1 December 2020

Topps Tiles Plc

Annual Financial Report

A year of challenge and change - emerging stronger and refreshed

Topps Tiles Plc ("Topps", "Topps Tiles" or "the Company"), the UK's largest tile specialist, announces its annual financial results for the 52 weeks ended 26 September 2020.

Strategic and Operational Highlights

Financial Highlights

Adjusting items are detailed in the notes below - these include the impact of IFRS 16 in 2020, items which are one-off in nature or can fluctuate significantly from year to year (such as some property-related items).  In the prior year, adjusting items included trading losses from the Commercial business whilst the business went through an initial two-year phase of investing in growth.

Financial Summary

Commenting on the results, Rob Parker, Chief Executive said:

"In what has been a very challenging year, I am pleased with our response as a business, in the resilience we have shown and, in particular, the strong bounce-back in retail sales delivered since the initial national lockdown.  Underpinning all of this have been our exceptional colleagues across the Group, and I would like to thank them all for their hard work and commitment throughout this testing period.

"During the year we have transformed our balance sheet and have accelerated our strategic development, building on our credentials as the UK's leading tile specialist.  We are ambitious for the business and have set ourselves a new goal of taking £1 in every £5 spent on tiles and associated products in the UK by 2025.

"It has been a year of challenge and change for Topps but we are emerging stronger and refreshed.  Our new financial year has begun strongly, with retail like-for-like sales in the first eight weeks ahead by 19.6%.  With our true omni-channel offer, specialist credentials and strong financial footing, Topps is well-positioned for growth as the UK economy begins to recover."

Notes

¹Retail like-for-like sales revenues are defined as sales from online and stores that have been trading for more than 52 weeks.  In 2020 sales in like for like stores was £182.3 million (2019: £209.8 million), with an average of 357 stores included in the weekly calculation.

² Adjusted profit before tax excludes the impact of IFRS 16 and several items which are either one-off in nature or fluctuate significantly from year to year (such as some property related items).  These are set out as follows:

* In the prior year, adjusting items included trading losses from the Commercial business whilst the business went through an initial two-year phase of investing in growth.  In the current year, Commercial trading losses are included in adjusted profit.  In the current year, we have impaired commercial goodwill, intangibles and property, plant and equipment, recognising the risk of a slower growth profile following the impact of Covid-19 on sectors that the Parkside and Strata businesses serve.

³ Adjusted earnings per share is adjusted for the items highlighted above, plus the impact of corporation tax

⁴ Adjusted net debt is defined as bank loans, before unamortised issue costs (note 20), less cash and cash equivalents.  It excludes lease liabilities under IFRS 16.

⁵ Gains on disposal of freehold properties include a £4.0 million gain on the sale of the Group's head office and central warehousing buildings calculated on a pre IFRS 16 basis, the sale and leaseback transaction under IFRS 16 generates a £2.9 million reversal of this gain leaving a net gain of £1.1 million - see note 4 to the accounts.

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STRATEGIC REPORT

The content of this Strategic Report meets the content requirements of the Strategic Report as set out in s414a of the Companies Act 2006.  This Strategic Report 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.

MARKETPLACE

The UK Tile Market

The UK tile market splits into two broad sectors - domestic, accounting for around 55% of the market, and commercial, accounting for the remaining 45% (source: Mintel).  The domestic market includes the renovation, maintenance and improvement of residential properties and the commercial market includes commercial building projects in their many and varied forms, as well as new build residential property.

An external survey of the tile market is published by Mintel in September each year.  It covers the whole of the UK tile market, based on manufacturer and supplier data.  The September 2020 report quotes the 2019 total market at £375.5 million at MSP (manufacturers' selling prices) with a projection for 2020 at £285.8 million, a 23.9% fall.  The projected decline in the market this year is largely due to the significant disruption from Covid-19 and any projection of future performance is particularly problematic due to the continued uncertainty the pandemic has caused.  Mintel forecasts that the market will rise by around 9% to £310.6 million in 2021 and then recover to £375.5 million in 2022 but these estimates are highly likely to be revised based on the current strong level of demand being seen in the domestic sector.

Domestic Tile Market

Taking on a home improvement project is generally regarded as discretionary spend and therefore consumer confidence is seen as a good indicator of future growth.  However, due to the pandemic, there are other factors influencing levels of demand.  Following the period of lockdown, there has been a wave of domestic home improvement work, a rediscovery of the love of the home and in some cases, diversion of discretionary spend from other areas such as holidays into home improvement.  The market is therefore currently more buoyant than the metrics suggest however the sustainability of this trend is hard to forecast.

During 2020, the average level of consumer confidence was -22.1, which compares to -12.5 in 2019 (source: GFK).  Over the first half (excluding March), the index was relatively stable at -11, the second half has been dominated by the effects of Covid-19 with an average level of consumer confidence at -29.3.   

A further key driver of the customer decision to take on a home improvement project is buying a new home; housing transactions are therefore a useful indicator of likely future demand.  UK housing transactions across the first half were stable, averaging around 1% growth (excluding March).  The second half has seen significant disruption as Covid-19 preventative measures specifically impacted the housing market and transactions fell by 31%.  Transactions for the financial year were 1.0 million, around 16% below the trend over recent years of approximately 1.2 million (Source: HMRC).  

UK housing prices can also be a useful indicator of our market.  In a rising market, home owners tend to feel more affluent and are more confident in spending money on their homes.  During the year house prices grew slowly, with the average price of a house in the UK at £218,947 (2019: £214,394) (Source: Nationwide).  It should be noted, however, that 2020 has been a highly unusual year for economic indicators and the significant restriction in housing transactions detailed above may also mean that the house price data is a less robust indicator for this specific period. 

Construction output for private housing repair, maintenance and improvement declined by 18.6% across the period (source: ONS).

Commercial Tile Market

The UK commercial tile market is fragmented and regionalised with only a small number of scale competitors.  The smaller competitors tend to specialise in certain sectors of the market - examples being transport, restaurants, automotive, leisure, offices or higher end residential.  Our success in this market results from appealing to both designers and architects, with our quality and differentiated offer, and to contractors, who may require more commoditised products, in large quantities, in short timescales, but at lower prices.  Although the focus for our commercial business is on customers in the former category, where we can leverage our access to differentiated product through our supplier relationships, the Group's buying advantage and stock holding position also supports volume sales.

The commercial tile market has seen and continues to see significant disruption resulting from Covid-19.  During the most intense period of the UK lockdown during the third quarter a number of our construction and refurbishment projects were postponed or starts delayed or cancelled.  The long-term nature of many commercial projects means that some of these may now take time to materialise as investment in certain sectors remains constrained.  Although data indicates an improvement in new project starts, they remain below FY19 levels and it is likely the commercial market for tiles will remain somewhat subdued for the next 12-18 months.  Market performance remains highly varied by sub-sector and by client within each sub-sector and we have seen differing activity levels across retailers, restaurant brands, hotel, construction and developer clients.

Construction output for the private commercial sector declined by 15.4% across the period (source: ONS).

Covid-19

In common with all organisations, the global pandemic has generated an unprecedented level of disruption to our business.  Our Retail stores closed from 23 March 2020 and the most significant period of disruption was in our third quarter, from April to June.  Whilst stores were closed, we relied on our website (which was relaunched in October 2019) and online sales trebled in this period.  We slowly re-opened stores (allowed due to our 'Home and hardware' categorisation) as we developed safe working practices for our colleagues and customers, and gained confidence that we could safely service our customers' needs.  One particular highlight during the lockdown period was our ability to maintain supply through the strength of our supplier relationships and the hard work and endeavour of our colleagues working in inventory management, buying and logistics.

Alongside the safety of our colleagues and customers, the key focus of the business in this period was on managing cash and strengthening our financial position.  We have emerged stronger as a result, having removed an annualised £4.0 million of operating costs, further rationalised the store estate, monetised £18.1 million of freehold assets through the sale and leaseback of our head office and warehouse facilities and reduced capital expenditure (excluding freehold purchases) by £3.2 million, compared with the prior year.  These actions, combined with a much stronger period of trading in our retail business over the final quarter and the timing of year end, put the business in a strong position with adjusted net cash of £26.0 million and available headroom against existing facilities of £75.0 million at the year end.

