed us to approximately double the size of our addressable market whilst staying within our specialism of tiles.  As the UK's leading tile specialist, our aim is to deliver outstanding value to all of our customers, across the following areas: 

Range - our core specialism in sourcing and developing differentiated collections of tiles from around the world is our key element of competitive advantage.  Topps is the leading tile specialist in the UK and we have the most comprehensive, on-trend range of quality tiles and complimentary finishing touches available.  Highlights from the first half include:

People -  our colleagues remain critical to our success because of the specialist service and advice they provide to our customers.  Key areas of focus in the first half included:

Trade - our trade customer base is an important source of growth but often also a channel to the homeowning end consumer.

Digital experience - providing our customers with an inspirational digital experience is a crucial aspect of their overall journey with us and a key element of our strategy.  We know that almost all of our customers will go online at some stage of their journey with us - from when they start their initial research through to when they order their goods and pay, or at any stage in between.

Shopping experience - once our customers enter our stores we aim to deliver them a truly world class shopping experience.  This includes the integration of all of our channels (including trade) in order to ensure the customer's journey is as seamless as possible.  We continue to invest in customer service through programmes such as "Natural Service" and our latest initiatives are described above in the People section of this report.

Commercial - we purchased the Parkside business in August 2017.  Our plan is to be a market disrupter over the short to medium term as we grow from a small base, with an ambition to construct a new market leader in this fragmented market.  

Risks and Uncertainties

The Board continues to monitor the key risks and uncertainties of the Group and does not consider that there has been any material change to those documented in the 2017 Annual Report and Accounts.  The key risks include: general economic and consumer confidence, foreign exchange rate fluctuation, regulatory cost pressures, threat from competitors, attracting and retaining talent, loss of a key supplier, financing, cyber security, major reputational damage, and the new General Data Protection Regulations (GDPR).

Board Composition

The Board comprises an Independent Non-Executive Chairman, three Independent Non-Executive Directors and two Executive Directors.  As such the composition is fully compliant with the Combined Code.

Going Concern

Based on a detailed review the Board believes the Group will continue to operate within its loan facility covenants, and meet all of its financial commitments as they fall due. On this basis the Board considers that the Group will be able to continue as a going concern for a period of at least 12 months and has prepared the financial statements on this basis.

Current Trading & Outlook

We continue to strengthen our position as the UK's leading tile specialist.  In our core retail business, our proven strategy of "Out-specialising the Specialists" remains effective and is supporting further gains in market share.  In addition, our entry into the commercial tile segment approximately doubles our addressable market and we plan to build a leading position in commercial over the medium term.  While we are only in the initial stages of this journey we are excited about the potential in commercial and encouraged by the customer and colleague response to date.  

Trading in the first seven weeks of the second half has improved on Q2, with like-for-like sales down by 0.2% (2017: decrease of 5.8%).

While we are retaining a cautious view of market conditions for the second half, we expect that pre-tax profits for the full year will be within the current range of market expectations. .

RESPONSIBILITY STATEMENT

Cautionary statement

This Interim Management Report ("IMR") has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed.  The IMR should not be relied on by any other party or for any other purpose.

The IMR 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 but 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.

This interim management report has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to Topps Tiles Plc and its subsidiary undertakings when viewed as a whole.