Theworks.co.uk (LSE:WRKS) — FY24 Preliminary Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the group the works.co dot uk PLC Full Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They the Thank you.

0:27 Responses where it's appropriate to do so. Before Thank we begin, we'd like to submit the following poll, and I'm sure the company will be most grateful for your participation. I'd now like to hand over to CEO, Gavin Peck. Good afternoon. Hi. Thank you, Mark. Good afternoon, everyone, and thank you for joining. Those are now looking forwards to updating on our FY twenty four performance and the good progress we've made since, including how we're well placed heading into Christmas. As Mark said, we will look forward to taking your questions at the end.

0:59 Just giving a quick overview. You know, we are pleased with where we ended f y twenty four in line with market expectations despite the challenging trading conditions and a particularly tough Christmas. That reflects the decisive action we took at the start of 2024 to improve product margins, reduce costs, and scale back nonessential investments along with the improved trading we've seen since Christmas.

1:22 We're well positioned to offset the cost headwinds and return to profit growth in f y twenty five. We've had solid trading in the first twenty one weeks of f y twenty five, and we're well placed operationally ahead of peak Christmas trading. We've made good strategic progress, and we've got work underway to evolve the strategy to transform our business and position us for growth in the years ahead, and I will talk more about that later. But for now, I'll hand over to Rosie to take us through the numbers. Thanks, Gavin, and good afternoon, everybody. So before I take you through the highlights, I just wanted to remind you that these results of the period, the 05/01/2023 to the 05/05/2024, so reflect a fifty three week period. We've delivered revenue of GBP 2 and 82,600,000, reflecting store like for likes of positive 0.6% and negative online like for like sales of 12.4%.

2:13 It was a tougher year than expected, but we took decisive action, which enabled us to reach our 6,000,000 forecast EBITDA. And we've ended the year with positive cash balance of 1,600,000. In light of the lower profit levels, we've not proposed a final dividend, but we will continue to keep shareholder distributions under consideration, and we will set out our new capital distribution policy alongside our evolved strategy update in early twenty twenty five. During h two, we successfully moved to AIM, which will result in lower corporate costs, including a significantly lower audit fee. And within adjusting items for the year, it consists of one off restructuring costs and costs related to the AIM move along with IFRS 16 net impairment reversals and profit on disposals.

3:01 We're pleased to have been able to prepare the accounts on a going concern basis with the removal of the material uncertainty that was included in last year's accounts, and this will improve our negotiations with suppliers, credit insurance conversations and improve our working capital management as a result. So before I dive into the performance, I wanted to take a moment to remind you of the challenging macroeconomic backdrop for FY 2024. Consumers were continuing to feel the pressure on finances from a prolonged period of high inflation, which was at 8.7% at the start of the year. Family finances were further impacted as consumers were hit with high mortgage repayments as fixed mortgage deals came to an end. And despite significant wage inflation of nearly 10%, it was not enough to ease the pressure on personal finances or improve consumer confidence.

3:49 This was reflected in the BRC's nonfood retail like for like performance, which was on average minus 2% for the period. We faced significant cost headwinds, including the 10% national living minimum wage increase, along with high energy prices, all of which we anticipated at the start of the year. However, we couldn't foresee the Red Sea issues and the disruption it caused to our supply chain along with increased freight costs at the start of 2024. So despite the tough consumer environment, we've delivered revenue growth driven by stores and the extra week of trade. We had a really encouraging start to the year with strong store like for likes in Q1 of 6.4% and online growth of 4.5%. However, the consumer environment was progressively more challenging and sales were lower than anticipated towards the back end of Q2 and over Q3, the Golden Quarter.

4:43 It was not helped by our own operational challenges, which impacted golden quarter sales. We're really pleased to see a recovery in Q4 and return to growth for stores, which got us back to store like for like growth for the year. Online performance was down year on year, but we focused on improving profitability of the online channel and implemented changes, which saw an impact on sales but improved profits, resulting in the channel breaking even in FY 2024, and it is on track for profitability for FY 2025.

