RNS Number:5035R
Thorntons PLC
26 September 2000
PART I
THORNTONS PLC
Announcement of Preliminary Results for
52 weeks ended 24 June 2000 (Audited)
Thorntons, the speciality retailer and
manufacturer of high quality chocolate, toffee and
other confectionery, today reports its Preliminary
Results for the 52 weeks ended 24 June 2000.
Financial Highlights
Results before exceptional items
and reorganisation charges
2000 1999
Turnover #153.5m #141.3m
Operating profit #10.6m #13.7m
Profit before tax #6.6m #11.1m
Operating cash flows #20.8m #25.2m
Earnings per share 9.57p 15.45p
Dividend per share 6.80p 6.80p
* Sales up 8.7% but profit before tax down by 40.5%,
reflecting trading statement made in June 2000.
* Operating cash flow still strong.
* Focus is now on increasing short term profitability in a
consistent manner and improving shareholder value.
* Expansion plans reduced for this year.
* Thorntons market share continues to increase in the
growing premium chocolate market.
* Clear strength in strong brand, product range,
manufacturing and retail assets and people. The short-term
needs are to ensure that all these resources work together
to deliver results.
* Thorntons is: - Driving like-for-like sales and margin;
- Refocusing and reducing the strategic
initiatives;
- Creating efficient organisational
processes
- Increasing measurability and
incentives.
Commenting Peter Burdon, Thorntons new Chief Executive, said:
"Given the disappointing profits last year, the priority for
Thorntons is clear: deliver short-term profits in a
controlled, co-ordinated and efficient manner. We will focus
on our unquestionable strengths: strong brand; unique
products; modern assets and differentiated skills to
consolidate the company for future growth."
Contact:
Peter Burdon, Chief Executive 0207 466 5000 on 26 September
Martin Allen, Finance Director thereafter on 01773 540550
Charles Ryland/Catherin Miles 0207 466 5000
Buchanan Communications
CHAIRMAN'S STATEMENT
It is extremely disappointing to report to you that despite
all the hard work and investment made in our Group over the
last few years, we failed to meet our own and your profit
expectations.
We have taken a significant number of actions to stabilise the
situation in order to start to rebuild investor confidence but
we recognise that only results and not promises will recover
your full confidence.
Peter Burdon, our new Chief Executive, will outline our plans
and actions to-date within the Chief Executive's review.
Results
Turnover grew by 8.7% to #153.5m. Own shop sales increased by
10%.
However the cost of generating these additional sales resulted
in a fall in Profit Before Tax from #11.1 million last year to
#6.6 million, before including the #1.1 million cost of Belper
disposal and after a change in depreciation policy.
Underlying cash generation remains strong but lower than last
year. Our net debt increased in the year to #52.3m leading to
increased gearing of 106%. Our aim is to reduce this level of
gearing by containment of capital investment and reduced
working capital.
The effective tax rate at 4.6% remains low reflecting past
high levels of investment and a #0.6 million tax benefit from
prior years.
As a result basic earnings per share fell from 15.45 pence to
9.57 pence. Nevertheless, your Board is recommending an
unchanged final dividend of 4.85 pence net per share,
resulting in a full year dividend also unchanged at 6.80 pence
net per share. This reflects our confidence that the fortunes
of the Group can be restored in the medium-term.
People
We are delighted to welcome Peter Burdon as Chief Executive of
the Company, effective from 8 May 2000. Peter joins us after
four-and-a-half years with The Boots Company, principally as a
Trading Director within Boots The Chemists Limited. Peter
also has extensive commercial experience gained in Europe and
Australia with McKinsey & Co. where he spent six years prior
to joining The Boots Company.
The year has not been an easy one for our colleagues within
the Group but I would like to express my thanks for the hard
work, dedication and enthusiasm shown by all of them and also
for their clear determination to improve our fortunes.
Thorntons in the Community
Thorntons continues with its long standing support for
specified charitable and community initiatives. Cash
donations in the 1999/2000 financial year amounted to #71,000
in addition to company time and products.