We estimate that the trading disruption from Covid-19 in the third quarter, including temporary closure of stores, impacted gross profit by approximately £16 million, contributing to our statutory loss in the year.  The business used the support provided by the UK Government - principally the Job Retention Scheme and the cessation of retail business rates.  During April, when our stores were closed, around 90% of our colleagues were furloughed.  As stores re-opened, our use of Government support schemes reduced through to August, when we ceased further claims against the Job Retention Scheme.  The total amount of support received from the Government in the financial year was £10.7 million, comprising £5.3 million from the Job Retention Scheme, £4.7 million from the cessation of business rates and £0.7 million of grants.  Liquidity has been supported through an additional £10.0 million loan facility through existing lenders and backed by the UK Government Coronavirus Large Business Interruption Loan Scheme ("CLBILS") of which £5.0 million was drawn at year end, as well as £6.0 million of VAT deferrals which we expect to repay during the current financial year.

The risks presented by Covid-19 remain and we are very conscious of the resulting uncertainties that this generates.  However, the business is well positioned to deal with these uncertainties and we are confident that our market leading position will strengthen as we continue to respond by making decisions in the best long-term interests of the business.  One key lesson from the first national lockdown is how much our customers value our stores and the support of our colleagues, and the Board would like to place on record its thanks and gratitude to all colleagues across the business for their support and endeavour during this period.  Topps Tiles has a strong team of talented and capable people and this period has demonstrated that unequivocally.

Core Purpose, Goal & Strategy

The core purpose of the Group is to inspire customers through our love of tiles.  This gives us a very clear focus on our chosen specialism of tiles (and closely related products) and encourages all of our colleagues to be passionate about the products we sell.

This year we announced a new goal for the business.  Based on total market share (including both the domestic and commercial markets) and encompassing tiles, adhesives and grouts - which comprise a material portion of our annual sales - we estimate that our current combined market share in the UK is around 17%.  Our new goal is to achieve a 20% share - accounting for £1 in every £5 spent on tiles and associated products in the UK.  We believe that we can achieve this target by 2025, requiring us to outperform the market by approximately 3.5% each year over the next five years.

Our strategy to achieve this objective is to broaden our customer base while retaining our specialism in tiles and reputation for high-quality and innovative products.  Our Retail business is the clear leader in the UK.  This year we have conducted a robust appraisal of a number of aspects of our retail business and identified exciting opportunities for future growth.  For example, we will ensure that customers fully appreciate our value credentials - that with our market-beating product range they will always be able to find great products at great prices and truly 'get the look for less'.  Our entry into the Commercial tile market in 2017 was a key strategic step, allowing us to approximately double our addressable market whilst maintaining our specialism in tiles.  Our continued progress against our Commercial ambitions is explained below. 

Our Retail and Commercial businesses are both supported by our Group strategies of "Leading Product" and "Leading People".

Leading Product

Our specialism in tiles is our key source of competitive advantage.  We are experts in the ranging, sourcing and procurement of tiles on a global basis and we work with carefully selected partners around the world to develop and produce differentiated products that are innovative, high quality and exclusive.  We protect the intellectual property and design assets we create through partner exclusivity and design registration.  Ultimately, it is this Group specialism that we leverage through our business units into both the retail and commercial markets.

Progress and Outlook

This year we relied on the strength of our supply chain more than ever before.  During the period of peak Covid-19 disruption many of our suppliers were also experiencing disruption and we worked with them very pro-actively to ensure we would have continued access to product.  This was further compounded by the period following lockdown when our retail business experienced an exceptionally robust recovery in demand.  We believe the strength of our supply chain and strategic relationships with manufacturers have enabled us to stay ahead of our competitors in terms of product availability through this period.  Our strategic supplier base accounts for 80% of our purchases (2019: 70%).

In response to the disruption caused by Covid-19 we slowed the flow of new product into our Retail business this year, delivering 32 new product ranges; approximately 35% of these were design-led by us in collaboration with key supply partners.  87% of our retail ranges are either own brand or exclusive to us and this forms a key aspect of our product differential.  In addition, we launched a further 11 ranges under our rebranded 'Get The Look For Less' initiative.

This year we have also launched the second of our unique 'collections', which bring a group of tiles and associated products together under one brand that we can present to our customers as a single project solution.  Following the launch of Regal® in 2019, Matrix® is a portfolio of small format ceramic wall tiles in 23 colours, two sizes and two finishes, with co-ordinating detailing including tile trims and grouts.  The colours have been developed by Topps and are built on design trends and customer insights.  The range represents a significant growth opportunity appealing equally to both domestic and commercial clients.  Matrix® is advantaged in the market on design, choice, quality and stock availability compared to any of its market rivals.

In our Commercial business, we have continued to leverage the Group's scale to develop strategic supplier relationships; allowing us to build a portfolio of recognised brands and products appealing to the architectural and design sector, often on an exclusive basis.  The Commercial business now has access to more than 8,000 products from our global supplier base.  Leveraging our scale means more than two-thirds of commercial purchases are through our strategic supplier group and provide us advantaged cost of goods.  Leveraging our specialism means we have been very successful at developing bespoke projects for key clients and won sizeable developments across the residential, retail and hospitality sectors.

Technical authority is a further key aspect of differential in our market and we are leaders in this field, working closely with our strategic supplier base to set exacting standards on quality and performance. We have our own in-house technical team to meet the demands of our broader customer base and offer key technical information and on-demand support across all channels through our dedicated in-house testing facilities and quality control.

Leading People

The Group's success is underpinned by nationally-recognised and industry-leading levels of capability and engagement of our colleagues.  This ensures excellence in both service to our customers and clients, and to the support provided to store teams by our Leicester support office and field teams.  This starts with our Leading People initiative, which encourages colleagues to lead the thinking, lead the pace and for our managers to lead the team.

Progress and Outlook

The Covid-19 pandemic has been central to our engagement with our people this year, with around 90% of our colleagues being furloughed during the period of maximum disruption in the third quarter of our financial year.  From early August all of our colleagues had returned to work and we stopped using the Government Job Retention Scheme.  Our commitment to our colleagues and their wellbeing and engagement was reflected in being named a Top Five retailer for our handling of the crisis by employee review site Glassdoor and Retail Week magazine.  This latest acknowledgment followed a previous award from Glassdoor where we were also named in the top ten Best Employers in the UK (and were the highest-listed retailer).

We have introduced a strong focus on mental health and wellbeing this year, with 24 colleagues across the country trained as Mental Health First Aiders, and 50 more volunteering to join the second phase of training.  The business joined the annual 'Time to Talk' day, a campaign run by Time to Change, a social movement that aims to change the way people think and act about mental health.  This included encouraging colleagues to reach out to each other through whatever means they can, providing a support network where they feel people may be more vulnerable, as well as online materials to support colleagues and a telephone helpline.

Our consistently high engagement levels were evidenced in our annual colleague survey, MyVoice, which enables all colleagues across the business to have their say on their feelings about leadership, work and wellbeing.  In November 2019, 70% of colleagues completed the survey, with 74% of responses strongly agreeing, or agreeing, with positive statements about the Group.

Our investment in our people continues with the development opportunities we provide.  A total of 35% of vacancies across the Group are filled internally, enabling us to offer progression within the business as well as retaining the technical skills of store colleagues.

This year we introduced an apprenticeship scheme to enable us to use our contributions to the Apprenticeship Levy to develop our people and business capability.  We are working with national specialist partners to provide Level 3 to Level 6 apprenticeship qualifications which are currently developing colleagues in IT, Project Management, Finance, Payroll, HR, Business Administration, Marketing and Customer Service disciplines.  Qualifications will soon be available for store colleagues as well as a 'warehouse to wheels' provision which will enable warehouse colleagues to acquire an LGV licence - providing career progression opportunities.

Sustainability

Sustainability is becoming a key part of our agenda.  This year we made progress in reducing our impact on the environment across a number of areas, specifically in transport and supply chain, waste and recycling, working with suppliers on innovative products involving high recycled content, and investing in energy efficient infrastructure.

We improved transport efficiency by repatriating more than 1,000 product lines within our 'Essentials' category to our distribution centre in Leicester, removing the need for c.10,000 direct-to-store deliveries by our suppliers every year.  We also changed the provider of direct customer orders, which were previously managed from our stores, such that these orders are now fulfilled on shared resource, on vehicles which are largely full from the point of collection to delivery.  This increases efficiency and reduces the level of carbon emissions.

In our supply chain, we build long term relationships with suppliers who share our ethical values.  All of our suppliers are required to comply with the Topps Responsible Sourcing Code.  This code has been designed to be ethical, auditable, and achievable and is in place to promote good working practices with our suppliers.  As part of our auditing process, all of our suppliers have to complete a Social and Ethical Self-assessment document to be able to identify if there are any product or geographical risks.  We are working closely with Intertek, the leading Quality Assurance experts, who will carry out independent third-party auditing where due diligence mapping has identified any potential risks.  To mitigate any additional risk there are also on-going surveillance visits carried out by our buyers, factory agents and members of our technical team to ensure that our products continue to be ethically sourced.