5:14 So combining the lower than anticipated sales with the cost headwinds put pressure on our profitability, and we've taken action to mitigate this pressure, which meant we hit our GBP 6,000,000 EBITDA forecast and have created a platform for profit growth moving forward. I'll now talk you through the action that we've taken. We implemented operational changes to the ways of working in the DC and to make changes to our store labor models, which help partially mitigate some of this 10% wage headwind. In January, we moved our third party online fulfillment center to a more efficient facility, which we expect to deliver 1,000,000 annualized saving. We were tough with landlords on lease negotiations and saw good year on year rent savings of over 20%.

6:00 We've improved product margin during Q4 with focused cost price negotiations with suppliers and more targeted promotional activity, and we're seeing this improvement continue in FY 2025. We ended our loyalty scheme, which previously rewarded customers with a 5% discount, and this should see a 1,000,000 tailwind for gross margin in FY 2025. We also restructured the operating board to improve strategic focus, and this will result in FY 2025 cost savings. And as I mentioned earlier, we moved to AIM, which will see a significant reduction in our audit fee.

6:38 Following on from the challenging Christmas, our focus was to was to improve product margins. However, margins were down year on year as a result of our evolving product mix. For example, our new toys and games ranges drove incremental sales with double digit growth in the period. However, they do attract a lower margin, and we continue to invest in front list adult fiction books, which also lowers the rate. The additional promotional activity across Peak also reduced the gross margin percentage, and the hedged FX rate on payments made in US dollars remained a headwind. Margin benefited from a reduction in container freight prices in versus 2022 rates, notwithstanding the higher freight costs post peak. And our action taken to improve product percentage product margin percentage in Q4 is set to continue into FY 2025.

7:31 So let's take a look at the costs. Tighter cost control helped to mitigate the headwinds and stabilize our profitability in FY '24. However, saw payroll costs increase still by 3,400,000. We changed our store labor structure at the start of the year to help mitigate this this headwind. And following a tough peak, we also implemented a labor hours efficiency project in January, which should deliver savings in FY '25. Property costs, as I've already mentioned, benefited from strong landlord negotiations on rent and further reductions in property costs as we closed loss making and marginal stores. These reductions were partially offset by adverse electricity costs in the period.

8:16 Online variable costs decreased by 2,600,000, reflecting lower volumes and the actions taken to increase profitability through changes to online marketing and our delivery propositions. And relocation of our online fulfillment center, as I've mentioned previously, saw savings from Q4 onwards and will continue to see an annualized saving of GBP 1,000,000. Distribution costs increased by GBP 2,400,000. We made changes to the distribution center management team and implemented improved ways of working to mitigate 10% wage headwind. However, costs were adversely impacted by capacity issues in the run up to peak, which resulted in increased labor costs and higher volumes, which saw increases in storage and pallet costs. A strengthened management team in the DC and improvements in the ways of working though are expected to see efficiencies that will help help offset further wage headwinds from April 24.

9:11 Underlying admin costs increased by 2,800,000, reflecting the investment in support center labor at the start of the year and increased IT costs from the new ecosystem rollout along with the strengthening of our IT security. And as I've mentioned, operating board changes will support the reduction in our FY '25 admin cost base. So let's have a look at the balance sheet. We ended the year debt free and with ample liquidity to support this buildup of stock for peak. Our year end cash position was 1,600,000, but due to the fifty third week, this reflected all of our month end payment months, and fifty two week comparable number is 6,500,000. CapEx was approximately 1,000,000 lower year on year, reflecting higher new store costs due to lower landlord contributions and cost inflation.

10:01 This was offset with reduced spend on store refits as we focused on controlling cash post peak. IT investment spend was lower year on year as we annualized against higher EPOS implementation costs. Tighter stock management enabled by the new merchandising team supported a planned reduction in our closing forward cover, which saw a reduction in gross stock of 2,900,000. This was, however, offset with higher stock in transit, reflecting the impact of the longer transit times due to the ongoing disruption in the Red Sea, which means we have approximately two weeks more working capital tied up in stock. So let's take a look at our FY 2025 outlook. We're well positioned for FY 2025 with a forecast EBITDA of GBP 8,500,000.