The Company is always mindful of its environmental
responsibilities. We won two environmental awards during the
year "the Derbyshire "Greenwatch" award and the "Millennium
Marque".
Outlook
The outlook is dependent upon a clear focus on short-term
profit and the changes required to deliver it. We cannot
enact a long term growth strategy without a firm base to build
upon - this is our priority.
The current year has started positively and we are taking
decisive actions but the true measure of our success will only
be in results delivered.
CHIEF EXECUTIVE'S REVIEW
Given the disappointing profits last year, and the decline in
the net profit margin over the last few years, it would be
easy to question the ability of Thorntons to deliver
shareholder value in the future. However, since joining
Thorntons a few months ago, I have appraised the Group - its
strengths and its areas for development - and been pleased and
encouraged by what I have found.
Clearly mistakes have been made in the past, but we understand
how they arose and what we have to do to prevent their
reoccurrence. More importantly though, the Group has some
phenomenal strengths on which, if we focus and align our
efforts, we can deliver increased profits, and hence a good
return to our shareholders.
There are five strengths I would like to highlight in
particular: the market we operate in; our brand; our
products; our assets; and, our colleagues.
Whilst the overall market for confectionery has not enjoyed
high growth in the last few years, the market for quality
chocolate is expanding. In our vibrant economy, customers are
becoming more discerning and are investing more time and
expenditure on food. This is having an impact on our markets.
For example, the UK boxed chocolate market for the year ended
April 2000 was worth #644 million, up 3.6% on the previous
year. Our share of the premium end of that market, currently
worth #130 million, has grown from 46.6% to 48.9%.
The brand grows ever stronger. Thorntons enjoys fantastic
loyalty among existing customers and high positive awareness
among the population. Over a two year period our prompted
brand awareness has risen by 1% to 86%. Our brand's
spontaneous awareness has risen by 4% to 61%, compared with
47% and 41% for our two most direct competitors.
And there is a good reason for this. Our core products are
widely recognised for their superb quality at reasonable
prices. With our Continental range, we have a selection which
is the envy of our competitors. Not only are we strong in the
gift segment, we are successfully increasing our presence in
the personal treat market with products like Chocolate Bites
and Toffi-chocs.
Thanks to our recent investment programme, our assets in
manufacturing, distribution, retail and IT are as good as
those of our most vigorous competitors.
Our most important strength is the skills, enthusiasm and
loyalty shown by my colleagues throughout the Group. More
than anything else, they need clear leadership and direction
so their efforts can be reflected in sustained profit growth.
With my executive team, I intend to provide that lead.
These five strengths provide a stable foundation on which to
build a sound future for Thorntons. However, before
explaining our strategy going forward, it is worth reflecting
briefly on the causes of last year's disappointing profit
result, so that we can demonstrate that our solution is both
appropriate and robust.
In many ways, the strategy of the last few years was sound -
it was in its execution that mistakes were made. Over that
period of time, Thorntons was simply too ambitious. We were
trying to become too big too soon, such that we struggled to
increase sales and gross margin sufficiently to cover the
significant increase in fixed costs. The target of 500 stores
was appropriate, however, with hindsight, it was unrealistic
to have aimed to achieve that target by 2001.
As a rule of thumb, new stores take about three years to reach
a mature level of sales growth - often with a slight dip in
year 2. Our dramatic expansion of the stores, therefore,
created an increasing proportion of immature stores. This,
combined with the significant yet appropriate increase in
property and manufacturing costs, meant that we could not
invest enough in marketing or new product development (NPD) to
sufficiently stimulate the sales line or gross margin.
Moreover, our marketing and NPD investment was poorly targeted
and un-coordinated.
This situation was compounded in the last financial year by
over ambitious sales expectations for Easter, which led to an
excess of Easter eggs at the end of the selling period. These
had to be sold at a deep discount subsequently.
The analysis of the last few years gives a very clear
indication of the actions we need to take to restore our
profitability. In summary, we need to slow down our expansion
to focus our effort and investment on creating the appropriate
return from our existing retail estate and manufacturing
facilities.