We continue to work with suppliers to increase the level of recycled content used in production and, this year, made a long-term commitment with one supplier to support production of tiles with 98% recycled content.  This unique technology has the potential to revolutionise tile production in the future, utilising waste materials and reducing gas consumption.  Our first range, Sequel Vibe, has already won several awards for our commercial business Parkside.  Our second range Principle™ will launch in early 2021.

We collect waste from across our store network and are working with Biffa Waste Recycling to reduce the level of waste sent to landfill.  We also collect damaged tiles from our stores and this year recycled 84% of our tiles, a 32 ppts increase on the previous year.

Our rolling programme of LED lighting installations across the store estate continues, with 100 additional stores due to complete by early 2021.  This programme will deliver 1,530 tonnes of annual CO2 savings as well as provide reduced maintenance across the estate.

Retail - Topps Tiles

This year we have launched a new strategy in our retail business - "Great Experience, Great Product and Great Value".  We strive to ensure that the journey for all of our customers starts and ends with a great customer service experience, whether in-store or online, and we complement this with a range of market leading products supported by our Leading Product initiative.  Ultimately, these are combined to deliver great value to our customers. 

Progress and Outlook

As part of our new strategic retail focus to deliver great value for customers and our new Group market share goal we are keen to ensure we appeal to as broad a range of customers as possible.  A thorough analysis of our offer was completed during the year and identified an opportunity to increase our participation in the lower-priced 'value' segment.  As part of this strategy we have rebranded and relaunched the 'Get The Look For Less' part of our offer as well as adding new ranges.  This new branding in stores makes it easier for our customers to seek out our lower priced ranges where they wish to do so and ensures that we have a relevant offer for a wider range of customers. 

We have also reviewed our range of tile accessory items such as adhesives and grouts and ensured that we are offering our retail customers strong value in these areas.  This has resulted in some price reductions and hence investment of gross margin.  Sales have responded positively and this initiative has been profit enhancing.

Our digital platform remains a vital part of our overall offer and for many customers our website is the first step on their journey with us.  We relaunched our website at the start of this year - this included an all-new design but also a modern platform with greater flexibility and resilience.  This served us particularly well during the peak of the Covid-19 disruption.  During the period when our Retail stores were closed, our website sales trebled and this provided a vital inflow of cash to the business, and allowed us to continue to service some of our customers' needs.  Subsequently, with the re-opening of our stores, online sales have decreased but remain above the prior year level.  We are very focused on offering our customers a true omni-channel experience and our new website has now made this possible - customers can choose which channel they utilise during their journey - and can change seamlessly between them as they wish.  Almost all of our customers will use our website at some stage but 90% of our customers will also visit one of our stores. 

We have continued to progress our social media activities this year across Instagram, Pinterest and Facebook.  We now have 50,000 followers on Instagram, an increase of 44% on the prior year.  Engagement in our Facebook retail page has increased by 82% this year, and on Pinterest we have an audience of around 850,000, with impressions double the prior year.

Our colleagues offer our customers a world-class experience within store.  The majority of our customers shop infrequently for tiles which means that when they do, they need advice and expertise.  Our customer satisfaction scores are very important to us in delivering our strategy and this year we have achieved an overall satisfaction rating of 89% (2019: 86%).  This means that 89% of customers who filled in a survey rated us as five out of five, an outstanding performance.

The size of our store portfolio is also a key source of competitive advantage as this makes us very convenient for the majority of the UK population.  Over recent years we have identified opportunities to reduce the size of our portfolio without significantly reducing convenience for our customers.  This helps us to continue to respond to our customers' changing needs, develop a true omni-channel business and also to drive improvements in return on capital employed.  At the period end we had 342 stores (2019: 362 stores), having closed 24 stores during the period and opened 4.  We anticipate that there will be further opportunities for modest reductions in the store portfolio and recognise that this approach requires flexibility in our leased portfolio.  The average unexpired lease term to the next break opportunity is 3.4 years (2019: 3.8 years); removing stores which are strategically important (where we have proactively taken longer terms to secure our tenure) from that calculation the average unexpired lease term to break falls to 3.3 years (2019: 3.1 years).

Our customer base splits into two distinct but related groups - professional fitters (trade) and homeowners (retail).  The two groups are related in that trade provides a vital link to homeowners who prefer to transact through their fitter rather than with us direct.  This year we have seen increased demand from our retail customers, especially in the period following the initial Covid-19 lockdown. We attribute this to homeowners having more time to invest in DIY and also concerns about tradespeople entering their homes during the pandemic.  It is too early to say to what extent this shift is temporary or structural but the business is equally well positioned to provide for either customer group.  Our trade customer base represents 55% of our total sales (2019: 56%) and includes 97,000 (2019: 90,000) registered traders who also participate in our market-leading trade loyalty scheme. 

Commercial - Parkside & Strata

The commercial tile market represents around 45% of the overall UK tile market, and with our entry into this market in 2017 we approximately doubled the size of our addressable market whilst maintaining our specialism in tiles and related products.  Our entry started with the acquisition of the Parkside business in September 2017 and in April 2019 we purchased the Strata business which was complimentary to Parkside.  Our strategy of "Disrupt and Construct" means that we plan to 'disrupt' the existing highly fragmented competitive landscape and put in place the building blocks to 'construct' a new market leader.  Our tile expertise, supplier relationships, size and scale as a Group is central to this plan - giving us the resources to recruit a talented sales team, invest in market-leading pricing and access the broadest range of products, often on an exclusive basis.

Progress and Outlook

The first half of the 2020 financial year was a positive period for our Commercial business with sales growing above £4.5m in the first six months and increasing by 246% year on year (including the benefit from acquiring Strata in the prior year) as we successfully executed our strategy.  The disruption generated from Covid-19 has been significant in the commercial market and we have seen fewer projects commencing and delays to existing projects.  The impact of this was to reduce sales by 18% year on year across the second half.  Our buying power and technical expertise in tiles gives us the flexibility to focus on commercial sectors and sub-sectors less affected by Covid-19.  Even within hospitality and leisure, areas highly impacted, activity remains and our broad client base and flexibility of supply means we are well placed to service this demand.

Overall sales for the full year were £7.5 million, an increase of 53% (including the benefit from acquiring Strata in the prior year).  Trading losses across the year improved slightly to £1.9 million (2019: £2.0 million), excluding £0.3 million (2019: £0.3 million) arising on the amortisation of intangible assets and provision for redemption of non-controlling interest.  Our stated desire to move our Commercial business to breakeven has been delayed due to the Covid-19 disruption and a further loss is expected in the year ahead.  As covered in the Financial Review, the Board have conducted an impairment review of the goodwill, intangible assets and property, plant and equipment held within the Commercial business.  The Board reviewed a range of scenarios but, taking a prudent view and recognising the risk of a slower growth profile following the impact of Covid on sectors that the Parkside and Strata sales teams serve, the Board have decided to impair these assets to a carrying value of zero.  The impact on loss before tax of this impairment was £5.6 million.

Notable projects we delivered this year include supplying the tiles for over 11 hotel projects including the Hilton, Hyatt, Marriott and Grosvenor hotel groups.  We continue to supply major UK retailers and 2020 has included some exciting work with Harrods that will continue into the new year.  We have worked closely with residential building development partners to deliver unique tile designs including the Silk District Whitechapel development where we supplied bespoke tiles for 700 apartments.

Digital interaction is critical to success in the commercial market, with the key customer groups of architects and designers needing to access services digitally.  This year we again strengthened our digital offer by launching video consultations, a five-minute sample selector tool, 360 studio tours, and an online colour design lab.  Engagement with our partners and clients has risen significantly through the Parkside and Strata websites and social media.  We attended over 30 sales events in FY20 and built project pipelines that have more than doubled year on year.  The commercial sector is a relationship business and our sales team of 25 people is key to this success.

During the year we integrated the Strata sales support operation into our Parkside business and exited the Strata offices and warehouse in Guildford.  Both businesses now operate on the same new systems platform and are supported from our central team in Leicester, as part of the 'construct' side of the strategic plan.  This will ensure that our Commercial operations are more efficient and future-proof, and also helps to reduce our cost base significantly.