10:47 We expect to end the year with approximately GBP 5,000,000 of cash, and our CapEx investment will be around GBP 5,000,000 too. So FY 2024 was challenging with a particularly tough peak. We've taken action to reduce the pressure on FY 2024 profit and have made clear operational improvements that have created a strong platform for profit growth, and we're focused on returning to 5% EBITDA margin over the medium term. I'll I'll now hand over to Gavin to talk through strategy. Thank you, Rosie. So I better not just figure strategies as we set out three years ago, which, in essence, looks to give brand and proposition on clarity and make us a better and more modern retailer. We've had we've made good progress despite significant interferences over the past three years with COVID, global supply chain issues, a cyber attack, and a tougher consumer environment through 2023, as Moses just mentioned.

11:42 We've always believed and still do that this delivery of this strategy will give us meaningful sales growth, significant operational improvements, and improved profitability and shareholder returns. It's built on four strategic pillars, which are underpinned by our three strategic enablers.

12:00 One area that we've made great progress on in the last twelve months is more clearly defining our brand and the role that we play in customers' lives. That's vital for the longevity of the business and the growth of the brand and differentiates us from our competition. It starts with our purpose, which is as we set out three years ago, which is to inspire reading, learning, creativity, and play. The new part is the problem that we are looking to solve and and our mission in doing so. There's increasing research that shows that screen addiction and overuse of screens is a growing concern, particularly amongst parents. We've done a social media study, and there's others from consultants and hospitals that show that fifty percent, two thirds of parents, see this as their biggest concern regarding the children's health.

12:46 So for us, the problem that we're looking to solve is in a world full of screens, people want to find other ways to connect and spend their time. And we're here to support families with affordable, feel good ways to spend their time connecting people with screen free things to do. And you'll see our strapline, which will launch this Christmas time well spent that looks to really take the opportunity for people to pause the screens and connect with real life things, which, you know, is increasingly important. Examples include reading a book whilst on holiday, crafting with kids on a rainy day, or playing a board game as a family on a Saturday night, or giving time well spent courtesy of the works. Delivered through our brand proposition.

13:31 We've have four specialist categories, books, toys and games, art and craft, and stationery, all providing feel good ways for people to spend their time. It's delivered through our convenient channels, which make our products accessible. We have a large and profitable store portfolio of 511 stores and a transactional website, works.co.uk. Everything we do is underpinned by three things that we wanna be famous for, great value, fantastic ranges, and screen free activities. Value is the core of everything we do. We are a value retailer, and we have extremely low prices all year round, but really underpinned by our three hero deals. We have 10 for £10 kids books and three for six adult books across both fiction and nonfiction.

14:22 We've got two for 12 and three for £15 gifting, which is fantastic gifts all year round, particularly at Christmas. Again, all linked to reading, learning, creativity, and play. Our 11 owned brands help underpin that value, particularly in art, craft, and stationery, give us unique products as well. Our fantastic ranges is all about curating the right ranges for our stores, with selected online extensions, where we have other products that we want to stock, but our stores can't hold the space. And we always have something for all the families, not just focused on the kids. I'll come on to talk about our core customer group. It's for all the family. And the key differentiator with the hundreds of new lines arriving every month, driving inspiration and repeat visits. And screen free activities really is all about reading, learning, creativity, and play, being an alternative to tech technology and enabling people to connect with themself and others.

15:20 Let's say we're much clearer on our target customer and position in the market. We've done some work over the last eighteen months, looking into customer insights. Yeah. Our target market really is families with young children. 77% of our customers are under the what we class as do it alls and kids firsts. They are typically, females aged 25 to 44 with children, although nearly a third of the kids first are also grandparents. So it's very much families looking for ways to keep their kids entertained. And this has shifted our thinking in terms of how we go to market around ranging the store environment and our customer comms. Our market position remains unchanged, and we see ourselves very much as a value specialist.

16:05 So we compete on price with the full price specialists that are there in the right hand corner of that graph. That can be up to half or a third of the prices of those full price specialists in some instances. And with the discounters in the bottom left who also sell a lot of what we sell, we position ourselves there with specialist knowledge, much more, accurately curated ranges, and customer service.

16:33 So moving on to the strategic progress that we've made in f y twenty four. We've created a new commercial director who joined us, just over a year ago, Lynn. She's extremely experienced across brand proposition, sourcing, QA, and has led the brand and customer work we've done, the proposition evolution that we've been undertaking in the last twelve months, and driven the margin improvement that Rosie talked about earlier. We've also made those proposition improvements within kids books. We had a complete relay of our kids books range from baby and board books right through to fiction books for five to 13 year olds. And kids books is now well ahead of last year and ahead of budget in recent weeks. Adult books continues to be a real area of strength for us, in particular in adult fiction where we are 50 to 60% share on some of new releases.