The four strategic priorities we have developed for the coming
year reflect this requirement. We have already commenced
their implementation in a calm, cogent and systematic manner
and, whilst it is early days, the results to-date are
encouraging.
The four priorities are:-
- driving like-for-like sales and margin
- refocusing and reducing the strategic initiatives
- creating efficient organisational processes
- increasing measurability and incentives
Each of these is worth analysing more closely.
Driving like-for-like sales and margin
Sales momentum in our own shops was lost over the last few
years by our marketing mix (product development,
merchandising, advertising, promotions, pricing and customer
service) receiving insufficient investment, customer focus or
co-ordination.
Thorntons operates in four customer-market segments: gifts;
personal treat; family-share; and, childrens, each with
different customer needs. Our marketing mix must reflect
these different needs in a complimentary and co-ordinated
manner so that we maximise the impact of the spend on sales
and margin.
This issue is being addressed through an internal programme
called "Restoring the Magic". The aim of the programme is to
ensure each element of the marketing mix is clearly focused
and co-ordinated to drive like-for-like sales throughout the
year.
On the product development front, there are many developments
on the way, thanks to an enhanced new product development
initiative that concentrates on fewer - but more focused and
profitable - projects. As part of the renewal of the range,
we will be seeking to increase gross margin whilst offering
customers even better value.
We need to remerchandise our stores to reflect the needs of
our customers, the core of whom are family women over 30. At
minimal cost, we are rearranging the layouts of every one of
our outlets, making shopping easier - and more enticing - for
both our regular and potential customers. The layout will
give appropriate prominence to old favourites as well as
making our innovations more obvious and attractive.
Our style and emphasis in advertising and promotions is
changing. We have recently changed our advertising and public
relations agencies. With their help, we aim to allocate more
spend to encourage all-year-round sales with a series of
events' that focus on each customer-market segment, as
appropriate.
We are also increasing the training and development of in-
store colleagues. This will provide them with greater
expertise in product knowledge, store management and
satisfying customer needs.
All of these changes to the marketing mix are designed to
increase customer count per store and average spend on an all-
year-round basis and, hence, like-for-like sales and margin.
Early indications are that the strategy is beginning to work.
The remaining three strategic priorities are designed to
support the revitalised marketing mix.
Refocusing and reducing the strategic initiatives
We are adopting a disciplined approach to improving the return
from our retail and manufacturing assets. We have reduced the
number of projects and initiatives to those that will create a
short-term payback for those assets.
In particular, we are minimising less viable low volume
products, reducing the Thorntons product range by about 10%.
This will enable us to devote more space and promotional
effort to the excellent products remaining and it will also
have an immediate and positive impact on manufacturing
efficiencies.
Regarding expansion, our programme is slowing down to a more
manageable figure of fewer than 15 new stores per year on
average.
We are also seeking to maintain and grow our successful
commercial business for such major customers as Marks &
Spencer and Boots, as well as seeking new business with other
non-supermarket retailers.
We will maintain and develop Thorntons new presence on the
Web. Our e-commerce and mail order efforts will continue to
focus on our core products. Our main priority now is the
fulfilment process, with customer satisfaction the key to
creating a profitable business. We have created a dedicated
management team with full profit and loss responsibility. We
do not intend to spin off this business as we feel it is
important to create a seamless' brand across our various
routes to the customer.
Our other new venture, Cafi Thorntons, is also a subject of
cautious optimism. Our food and drink offer built on coffee
and chocolate is an attractive concept for our customers. It
sits very comfortably with the brand and will ultimately add
to it.
We have been improving the Cafi offer to increase transaction
values and attract new customers. There have also been
efforts to improve operational management to ensure sales
revenues flow through to the bottom line. We are now pulling
together our learning on the best locations, customer offer
and operational configuration. Once we have evaluated the
options, we will decide whether to rollout the Cafi concept
further and in what manner.