Our Commercial business remains a key element of our Group strategy and we remain confident in our ability to build a market-leading profitable business over the medium term.

Key Performance Indicators ("KPIs")

The Board monitors a number of financial and non-financial metrics and KPIs both for the Group and by individual store.  This information is reviewed and updated as the Directors feel appropriate.  Specific measures include:

* as defined on page 3

Notes: Customer overall satisfaction scores are calculated from the responses we receive through our TileTalk customer feedback programme.  Overall satisfaction (OSAT) is the percentage of customers that score us 5 in the scale of 1 - 5, where 1 is highly dissatisfied, and 5 is highly satisfied.  We estimate that this places us in the top three of UK retailers based on published data from the Institute of Customer Service and our own results data.  Energy carbon emissions have been compiled in conjunction with our electricity and gas suppliers.  This is based on the actual energy consumed multiplied by Environment Agency approved emissions factors.  Vehicle emissions have been calculated by our in-house transport team based on mileage covered multiplied by manufacturer quoted emission statistics.

FINANCIAL REVIEW

Adjusted Measures

The Group's management uses adjusted performance measures, to plan for, control and assess the performance of the Group.  
Adjusted profit before tax differs from the statutory profit before tax as it excludes the effect of one off or fluctuating items, allowing stakeholders to understand results across years in a more consistent manner.  It also excludes the impact of IFRS 16 to enable a more meaningful comparison to the prior year.

For the current year the following items have been excluded:

In the prior year we adjusted for a gain relating to repayment of historical import duty from HMRC of £2.3 million, losses from a write off of goodwill relating to a historic acquisition (Surface Coatings Ltd) £0.2 million, losses related to the Commercial business and the purchase of Strata of £2.7 million and, as described above, losses related to movement in property related provisions of £1.8 million and vacant property costs of £1.1 million.

All of the FY20 adjustments other than the costs relating to the business reorganisation and some of the vacant property costs were non-cash.

STATEMENT OF FINANCIAL PERFORMANCE

Revenue

Total revenue for the period ended 26 September 2020 decreased by 12.0% to £192.8 million (2019: £219.2 million).  Revenue was materially impacted by temporary store closures in the third quarter as part of our response to the Covid-19 pandemic.  In addition, there was a net closure of 20 stores in the year. 

Retail like-for-like store sales were 12.5% lower than the prior year, which consisted of a 6.1% decrease in the first half of the financial period and a 18.8% decrease in the second half.  Retail like-for-like sales in the final quarter increased 16.5% on the prior year.

Gross Margin

Total gross margin was 58.5%, a decrease from 61.6% in the prior year.  0.3 ppts of the margin decline was due to the changing sales mix between Retail and Commercial, with the balance due to lower margins in Retail.

Gross margin in the retail business decreased from 62.0% in the prior year to 59.2% in the current year, a 2.8 ppt decline.  This was driven by an increased focus on pricing competitiveness and changes in product mix (1.0 ppt impact), as well as direct delivery costs, especially web sales delivered direct to our customers during lockdown (0.4 ppts impact) and a higher expense relating to inventory write offs and a higher inventory obsolescence provision (1.4 ppts).  The impact of foreign exchange on cost of goods sold this year was immaterial.

For the year ahead, we anticipate that gross margin will be between 59% and 60%.

Operating Expenses

Operating expenses were £118.8 million compared to £121.6 million in FY19 however the year on year change is distorted as a result of the adoption of IFRS 16 and impairment of Commercial assets.  On an adjusted basis, operating expenses reduced from £116.1 million to £108.4 million.  Commercial operating expenses were included within adjusted items for the first time, increasing adjusted costs by £5.0m when compared to FY19.  In addition, within the year the Group benefitted from £10.7 million of government support (see breakdown below).  To provide a more meaningful year on year movement, excluding government support as well as Commercial operating expenses, adjusted operating costs would have been £114.1 million, a decrease of 1.7% on the prior year.

The movement in adjusted operating costs is explained by the following key items:

For the year ahead, we expect the adjusted operating costs excluding IFRS 16 for the business to be between £115 million and £116 million, subject to the level of trading performance. 

Financing

Interest on bank loans and overdrafts, net of bank interest receivable, was £0.8 million (2019: £0.9 million).  During the period of national lockdown, the Group drew down the full £39 million available on the revolving credit facility and took additional facilities of £10 million (as part of the CLBILS government backed scheme).  Following the sale of the Grove Park freehold assets for £18.1 million and very strong focus on liquidity the Group has ended the year in an adjusted net cash position, excluding lease liabilities under IFRS 16.

Net interest cover (calculated as adjusted EBITDA divided by net interest on bank loans, overdrafts and deposits) was 15.7 times (2019: 28.2 times).

IFRS 16 has had the impact of increasing finance costs by £3.0 million, resulting in total net finance costs of £3.8 million (2019: £0.9 million, as reported under IAS 17).

Profit Before Tax

The loss before tax was £9.8 million (2019: £12.5 million profit). 

Excluding the adjusting items detailed above, profit before tax was £3.6 million (2019: £16.0 million).  The Group adjusted profit before tax margin was 1.9% (2019: 7.5%).

Tax

The effective rate of corporation tax for the period was 18.4% (on a post IFRS 16 basis) (2019: 19.2%).

Earnings Per Share

Basic earnings per share were (4.11) pence (post IFRS 16).  Basic earnings per share on a pre IFRS 16 basis were (0.86) pence (2019: 5.18 pence).  Diluted earnings per share were (4.11) pence (post IFRS 16).  Diluted earnings per share on a pre IFRS 16 basis were (0.86) pence (2019: 5.14 pence). Excluding the adjusting items, adjusted earnings per share were 1.57 pence (2019: 6.61 pence) - both calculated excluding the impact of IFRS 16.

Dividend and Dividend Policy

No final dividend has been proposed in light of the challenges faced this year and the importance of conserving cash, as indicated in the Interim Results (2019: full year dividend 3.4 pence per share).  However, the Board is keen to re-instate the dividend policy of remitting approximately half of the adjusted earnings per share back to shareholders as soon as is appropriate.  This should be possible in the new financial year, subject to delivering a positive adjusted EPS.

STATEMENT OF FINANCIAL POSITION

Capital Expenditure

Excluding freehold and long leasehold acquisition, capital expenditure in the period amounted to £4.4 million (2019: £7.6 million), a decrease of 42% year on year.

Key investments are as follows:

In addition, we purchased two freehold properties as described in the Acquisitions & Disposals section below for £2.3 million (2019: £0.2 million).

The Board expects capital expenditure in the year ahead to be between £5 million and £6 million which will cover our core investment plans, including investment of over £1.3 million in a programme to retrofit LED lighting into a further 100 stores which will deliver a significant saving in energy and carbon emissions.  Any strategic acquisitions that the Group may consider as part of its growth plans in the commercial tile market would be additional to this guidance.

Acquisitions & Disposals

During the year we entered into a sale and leaseback arrangement for our head office and central warehouse buildings for a price of £18.1 million before costs (£17.9 million net of costs).  Following completion, we entered into leases for a combined annual rent of £1.2m over a 20 year period. As a result of this transaction, £13.7 million of non-current assets were derecognised and a right of use asset of £10.5 million and a lease liability of £12.7 million were booked.

We also disposed of our only investment property, an office building, for a consideration of £0.8 million.  During the year we purchased the freehold interest in two store properties for £2.3 million to allow the Group to restructure the lease payments.  These assets were subsequently reclassified as assets held for sale and, after year end, we entered into sale and leaseback agreements on both sites. 

At the period end the Group held five freehold or long leasehold sites, with a total carrying value of £3.1 million (2019: six freehold or long leasehold sites valued at £13.8 million).  The carrying value is based on the historic purchase cost and capital expenditure less accumulated depreciation and, in the case of the investment property held at the last year end, at fair value. 

Impairment of Commercial assets

Following a review of indicators of impairment under IAS 36, the Board reviewed the recoverable amounts of the goodwill, intangible assets and plant, property and equipment relating to our Commercial business.  Specifically, this is in relation to the acquisition of Parkside Ceramics Limited in 2017 and Strata Tiles Limited in 2019, and subsequent capital expenditure relating to these businesses.  The Board reviewed a range of scenarios but, taking a prudent view and recognising the risk of a slower growth profile following the impact of Covid on sectors that the Parkside and Strata businesses serve, the Board have decided to impair these assets to a carrying value of zero.  The impact on loss before tax of this impairment was £5.6 million.