17:25 We've also successfully launched three for six non fiction books, ranges of biographies and general interest history books as part of our three for six fiction deal that we have run for many years, and that's been a success. So looking at enhancing our online proposition, we've made improvements to the customer experience through better analytics. We are at the early stages of that, but we've got more to do. And our head of finance, who joined us in April, will be leading that. So head of online will be leading that. We've been undertaking a lot of customer engagement and fulfillment trials. They'll view to improving profitability of the website, but also improving customer service. So we have increased the free delivery threshold for online orders, but also introduced a new free next day delivery threshold as well. So if customers want, they can have that improved service and free next day delivery for a higher threshold.

18:22 We've also increased the click and collect free delivery threshold, but improved the service levels from three days to one to two days. That's been positive in terms of driving higher average order values, therefore increased profits, and also improved customer satisfaction. As mentioned, we've managed to make the website breakeven in f y twenty four, and we are on track for that to be profitable in f y twenty five. In terms of our store estate, the context here is our store estate is the lifeblood of our business and always will be. So we have 511 stores, 90 cent 6% of which are profitable and are still delivering like for likes. We've been continuing with our portfolio management in recent years. In the last year, we opened nine stores, closed 24, relocated five, and then took 21 refits.

19:12 In the current financial year, we expect up to 10 new store openings, of which three will likely be relocations, 15 closures, and 10 refits. As Rosie mentioned, we continue to drive rent reductions on lease renewals, particularly in lower profits or loss making stores. We've started to develop our space planning capabilities to increase our store sales densities. We're very much at the early stages of that with a one size fits all and optimizing the space within a one size fits all. But we are looking to develop new capabilities as part of strategy to be able to offer different ranges in different locations. So somewhere like Westfield White City would have a different offer to somewhere like Dagganon. And in terms of driving operational improvements, Rosie's touched on most of the developments here, relocation of the off online fulfillment center to a more automated center, the new DC ways of working, and the new EPOS rollout, which was completed this summer. That primary driver of the EPOS rollout was to replace end of life software, but it does help increase operational efficiency in store and, ultimately, customer service by bringing the number of the back office functions that are currently performed on a computer at the back of that store onto the till fronts that colleagues can spend more time on the shop floor.

20:30 And it does enable us in time to explore different tills and new hardware in store. So overall, good progress made despite the challenging conditions. We've had several key leadership changes in recent months. As Rosie referenced, we had an operational board restructure earlier this year, which saw the team reduce from nine to five. Helps with streamlined decision making, a really strong team, and a good blend of experience. We are now investing some of the savings back into the structures below to support the team with the very much wanting the board focused on driving strategic change we move forward with the day to day running much been much more led by the senior leadership team.

21:13 Steve joined us as chair in July, now replacing Caroline. Caroline was very much involved in the customer and brand work that we are are launching and just talked through. Steve joins very much as a very strong experienced chair and non exec director, very strong in strategy and transformational change. As I'll come on to talk about, he's working closely with me and the team to evolve our current strategy. Catherine Glickman, as reference, will not be standing for election at the a reelection at the AGM. Harry and Catherine joined us back on IPO and would be rolling off in nine years. So as part of the plan changes to evolve the board, Catherine will not be standing for reelection, and we are out recruiting for someone with strong value retail experience to complement the current PLC board of directors.

22:01 So as I referenced, we've got a new leadership team working through the strategy evolution. Think with the external interferences that we faced over the last four years, the Christmas the operational challenges that we had, as Rosie referenced, meant we had to shift our short term focus to improving profitability, which has been successful in driving improved profitability in the current year. And that with the leadership changes just really gave us an opportune time to review and reset our meeting term ambitions.

22:31 We've maintained that the current strategy is is broadly the right strategic direction for THEWORKS, but we want to set a really clear three year financial targets and a clear operational plan that underpins those targets. We will share further details alongside our interim results in January. As I said earlier, our belief in the long term opportunity from delivering on that transformational strategy is unchanged. We believe we can step change sales and profitability, return to EBITDA margins of 5%, and improve shareholder returns in the long run. I look forward to sharing the details of that in January. Just turning on to current trading and just to end on summary before we take questions. Current trading is in line with expectations, the first twenty one weeks of the year.