Low cost, low risk opportunities in franchising and
partnership will also form part of our strategy. The success
of the Birthdays joint venture will lead to further
development of our partnership.
Finally, we have reduced the scale and scope of the
information systems investment programme. In the last few
months, we have cancelled or postponed a number of projects
that did not fit with the revised business strategy or had low
or indeterminate paybacks.
Creating efficient organisational processes
We cannot expect to improve performance without changing the
ways in which we work. This encompasses shifts in culture and
quality of communication, as well as improvements to processes
and more effective management of our cost base.
We have already begun to redesign the three key organisational
processes: stock fulfilment; range management and trading
management. Cross-functional and inter-related teams will
complete their work in mid October. However, early
opportunities for improvement have already been implemented.
Much of the process improvement will be accomplished by making
the most of existing hardware and software, such as EPOS
(Electronic Point of Sale tills) and related systems in which
we invested heavily in recent years.
Increase measurability and incentives
When you are working to clearly defined and clearly attainable
goals, you should have no hesitation in measuring progress in
achieving those goals. That is what we are now doing at
Thorntons.
Consistent with introducing more rigorous performance
management, we are updating the rewards and incentives for our
colleagues so that they have greater alignment with
shareholders' interests.
Looking ahead
There is no quick fix to the situation from which Thorntons is
now emerging. It will take the duration of the new financial
year to re-establish profitable sales growth. Restoring the
net margin to historical levels will take longer.
We have made a good start and early results are encouraging.
Like-for-like sales growth for our own shops for the twelve
weeks to 16th September 2000, a period which included the fuel
crisis, was 1.4%. Excluding the fuel crisis week, the like-
for-like sales growth for the period would have been 2.5%.
Overall sales for the Group over the same period are up 8%.
Though most of our efforts will be directed to short and
medium-term objectives during the months ahead, we will not be
neglecting the long-term future. In tandem with work on
current projects and immediate goals, we are embarking on a
comprehensive strategic review to look at longer-term
alternatives for growth.
Everyone with an interest in the success of Thorntons -
shareholders, customers and colleagues alike - should find
that their patience and loyalty are rewarded.
FINANCE DIRECTORS'S REVIEW
Summary
The overall results for the period were clearly disappointing,
especially in view of the continued rise in sales. The full
reasons for the lower than anticipated profit are given below.
Also detailed is the impact of a number of key changes in
accounting policy implemented during the period.
Sales Performance
Total turnover increased by 8.7% to #153.5 million, with
almost all of the #12.2 million increase coming from Own
shops, which increased from 390 to 410 outlets. Like-for-like
sales were flat for the period as a whole, but this compares
favourably to last year's 4.6% decline. Whilst the second
half achieved growth of 2%, this all came from key seasons
with other periods continuing a negative trend. Our
definition of like-for-like makes no adjustments for new
stores sales cannibalisation.
The number of franchises increased from 110 to 127. Whilst
full year sales were #0.5 million lower than 1999, second half
sales were higher than last year.
Our renewed focus on Commercial customers halted last year's
decline with sales almost static at #15.8 million.
From a small base our e-commerce sales, including mail order,
rose from #0.8 million to #2.0 million - an encouraging
growth.
Key results and taxation
Gross margin continued to rise in percentage terms from 52.7%
last year to 53.0%. However, continued underlying
improvements in manufacturing efficiencies were significantly
diluted by the cost of discounts, including increased
promotional activity and stock clearance.
Operating profit on continuing activities fell to #10.6
million from #13.7 million. Net interest costs rose from #2.6
million to #4.0 million and, as a result, profit before tax
and the loss on disposal of Belper fell from #11.1 million to
#6.6 million.
As advised at the Interim results announcement, we sold the
Belper facility for #1.7 million cash, but recorded a book
loss of #1.1 million.
Tax charged in the year, at 4.6% of profit on ordinary
activities, was significantly less than the standard rate,
primarily reflecting past high levels of investment and also a
#0.6 million credit following the beneficial progress on some
prior year computations.