Inventory

Inventory at the period end was £29.3 million (2019: £30.9 million) representing 134 days turnover (2019: 134 days turnover).  The September 2020 year end stock balance does not include any additional stock for future potential import delays in advance of the Brexit deadline (2019: £1.1 million was held in advance of the 31 October 2019 Brexit deadline).

Cash flow

On a statutory basis, net cash from operating activities was £51.0 million, compared to £21.9 million in the prior year period.  A significant factor in this change was the adoption of IFRS 16 which replaces lease payments (recorded within operating activities) with a payment of interest (recorded within operating activities) and capital (recorded within financing activities) relating to the lease liability.  See the section on IFRS 16 below for more details. To support comparability with prior years, an analysis of free cash flow is presented below which excludes the impact of IFRS 16.

Free cash flow was £41.8 million (2019: £11.5 million), an increase of £30.3 million year on year, analysed in the table below:

The working capital inflow was driven by a variety of factors, including the deferral of VAT from the second calendar quarter of 2020 (£6.0 million) as part of the Government's Covid-19 support package which is expected to be repaid from the start of the next tax year, a lower closing inventory (£1.6 million), a holiday pay accrual at year end (£1.9 million) and higher payables at year end due to strong trading in the last quarter (c. £8.0 million) as well as changes in other debtor and creditor balances.

Cash and cash equivalents at the period end were £31.0 million (2019: £18.7 million) with borrowings of £5.0 million (2019: £30.0 million).

Banking Facilities

The Group has a £39.0 million revolving credit facility in place which is committed to July 2022 (2019: £39.0 million).  At the year end, none of this was drawn (2019: £30 million was drawn).  In addition, the Group has £10 million of credit facilities through the Coronavirus Large Business Interruption Loan Scheme ("CLBILS").  At the year-end, £5 million of this was drawn.  At the end of the year, the Group had £44 million of undrawn committed banking facilities.

IFRS 16 'LEASES'

The Group has applied IFRS 16 'Leases' at 29 September 2019 (date of initial application), using the modified retrospective approach.  Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in retained earnings at the date of initial application.

Accounting under IFRS 16

IFRS 16 applies a single 'on balance sheet' approach to lease accounting. Under IFRS 16, leases are

accounted for as follows:

IFRS 16 results in the timing of lease expense recognition being accelerated for leases which would be currently accounted for as operating leases.  However, the total expense over the life of the lease will be identical under IFRS 16 and IAS 17.  IFRS 16 has no economic impact and does not impact the cash flows of the Group.

Statement of Financial Performance impact

The impact of the implementation of IFRS 16 on the Statement of Financial Performance is as follows:

Statement of Financial Position impact

On transition of IFRS 16 on 29 September 2019, the Group recognised additional right-of-use assets of £117.7m, sub-lease assets of £3.5m, lease liabilities of £128.2m and deferred tax assets of £0.7m, as well as a reduction in prepayments, provisions and liabilities.  As a result, a transitional adjustment of £3.6m decreased the opening balance of retained earnings.

As at 26 September 2020, adjusted net cash on a pre-IFRS 16 basis was £26.0m.  This becomes net debt of £98.1m under IFRS 16 due to the recognition of the lease liabilities which are now on balance sheet.

Our banking covenants are based on a frozen-GAAP basis and therefore the application of IFRS 16

has no impact.

Cash Flow Statement impact

IFRS 16 does not impact the total cash flow during the period.  However, under IAS 17 the rental

payments were included within operating activities, whereas under IFRS 16 these are treated as

financing activities.  The £nil impact on the cash flow is shown in the table below:

Brexit

Throughout the year, the Board monitored developments and received regular reports on progress from the Group's Brexit Working Group as we prepared for the end of the transition period, following the UK's exit from the European Union.  We have implemented the operational changes needed to manage new employment practices and further border formalities and customs procedures for imported products.  Robust plans have been put in place to flex delivery schedules to ensure continuity of supply should there be an initial period of disruption at ports of entry.  In addition, we have invested in additional short-term stock-holding and warehousing facilities to mitigate any near-term disruption.  In addition, the end of the transition period may see the imposition of tariffs on products imported from the EU.  With its geographically diverse supplier base and buying power, the Group is well-positioned relative to competitors to mitigate the impact on product costs, prices and margins.

Current Trading and Market Conditions for the Year Ahead

In the first eight weeks of the new financial year, retail trading conditions have remained encouraging against a backdrop of customers diverting discretionary spend away from holidays and other leisure activities into home improvement projects.  Against this backdrop retail like-for-like sales have increased by 19.6%.  Whilst we expect external events to continue to support investment in the home in the short-term, it is very difficult to predict medium and longer-term trends; we remain confident that our market-leading Retail offer and Commercial growth strategy, along with our supply chain and balance sheet strength, give us a solid platform from which to deliver sustainable long-term growth.

Going Concern

When considering the going concern assertion, the Board reviews several factors including the ability of the Group to meet its banking covenants and operate within its banking facilities based on current financial plans, along with a series of more pessimistic trading scenarios that were deemed severe but plausible.  The more pessimistic trading scenarios included a second national lockdown related to the Covid-19 pandemic during the next 12 months that would see our Retail stores closed for up to three months.

The Group took a number of actions to strengthen its liquidity during the Covid-19 pandemic, including accessing a range of support measures put in place by the UK Government, and the sale and leaseback of the Group's head office and central warehouse buildings in Enderby in June 2020.  The going concern review also outlined a range of other mitigating actions that could be taken in a severe but plausible trading scenario.  These included, but were not limited to, savings on store employee costs, savings on central support costs, and reduction of capital expenditure.

The Group's forecast covenant and cash headroom was reviewed against current lending facilities.  These were refinanced in July 2018 and expire in July 2022, with an opportunity to extend in June 2021 for a further year, so a potential full term of five years ending July 2023.  In all scenarios, the Board have concluded that there is sufficient covenant headroom and available liquidity for the Group to continue in operational existence for the foreseeable future.  The Board therefore continue to adopt the going concern basis in preparing the financial statements. 

Long Term Viability

The Board have also considered the Longer Term Viability ("LTV") of the business in light of updated Corporate Governance requirements.  Based on this review, the Directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the next 3 years. The full LTV statement can be found in our Annual Report.

Consolidated Statement of Financial Performance

For the 52 weeks ended 26 September 2020

Consolidated Statement of Comprehensive Income

For the 52 weeks ended 26 September 2020

The Group has initially applied IFRS 16 'Leases' at 29 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in retained earnings at the date of initial application, 29 September 2019 (see note 34). The comparative period is presented under the previous accounting standard, IAS 17 'Leases' and has accordingly not been restated. As such, the results for the 52 week period ended 26 September 2020 are not directly comparable with those reported in the prior period. See note 34 for a reconciliation of the IFRS 16 impact on the financial statements.

Consolidated Statement of Financial Position

as at 26 September 2020

The Group has initially applied IFRS 16 'Leases' at 29 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in retained earnings at the date of initial application, 29 September 2019 (see note 34).

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

The financial statements of Topps Tiles Plc, registered number 3213782, were approved by the Board of Directors and authorised for issue on 1 December 2020. They were signed on its behalf by:

ROB PARKER

STEPHEN HOPSON

Directors

Consolidated Statement of Changes in Equity

For the 52 weeks ended 26 September 2020

* The Group has initially applied IFRS 16 'Leases' at 29 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in retained earnings at the date of initial application, 29 September 2019. 

Consolidated Cash Flow Statement

For the 52 weeks ended 26 September 2020

The Group has initially applied IFRS 16 'Leases' at 29 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated.

Notes to the Financial Statements

For the 52 weeks ended 26 September 2020

1 GENERAL INFORMATION

Topps Tiles Plc is a public company, limited by shares, incorporated and domiciled in the United Kingdom under the Companies Act 2006. The address of the registered office is given in the Annual Report. The nature of the Group's operations and its principal activity are set out in the Directors' Report in the Annual Report.

These audited financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates.

ADOPTION OF NEW AND REVISED STANDARDS

In the current period, there were no new or revised standards and interpretations adopted that have a material impact on the financial statements, apart from IFRS 16 (see below). The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

STANDARDS ADOPTED IN CURRENT PERIOD

The following new and revised standards and interpretations have been adopted in the current year. Their adoption has not had any significant impact on the amounts reported in these financial statements that may impact the accounting for future transactions and arrangements, apart from IFRS 16.