23:19 The consumer environment clearly remains tough. Whilst consumer confidence has improved slightly, consumer spend still remains a challenge. Despite that, we have delivered sales in line with expectations. Like for likes pretty flat, but outperforming the wider nonfood sector. We track the BRC nonfood data, which has been running at minus two to minus 3% for most of 2024, along with other, public announcements of specialist and discounts are like for likes announced year to date.

23:51 We're operationally well placed heading into our peak Christmas trading period, and the DC capacity issues that we experienced last year have been addressed. We're using iForce, who were who are our online fulfillment partner, to fulfill some of our store orders, which has eased the capacity constraints at our main DC here in Colesville. This time last year, our DC was full, and we were able to take corrective action to delay intake, move stock off-site, push more stock to stores, and undertake promotional activity to keep volume moving through the business. As we sit today, we've got 5,000 free pallet spaces in our DC, which is nearly 40% of the free space. And with most of the stock on the water on its way to us, you know, we feel in a very strong position as we head into our peak Christmas trading period.

24:40 And as well as you've mentioned, taking that along with the strong product margin growth and the cost savings that are being delivered, and we've more than offset our ongoing cost headwinds, and I'm on track to deliver significant improvements in profitability in f y twenty five. So in summary, you know, we still believe there's a significant opportunity to transform our business both from a sales, operational, and profitability perspective. We've made good progress in on the strategy, but we've not had a clear run at implementing it with further challenge in f y twenty four. Our short term focus shifted to improving profitability, and we've been successful in that. We finished f y twenty four in line with advised market expectations, and we're on track to deliver significant EBITDA growth in f y twenty five.

25:26 We believe the long term opportunity from delivering that transformation remains, and as I with the step change in sales through multiple growth levers and getting back to an EBITDA margin of 5% in the medium term. That process to evolve the strategy is underway, and we'll share further details in January. And so importantly, we are well placed heading into our peak operational trading period, which is Christmas. So that concludes the presentation. I'll now take any questions that people have. That's great, Gavin, Rosie. Thank you very much for updating. As I will just bring up your cameras. Ladies and gentlemen, please do continue to submit your questions using the q and a tab just situated on the right hand corner of the screen.

26:12 You that the recording of this presentation And then along with a copy of the slides and the published Q and A will be available via your Investor Meeting company dashboard. Gavin and Rosie, you've had a number of questions from investors today. So firstly, thank you to everybody for your engagement. Perhaps, if I may start off with the first one, which reads as follows: Can you share more insights into the performance metrics for newly opened or relocated stores and how they contribute to the overall growth strategy? Are there any particular regions or formats that may be outperforming? Yeah. As we said in the release, the payback on new store openings is running at about a year, which is really, really strong payback. We're happy with that. And as a cohort overall, they are they are performing well. And it's probably we're doing the work as part of the strategic review, but there's certainly up to a 100 additional locations where we believe we could trade profitably and drive strong returns. I think what we found in the last couple of years of openings is

27:17 we retail parks, which we are underrepresented in, are clearly a growth area for us. But those retail parks do take time to mature, which is factoring to our decision on sort of year one sales expectations and returns. The second thing we've we've learned is sort of in a London or or in a m 25. We opened in Richmond and Wonsworth in recent years, those stores haven't met expectations. So we've just eased back from that. We've had some fantastic success in towns like Daventry, Malperth, and with relocations in particular, places like Grimsby, Wolverhampton, Chester, and Watford. So where we have a good strong presence and loyal customer group, but we're often in a slightly poor pitch or on a you know, in a undersized store, we've seen great returns by upsizing or moving to a better pitch.

28:09 So going going forward, you know, we'd like to get after reopening a a few more stores, and we'll likely share that as part of the strategy in January.

28:18 That's great. Thank you. And and I guess just sticking on the themes around stores, there's a few other questions here. Given that store account stores account for around 90% of sales and are performing well, how do you see profitability evolving for both physical and online channels? Will you invest equally in both? Or perhaps will there be a strategic focus on one over the other?