Shareholder returns and dividend
As a result of the fall in profit before exceptional items,
basic earnings per share also reduced from 15.45 pence last
year to 9.57 pence this year. On a fully diluted basis the
fall was from 15.35 pence to 9.50 pence.
In view of our confidence in the medium term, it is proposed
to leave the total dividend unchanged at 6.80 pence for the
full year, resulting in a recommended final dividend of 4.85
pence.
Net assets per share rose by 1.8% in the year to stand at 73.8
pence, compared with 72.5 pence per share last year.
Significant items affecting results
I have already covered the once off cost of the disposal of
Belper facility above. We have an operating lease on part of
the site until June 2003 by which time we expect to have
transferred all production to nearby Thornton Park.
FRS12 relates to the need to provide for potential future rent
liability on shops and premises which we have vacated or
sublet. The success of our disposal programme has been such
that we have released a net provision of #1.4 million. No new
provisions were required.
After last year's Annual Report, the best practice for
disclosure of onerous lease provisions and sublet receivables
was clarified, and accordingly, we have restated the sublet
debtors within provisions as at 26 June 1999.
In addition, TV advert production costs incurred in the period
of #0.6 million have been fully charged to the consolidated
profit and loss account.
Accounting standard and policy changes
During the year earnings were affected by a number of factors
relating to accounting policy changes and standards, and these
were outlined in our trading statement issued in June. I will
also cover them briefly below.
The new accounting standard, FRS15, has led us to change our
policy on certain costs which we had previously included
within deferred costs and amortised over more than one year.
All items brought forward, except those that meet the
definition of tangible fixed assets under FRS15, have been
charged against this year's profit and amount to #0.8 million.
Thorntons has operated a depreciation policy, in relation to
shop-fit costs, which is aggressive by retail industry norms.
Our change in strategic emphasis will result in a slower shop-
opening programme and fewer shop refits which means that
capital investments already made will last longer. We have,
therefore, revised the depreciation policy on fixtures and
fittings from 4 to 5 years. The net impact on profit is a
gain of almost #2 million this year, and we expect a net gain
of #1 million next.
Cash flow and borrowings
The reduced operating profit did result in a lower operating
cash inflow than last year, before working capital movements,
but the underlying strength of operating cash flows remains a
feature of the Group. The net inflow was #20.8 million before
a net working capital outflow of #3.5 million, mainly to cover
additional stocks, as a result of early pre-Christmas build
prior to annual factory shutdown in July.
Much of the supply chain process improvement work will be
aimed at maintaining stock at lower levels than this in the
future.
Net capital expenditure, after asset disposals, fell
significantly from #37.1 million last year to only #4.8
million this year. It is anticipated that expenditure will
remain at low levels for the coming year.
After payments for dividends, tax and interest, the net impact
was a #1.8 million reduction in borrowings to #45.9 million
from #47.7 million, the first decrease in borrowings since
1996. However, with over 40% of our new fixed assets acquired
through finance leasing, the overall impact was a 3% increase
in net debt to #52.3 million. This resulted in gearing rising
from 105.4% to 106.5%.
The Group's treasury policy remains largely unchanged from
last year. During the period, and further to our loan note
issue being graded below initial expectations, we have agreed
an additional US dollar 0.25% premium on the US$65 million
loan notes. This will amount to an additional #0.1 million
interest in addition to the fixed 7.35% interest payable.
Year 2000 and Euro
The plans made to cover any potential systems issues relating
to the year 2000 went very successfully and no problems were
encountered.
We continue to monitor, but not action, potential issues
relating to the single European currency. We already trade in
the Republic of Ireland with 5 sites.
Financial Outlook
The key priorities for the company are set out in the Chief
Executive's review.
Our plans and aims are to deliver shareholder value by
delivering increased profits and reducing borrowings.
The process improvements underway are designed to do this by
reducing our complexity, limiting our investment levels,
reducing stock and write-downs and ensuring full returns from
the investment already made over recent years.
MORE TO FOLLOW
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