Annual Improvements to IFRSs: 2015-17 Cycle (Dec 2017) - Annual Improvements to IFRSs: 2015-17 Cycle - IFRS 3, IFRS 11, IAS 12 and IAS 23 Amendments

Amendments to IFRS 10 and IAS 28 (Sept 2014) - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

IFRIC 23 - Uncertainty over Income Tax Treatments

Amendments to IFRS 9 (Oct 2017) - Prepayment Features with Negative Compensation

Amendments to IAS 28 (Oct 2017) - Long-term Interests in Associates and Joint Ventures

Amendments to IAS 19 - Plan Amendment, Curtailment or Settlement

Amendments to IFRS 3 - Clarification of definition of a business

Amendments to IAS 1 - Amendments regarding the definition of material

Amendments to IAS 8 - Amendments regarding the definition of material

IFRS 16 'Leases'

The new lease accounting standard is now effective for the Group for the first time and it has had a material impact on the Group's financials statements. Further details of IFRS 16 'Leases', including the impact of adoption are included in note 34.

2 ACCOUNTING POLICIES

The principal accounting policies adopted are set out below.

A) BASIS OF ACCOUNTING

The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") and IFRS Interpretations Committee ("IFRS IC") interpretations. 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, and as applied in accordance with the provisions of the Companies Act 2006. The financial statements have been prepared on the historical cost basis, except for the revaluation of derivative financial instruments and investment property. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements.

The Group has applied for the first time IFRS 16 'Leases'. Refer to Note 34 for details of the impact on transition to this standard.

B) GOING CONCERN

When considering the going concern assertion, the Board reviews several factors including the ability of the Group to meet its banking covenants and operate within its banking facilities based on current financial plans, along with a series of more pessimistic trading scenarios that were deemed severe but plausible.  The more pessimistic trading scenarios included a second lock down during the next 12 months that would see our retail stores closed for up to three months.

The Group took a number of actions to strengthen its liquidity during the Covid-19 pandemic.  The UK Government put in place a range of support measures for businesses and we accessed all of those available to us.  This included utilising the Coronavirus Job Retention Scheme to furlough the c.90% of our colleagues who were unable to work from home, business rates relief for the 2020/21 tax year, VAT deferral and utilising the Coronavirus Large Business Interruption Loan Scheme ("CLBILS"), which facilitates access to finance for medium-sized and larger businesses affected by the coronavirus outbreak.  The sale and leaseback of the Group's head office and central warehouse buildings at Enderby was completed in June 2020.  The going concern review also outlined a range of other mitigating actions that could be taken in a severe but plausible trading scenario.  This included, but was not limited to, savings on store employee costs, savings on central support costs, and reduction of capital expenditure.

The Group's forecast covenant and cash headroom was reviewed against current lending facilities.  These were refinanced in July 2018 and expire in July 2022, with an opportunity to extend in June 2021 for a further year, so a potential full term of five years ending July 2023.

In all scenarios, the Board have concluded that there is sufficient covenant headroom and available liquidity for the Group to continue in operational existence for the foreseeable future.  The Board therefore continue to adopt the going concern basis in preparing the financial statements. 

c) BUSINESS COMBINATIONS

Acquisition of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquisition and the equity interest issued by the Group in exchange for control of the acquisition. Acquisition-related costs are recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that:

Contingent consideration is recognised at fair value at the date of acquisition. Subsequent changes in contingent consideration which has been classified as an asset or liability which does not result from a measurement period adjustment is accounted for in accordance with IFRS 9 where the asset or liability is a financial instrument, and in accordance with IAS 37 in all other cases.

d) BASIS OF CONSOLIDATION

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the period are included in the consolidated statement of financial performance from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

e) FINANCIAL PERIOD

There has been a change in accounting policy during the year, from the accounting period ends on the Saturday which falls closest to 30 September resulting in financial periods of either 52 or 53 weeks, to the accounting period is drawn up to a Saturday within 7 days of 30 September resulting in financial periods of either 52 or 53 weeks.  There has been no impact on prior period financial statements as a result of this change.

Throughout the financial statements, Directors' Report and Strategic Report, references to 2020 mean "at 26 September 2020" or the 52 weeks then ended; references to 2019 mean "at 28 September 2019" or the 52 weeks then ended.

F) GOODWILL

Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held equity interest (if any) in the entity over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

If, after reassessment, the Group's interest in the fair value of the acquiree's identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held equity interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.

Goodwill is not amortised but is reviewed for impairment at least annually. 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.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

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 will not be included in determining any subsequent profit or loss on disposal.

G) REVENUE RECOGNITION

Revenue is measured at the transaction price received or receivable and represents amounts receivable for goods in the normal course of business, net of discounts, VAT and other sales-related taxes.

Revenue from the sale of goods is recognised on the collection or delivery of goods, when all the following conditions are satisfied:

These conditions are met, predominantly, at the point of sale.  The exceptions to this are for: goods ordered in advance of collection, where revenue is recognised at the point that the goods are collected; sales of goods that result in award credits for customers (see below); and web sales, where revenue is recognised at the point of delivery.

Sales of goods that result in award credits for customers, under the Company's Trader Loyalty Scheme, are accounted for as multiple element revenue transactions and the fair value of the consideration received or receivable is allocated between the goods supplied and the award credits granted. The consideration allocated to the award credits is measured by reference to their fair value being the amount for which the award credits should be sold separately. Such consideration is not recognised as revenue at the time of the initial sale transaction, but is deferred and recognised as revenue when the award credits are redeemed and the Company's performance obligations have been satisfied.

The level of sales returns is closely monitored by management, and as such, the Group holds a sales return provision in the Consolidated Statement of Financial Position to provide for the expected level of returns.  The sales value of the expected returns is recognised within Accruals, with the cost value of the goods expected to be returned recognised as a current asset within Inventories.

H) INTANGIBLE ASSETS

Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at the fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at costs less accumulated amortisation.

Costs that are directly associated with identifiable software products controlled by the Group, and that will generate economic benefits beyond one year are recognised as intangible assets. These intangible assets are stated at cost less accumulated amortisation and impairment losses, and are amortised over four years.

I) PROPERTY, PLANT & EQUIPMENT

Property, plant and equipment is 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 land is not depreciated.

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Consolidated Statement of Financial Performance.

Non-current assets are classified as held for sale if the assets are available for immediate sale in their present condition and the sale is highly probable. After reclassified as held for sale, the assets are measured at the lower of their carrying value and fair value less costs to sell.

J) IMPAIRMENT OF TANGIBLE, INTANGIBLE AND RIGHT-OF-USE ASSETS

At each period end, the Group reviews the carrying amounts of its tangible, intangible, and right-of-use assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future pre-tax cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

K) INVENTORIES

Inventories are stated at the lower of cost and net realisable value and relate solely to finished goods for resale, net of supplier rebates. Cost is derived using the average cost method and includes an attributable proportion of distribution overheads based on normal levels of activity. Net realisable value represents the estimated selling price, less costs to be incurred in marketing, selling and distribution. Provision is made for those items of inventory where the net realisable value is estimated to be lower than cost. The net replacement value of inventories is not considered materially different from that stated in the consolidated statement of financial position.

L) 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 period. Taxable profit differs from net profit as reported in the statement of financial performance because it excludes items of income or expense that are taxable or deductible in other periods 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, 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 based on tax laws and rates that have been enacted at the balance sheet date. Deferred tax is charged or credited in the statement of financial performance, 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.

m) FOREIGN CURRENCY

The individual financial statements of each Group company are presented in pounds sterling (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company, and the presentational currency for the consolidated financial statements.

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 statement of financial performance for the period.

Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the statement of financial performance for the period.

n) LEASES

The Group has changed its accounting policy for leases as a result of IFRS 16 ''Leases''. The new policy is detailed below and the impact of the change is described in note 34.

IAS 17

Until 28 September 2019, as a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred substantially all the risks and rewards of ownership. Rentals payable under operating leases were charged to the Consolidated Statement of Financial Performance on a straight-line basis over the term of the relevant lease even where payments are not made on such a basis, except where another more systematic basis is more representative of the time pattern in which economic benefits from the lease asset are consumed or a provision has been made for an onerous lease. Contingent rentals arising under operating leases were recognised as an expense in the period in which they are incurred.

In the event that lease incentives were received to enter into operating leases, such incentives were recognised as a liability. The aggregate benefit of incentives was recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis was more representative of the time pattern in which economic benefits from the leased asset were consumed.

The Group leases properties from which it no longer trades. These properties are often sublet to third parties. Rents receivable were recognised by offsetting the income against rental costs accounted for within the Consolidated Statement of Financial Performance.