28:41 I think as I said, stores are definitely the lifeblood of the business, and 90% of sales and much higher percentage of profit with the online channel just being breakeven. You know, we want to continue to grow both channels and and invest in growing both channels, but the, you know, the the pound notes spent there will be much more significant within the with within the the store base. Yeah. With the way we view the website is it's it's not only a transactional channel that we we can grow, but it also plays a huge part in in our overall brand and driving customers to stores. So we want to get the time well spent message out there and and and get our brand and proposition out there. A lot of that is gonna come from the social media or email in particular, and that clicks straight through to the websites. The website needs to be a good reflection of our brand. It needs to give a great connectivity to the 511 stores that we have.

29:41 So we will continue to invest in developing the website as a standalone trading channel, but also to perform that role for stores. Things like reserve and collect or store stock visibility will be functions you want to bring. But continuing to invest in, probably got about 50 stores that still need a refit to bring them up to what we would see as a a standard that we're proud of as of today. Continuing to open new stores, relocate existing stores is is a big part of our future plans. And, Peter, just further question from Peter that relates to, I guess, is how many stores do you expect to close or relocate in full year '25? Expect to close up to up to 15 stores. That would depend on how discussions with landlords go on a number of marginal stores over the next few months, we will relocate probably relocate three stores.

30:38 Thanks very much indeed. Any plans to accelerate your growth growth ambitions either through partnerships or maybe opening outside The UK? Partnerships is something we're looking at and considering as part of the new strategy, so we'll share share more details of that in in January. So international expansion isn't something that's currently on the road map. Great. Just switching tones, I guess, around your move to AIM. Have you seen any benefits in terms of accessing new investors since your move from the main list to AIM? So not significantly given that we only moved on to AIM at the very end of our financial year. Obviously, this is a new approach that we've taken for our preliminary results coming onto this platform, and it's something that we're looking to seek out opportunities for over the coming year.

31:32 Great. Thank you. Another question here. In what areas do you expect to see change to achieve the longer term goal of 5% EBITDA margins? I can go so I think the big part of that will be driving sales incremental sales growth, you know, particularly through through both both channels. We we will continue to face cost headwinds, you know, through national living wage and other inflationary costs. So to get back to that 5% EBITDA margin, it really is about using the assets we've got and pushing more sales through those. So we believe we can can grow sales in in both both channels. We're also looking to improve our product margins. We'll see as Rosie's reference, we'll see good growth in margins this year, which will help offset some of those cost headwinds.

32:26 And a big part of the strategy also will be just looking at, you know, making sure we are making efficient use of our cost base as well. I imagine most of that, the savings that we make there will be offsetting other inflationary pressures rather than necessarily improving the EBITDA margin. But, yeah, a combination of sales growth, product margin growth, and, yeah, more efficient use of our cost base. Thank you. And question from Alastair. Thank you, Alastair. Few question. Well done for ending the year in line with expectations. You're planning circa $5,000,000 capital investment and still working on the strategy. So when will you be clear on the priorities to improve efficiency and growth? And do you have a feel for the mix of this?

33:15 Mercy, do wanna answer the overall CapEx question? Yep. Yep. Definitely. So, obviously, we've constrained CapEx slightly this year following a tough peak coming out of FY twenty four with lower profits. We didn't want to increase our capital investment over the course of FY twenty five. But as we're working through our three year plan and investment plan, we're looking to increase that, but certainly not over and above our profit levels. That's great. Thank you very much indeed. Well, guys, that takes care of the questions from investors today. So thank you to everybody for your engagement this afternoon. Gavin and Rosie, I know that investor feedback is important to you. I'll shortly redirect those on the call to give you their thoughts and expectations. But perhaps before doing so, Gavin, I could just come back to you for a couple of closing comments.

34:09 Yeah. Sure. Thanks, Mark. So as we've said, f y twenty four was more challenging than we expected. We we did take decisive action at the turn of the year. We've been successful in ending the year in line with the revised expectations, and we've made a really solid start to f y twenty five. And so, importantly, we're we're in good position ahead of Christmas. So, you know, we're feeling cautiously optimistic as we head into Christmas. We've got some great work ongoing in the background to give much clearer view of our future three year plans and what that looks like both in financial terms and what we'll actually be doing. So I look forward to updating you again in January, but, yes, it's the first time we've done one of these. So thanks for your interest, and look forward to seeing you again in January.