The Group provided for the unavoidable costs prior to lease termination or sub-lease relating to onerous leases. Dilapidation costs were provided for against all leasehold properties across the entire estate.  See note 2U and 2Y for details on how these provisions are calculated.

IFRS 16

The following policies apply subsequent to the date of initial application of IFRS 16, 29 September 2019.

Leases in which the Group is a lessee

The Group leases assets which consist of properties, vehicles and equipment. Rental contracts are typically made for fixed periods but may have extension options or break options to maximise operational flexibility. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.

The Group now assesses whether a contract is or contains a lease based on the new definition of a lease. Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

At the commencement date of property leases the Group determines the lease term to be the full term of the lease, assuming that any option to break or extend the lease is unlikely to be exercised. The Group considers the lease term to be the non-cancellable period and in assessing this applies the definition of a contract and determines the period for which the contract is enforceable.

Under IFRS 16, the Group recognises right-of-use assets and lease liabilities for most leases.

The Group has elected to take advantage of the following recognition exemptions and account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:

For leases where the Group has taken short-term lease recognition exemption and there are any changes to the lease term or the lease is modified, the Group accounts for the lease as a new lease.

From 29 September 2019 leases are recognised as a right-of-use asset with a corresponding liability at the date at which the leased asset is available for use by the group. Each lease payment comprises an element of capital and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Right-of-use assets are measured at cost comprising the following:

After lease commencement, the Group measures right-of-use assets using a cost model. Under the cost model a right-of-use asset is measured at cost less accumulated depreciation and accumulated impairment.

Subsequent to initial measurement, lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. The lease liability is also remeasured to reflect changes in:

The remeasurements are matched by adjustments to the right-of-use asset.

Lease modifications may also prompt remeasurement of the lease liability unless they are determined to be separate leases.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-use asset is reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The capital element of payments related to leases are presented under cash flow from financing activities in the Consolidated Cash Flow Statement, and the interest element of payments presented under cash flow from operating activities.

Leases in which the Group is a lessor

Lessor accounting remains similar to current accounting under IAS 17. At lease inception, lessors will determine whether each lease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is considered to be the case, then the lease is recognised as a finance lease, if not then it is recognised as an operating lease. As part of this assessment, the Group considers certain factors such as whether the lease is for the major part of the economic life of the asset.

When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the Group applies the recognition exemption, then it classifies the sub-lease as an operating lease.

The Group has reassessed the classification of sub-leases in which the Group is a lessor. Under IAS 17, the subleases were classified with reference to the underlying asset which resulted in all subleases being classified as operating leases.

On transition to IFRS 16 on 29 September 2019, the Group has reclassified a small number of sub-leases as finance leases, resulting in recognition of a finance lease receivable, being equal to the net investment in the lease. The Group recognises finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return on the net investment. 

There will be no change to the accounting for the remaining subleases which continue to be accounted for as operating leases, and income from these leases will continue to be recognised on a straight-line basis over the term of the lease.

Sale and leaseback

A sale and leaseback transaction is where the Group sells an asset and immediately reacquires the use of the asset by entering into a lease with the buyer. On entering into a sale and leaseback transaction the Group determines whether the transfer of the assets qualifies as a sale (satisfying a performance obligation in IFRS 15 "Revenue from Contracts with Customers"). Where the transfer is a sale and providing the transaction is on market terms than the previous carrying amount of the underlying asset is split between:

The Group recognises a portion of the total gain or loss on the sale. The amount recognised is calculated by splitting the total gain or loss into:

The leaseback itself is then accounted for under IFRS 16.

O) RETIREMENT BENEFIT COSTS

For defined contribution schemes, the amount charged to the statement of financial performance in respect of pension costs is the contributions payable in the period. Differences between contributions payable in the period and contributions actually paid are shown as either accruals or prepayments in the statement of financial position.

P) FINANCE COSTS

Finance costs of debt are recognised in the statement of financial performance over the term of the debt at a constant rate on the carrying amount.

Q) FINANCIAL INSTRUMENTS

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

All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

Financial assets are classified into the following specified categories: financial assets "at fair value through profit or loss" (FVTPL), financial assets "at fair value through other comprehensive income" (FVOCI), and financial assets carried at "amortised cost". The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics.

FINANCIAL ASSETS AT FVTPL

Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. Transactional costs of financial assets carried at FVTPL are expensed in the Consolidated Statement of Financial Performance. 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.  Financial assets at FVTPL are subsequently measured at fair value, with net gains and losses, including any interest or dividend income being recognised in profit of loss.

Trade and other receivables

Trade and other receivables that have fixed or determinable payments that are not quoted in an active market are initially recognised at fair value and then carried 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.

EFFECTIVE INTEREST METHOD

The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Income is recognised on an effective interest basis for debt instruments other than those financial assets and liabilities classified as at FVTPL.

IMPAIRMENT OF FINANCIAL ASSETS

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each statement of financial position 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. The Group assesses on a forward-looking basis the expected credit losses associated with its financial assets carried at amortised cost.

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, as well as observable changes in national or local economic conditions that correlate with default on receivables. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for financial assets.

For all other financial assets carried at amortised cost, the amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets. The Group will write off, either partially or in full, the gross carrying amount of a financial asset when there is no realistic prospect of recovery. This is usually the case when it is determined that the debtor does not have the assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off.

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 of cash balances including credit card receipts and deposits, less bank overdrafts which are repayable on demand where there is a right of offset.  All cash equivalents have an original maturity of three months or less.

FINANCIAL LIABILITIES AND EQUITY instruments

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 that are classified as FVTPL relate to derivatives that are 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.

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, to the net carrying amount on initial recognition.

DERECOGNITION OF FINANCIAL LIABILITIES

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 to the financial risks of changes in foreign currency exchange rates.

The Group uses foreign exchange forward contracts to manage its foreign currency risk. 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 period end date. The resulting gain or loss is recognised in profit or loss immediately. The fair values are determined by reference to the market prices available from the market on which the instruments involved are traded.

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.

R) SHARE-BASED PAYMENTS

The Group has applied the requirements of IFRS 2 Share-based Payments.

The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) 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 Sharesave 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.

S) TRADE PAYABLES

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

T) OPERATING COSTS

Restructuring costs relate to board approved decisions such as business closures or major organisational changes.  Operating profit is stated after charging/(crediting) restructuring costs but before investment income and finance costs.

Employee profit sharing costs are classified as distribution and selling costs and administrative costs. 

U) PROVISIONS

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of 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.

V) SUPPLIER INCOME

Amounts receivable from suppliers are initially held on the balance sheet within the cost of inventory and recognised within the income statement once the contractual terms of the supplier agreements are met and the corresponding inventory has been sold.

Volume rebates and price discounts are recognised in the income statement as a reduction in cost of sales, in line with the recognition of the sale of a product.

W) INVESTMENT PROPERTIES

Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the reporting date. Gains or losses arising from changes in the fair values of investment properties are included in profit or loss in the period in which they arise, including the corresponding tax effect. Investment properties are not depreciated.

The Group obtains independent valuations for its investment properties, and at the end of the reporting period, the fair value of each property is updated, taking into account the most recent independent valuation. The best evidence of fair value is current prices in an active market for similar properties. Where such information is not available the directors consider information for properties of different nature or recent prices of similar properties in less active markets, adjusted to reflect those differences.

Investment properties are derecognised either when they have been disposed of or when they are permanently withdrawn from use and no future economic benefit is expected from their disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in profit or loss in the period of de-recognition.

The Group has no restrictions on the realisability of its investment properties and no contractual obligations to purchase, construct or develop investment properties or for repairs, maintenance and enhancements.

X) GOVERNMENT GRANTS

The Group applies IAS 20 'Accounting for Government Grants and Disclosures of Government Assistance' when accounting for government grants.  A government grant is not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to it, and that the grant will be received.  Government grants are recognised in the Consolidated Statement of Financial Performance on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate.  The Group has chosen to present government grants netted off against the related expense.

Y) 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.

CRITICAL ACCOUNTING JUDGEMENTS

The key accounting judgements used in the financial statements are as follows:

LEASE TERMS

IFRS 16 defines the lease term as the non-cancellable period of a lease together with the options to extend or terminate a lease, if the lessee were reasonably certain to exercise that option. The Group has applied judgement to determine the lease term for some lease contracts in which it is a lessee that includes renewal options and break clauses, which can significantly affect the amount of lease liabilities and right-of-use assets recognised.

At the commencement date of a property lease the Group normally determines the lease term to be the full term of the lease, assuming that any option to break or extend the lease is unlikely to be exercised and it is not reasonably certain that the Group will continue in occupation for any period beyond the lease term.

For property leases the key factors that are normally the most relevant are the profitability of the leased store, the future plans of the business, and whether there are any penalties associated with exercising an option.

Leases are regularly reviewed on a lease-by-lease basis and will be revalued if it becomes likely that a break clause or option to extend the lease is exercised.  

KEY SOURCES OF ESTIMATION UNCERTAINTY

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

INCREMENTAL BORROWING RATE

Under IFRS 16, the Group recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The discount rate used to calculate the lease liability is the rate implicit in the lease, if it can be readily determined, or the lessee's incremental borrowing rate if not. The lease liability is initially measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate, adjusted to take into account the risk associated with the length of the lease which ranges between 1 and 20 years. The Group uses the lessee's incremental borrowing rate for all property and equipment leases.  

As a result of the significant impact the transition to IFRS 16 has had on the Group's opening balance sheet, the discount rate is considered to be a significant judgement with estimation. The weighted average incremental borrowing rate applied to the lease liabilities on transition was 2.30%, ranging between 2.17% and 3.09% dependent on the length of the lease term.

ONEROUS LEASE PROVISION AND LOSS MAKING STORES / STORE IMPAIRMENT

During the period the Group has continued to review the performance of its store portfolio, which has resulted in thirteen further stores being exited before their lease terms had expired (2019: five stores). In the prior period, in respect of the leases in relation to stores exited before lease end dates in prior periods that are still vacant, the Group provided for what it considered to be the unavoidable costs prior to lease termination or sub-lease.  The Group also reviewed any trading loss-making stores and provided for those leases considered to be onerous, and considered whether the net book value of the assets in relation to those stores were impaired.  In the current period, as a result of the adoption of IFRS 16, the onerous lease provision and loss-making stores provision have been released, and instead each store is tested for impairment in line with IAS 36.  For the prior period, the key estimates involved related to the forecast future cash flows of the stores identified as potentially loss making. These estimates were based upon available information and knowledge of the property market and retail market. For the current period, the key estimates involved relate to the pre-tax discount rate, long-term growth rate, and cashflow forecasts - see note 14 for further details.

INVENTORY PROVISION

The Group provides against the carrying value of the inventories held where it is anticipated that net realisable value (NRV) will be below cost.  The key estimate involves an assessment of clearance and discontinued lines, with an anticipated 100% mark down.  A 10% change in the volume of lines identified as clearance and discontinued would lead to a change in the provision of £226,000.

3 REVENUE

An analysis of Group revenue is as follows:

The Group has one reportable segment in accordance with IFRS 8 - Operating Segments, which encompasses the Topps Tiles Group revenue generated instore and online from retail and commercial customers. The Board receives monthly financial information at this level and uses this information to monitor performance, allocate resources and make operational decisions. All revenue is derived from sales in the UK.

The Group's revenue is driven by the consolidation of individual small value transactions and as a result, Group revenue is not reliant on a major customer or group of customers.

4 (LOSS)/PROFIT BEFORE TAXATION

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

During the year the business disposed of three freehold properties (2019: one freehold property). The loss on disposal of property, plant and equipment includes a gain of £1.1m in relation to the sale and leaseback of the Group's head office and central warehouse buildings in June 2020 for cash consideration of £17.9m, net of fees. In connection with the sale, the Group has entered into leases for the properties for a 20-year period following completion.  If the profit on the sale of the properties had been accounted for under IAS 17, a profit of £4.0m would have been recognised.

Analysis of the auditors' remuneration is provided below:

Audit related assurance services relate to the fee payable for the interim review performed. 

A description of the work of the Audit Committee is set out in the Annual Report and includes an explanation of how auditors' objectivity and independence is safeguarded when non-audit services are provided by the auditors.

5 STAFF COSTS

The average monthly number of persons employed by the Group in the UK during the accounting period (including Executive Directors) was:

The average monthly number of persons (full-time equivalents) employed by the Group in the UK during the accounting period (including Executive Directors) was:

Details of Directors' emoluments are disclosed in the Annual Report. The Group considers key management to be the Directors only. Employee profit sharing of £4.3 million (2019: £5.8 million) is included in the above and comprises sales commission and bonuses.

6 FINANCE INVESTMENT AND FINANCE COSTS

No finance costs have been capitalised in the period, or the prior period.

Interest on bank loans and overdrafts represents 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.

7 TAXATION

The charge for the period can be reconciled to the profit per the statement of financial performance as follows:

In the period, the Group has recognised a corporation tax credit directly to equity of £nil (2019: £64,064) and a deferred tax charge to equity of £1,622 (2019: £5,961) in relation to the Group's share option schemes.

In the prior year we disclosed a contingent liability in recognition of a historic tax claim relating to EU loss relief in relation to the closed Dutch business. The Group now recognises that this contingent liability was disclosed in error and the tax liability was fully provided for in the prior year accounts.

8 DIVIDENDS

Amounts recognised as distributions to equity holders in the period:

Due to the ongoing uncertainty in the wider environment, the Directors have not proposed a final dividend for the period ended 26 September 2020.

9 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.

The calculation of the basic and diluted earnings per share used the denominators as shown above for both basic and diluted earnings per share. The number of potentially exercisable shares were 1,758,101 but not included as they were anti-dilutive.

10 GOODWILL

The balance of goodwill remaining has been written down to £nil in the period. The carrying value held in the prior period arose on the acquisition of Parkside Ceramics Limited in 2017 and Strata Tiles Limited in 2019. The prior period balance related to two Cash Generating Units (CGUs). Goodwill of £1,216,000 (Parkside Ceramics Limited) related to one CGU, with the balance of £1,888,000 (Strata Tiles Limited) relating to another CGU.

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

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 years. The growth rate applied does not exceed the average long-term growth rate for the relevant markets.

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 Group's weighted average cost of capital. The growth rates of 1.5% 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 cash flows are calculated using a pre-tax rate of 16.5% (2019: 14.8%).

11 INTANGIBLE ASSETS

The brand and customer relationships additions occurred on the acquisition of Parkside Ceramics Limited on 31 August 2017 and the acquisition of Strata Tiles Limited on 18 April 2019.  These balances have been written down to £nil in the period.

The brands are amortised over their estimated useful life of 10 years. Customer relationships are amortised over their estimated useful lives of 3, 5 and 10 years. Software is amortised over its estimated useful life of 4 years. Amortisation is included within administrative costs within the Consolidated Statement of Financial Performance.

12a PROPERTY, PLANT AND EQUIPMENT

Land with a net book value of £4,104,000 included within land and buildings was disposed in the period.

Cumulative finance costs capitalised in the cost of tangible fixed assets amount to £nil (2019: £nil). Contractual commitments for the acquisition of property, plant and equipment are detailed in note 31.

During the period, the Group has continued to review the performance of its store portfolio and as the fixtures and fittings within these stores cannot be reused in other locations, the Group have provided for the net book value of the assets in relation to the sixteen stores (2019: seven) that are impaired. The carrying value of these assets has been fully provided for in the period, with an increase in the provision of £1,155,000 in the period (2019: £246,000 decrease in the provision) included within other operating expenses.

All assets classified as property, plant and equipment are UK based.

12b INVESTMENT PROPERTIES

On 11 May 2020, the Group completed the sale of its only investment property for a cash consideration of £750,000, to support the ongoing liquidity of the Group as the Covid-19 pandemic unfolded.  The investment property was carried at fair value, and a fair value adjustment of £nil (2019: £21,000 loss) was recognised in the Consolidated Statement of Financial Performance in the period.

12c ASSETS CLASSIFIED AS HELD FOR SALE

Two freehold properties were purchased in the year and subsequently reclassified as held for sale on 1 August 2020 in accordance with IFRS 5 - Non-current Assets Held For Sale and Discontinued Operations.  The sale of both properties has been completed shortly after the reporting period. Both properties are measured at the lower of their carrying amounts and fair value less costs to sell, resulting in a write down of £558,000 in the Statement of Financial Performance.  

13 SUBSIDIARIES

A list of all subsidiaries, including the name, country of incorporation and proportion of ownership interest is given in note 4 to the Company only financial statements.

14 LEASES

As a lessee

Right-of-use assets included in the Consolidated Statement of Financial Position at 26 September 2020 were as follows:

Lease liabilities included in the Consolidated Statement of Financial Position at 26 September 2020 were as follows:

The maturity analysis of the lease liabilities is as follows: