Final Results

Brown (N.) Group PLC 10 May 2001 N Brown Group plc PRELIMINARY RESULTS ANNOUNCEMENT YEAR ENDED 3 MARCH 2001 N Brown Group plc, the Manchester based direct home shopping and fulfilment company, today announces its preliminary results for the 53 weeks to 3 March 2001. The company has delivered a strong performance in what has been a challenging year for the retail industry. The core home shopping and financial services divisions continue to generate increased turnover and profits and the group has continued to invest in and develop its fulfilment division. Highlights of the results include: - Profit before tax £53.1m (2000: £47.6m//) + 11.5% - Operating profit £57.2m (2000 : £51.2m) + 11.6% - Turnover £ 400.5m (2000 : £354.7m) + 12.9% - Earnings per share 13.14p (2000 : 11.53p// *) + 14.0% - Final dividend per share 3.75p (2000 : 3.20p*) + 17.2% - Total dividend per share for the year of 5.20p (2000 : 4.55p*) + 14.3% //Excluding £3.8m exceptional profit on sale of shares in Zendor * Restated to reflect 1 for 1 bonus issue of shares in July 2000 Sir David Alliance CBE, Chairman, said: 'I am delighted to report that the group has continued to perform strongly in what has been a challenging year for both home shopping and high street retailers. 'In these circumstances it is particularly satisfying that we have been able to show strong sales growth of 12% in our core home shopping business. This growth has fully justified the group's decision to widen and strengthen its product ranges, especially in household and electrical goods. 'The improving trend seen in the second half has continued into the current year, with turnover for the first nine weeks being 14% ahead of last year. This reflects the benefits of our continuing investment in customer recruitment, database activities and product development. In addition, we have benefited from a range of measures taken to contain costs. Given the excellent start to the current year, the loyalty of our customers and the service and value we provide to them, I am confident in our ability to perform well again this year.' For further information please contact: N Brown Group plc (On the day) 020 7457 2345 Jim Martin, Chief Executive Tim Kowalski, Finance Director (Thereafter) 0161 236 8256 Websites: www.nbrown.co.uk www.zendor.com Gavin Anderson & Company Neil Garnett/ Louise Evans 020 7457 2345 CHAIRMAN'S STATEMENT In what has been a challenging year for retailing, I am pleased to be able to report another set of record results for the group. Profit before tax increased by 11.5% to £53.1m on turnover which rose by 12.9% to £400.5m in the 53-week period to 3 March 2001. Earnings per share are 14.0% ahead at 13.14p and the Board has recommended a final dividend of 3.75p, bringing the total for the year to 5.20p, up 14.3%. Strategy Our strategy in focusing on direct home shopping, while at the same time launching new initiatives that leverage the assets of our core business, has led to our record of sustained growth. Our product offers are specialist, cost effective and carefully targeted at the right customers. I am also justifiably proud of the speed with which we respond to changes in the market place and in our ability to take advantage of emerging technologies in opening up new sales channels such as the internet. I strongly believe that, with the increasing availability of new technology, changes in consumer lifestyle and the opening up of more channels to market, the direct distance shopping sector is set for a period of appreciable growth. The group is well positioned to benefit from these trends. Home shopping The home shopping sector and the high street have both faced difficult trading conditions in clothing, footwear and household and electrical goods. In these circumstances it is particularly satisfying that we have been able to show strong sales growth of 12% in our core home shopping business. This growth has fully justified the group's decision to widen and strengthen its product ranges, especially in household and electrical goods. The improving trend seen in the second half has continued into the current year, with turnover for the first nine weeks recording a healthy improvement over last year. We market our products through a number of channels. Bi-annual catalogues are supplemented by smaller brochures sent out each month. These are reinforced by our sophisticated telephone operations for both inbound and outbound calls, and by targeted media advertising. In addition, we recently re-launched our fully integrated websites for all main catalogue propositions, and I am delighted with our customers' response to this initiative. The combination of a wider range of goods, exploitation of new channels to market and our well-established tradition of offering value for money to a growing number of customers bodes well for continued growth in the future. Fulfilment Last year we recognised the strategic importance of fulfilment services when we announced the creation of a new division, Zendor. This business markets complete end-to-end fulfilment services, mainly to existing retailers wanting to enter the distance shopping market. Zendor, which is a joint venture owned 75% by the group and 25% by GE Capital, has been further strengthened by the acquisition of Eunite, the e-convergence company. Zendor has reached agreement with several new clients who have forecast their home shopping sales to be over £30m in their first year of operation, with commitments to Zendor having a typical duration of between three and five years. I am encouraged by the prospect of a continuing flow of new business which justifies an increased level of investment in people and resources. Financial services The progress of First Financial, our financial services division, is encouraging, as operating profits have increased from £1.3m last year to £1.6m this year. This has been largely driven by an enhanced financial services database, which enables us to segment and target customers with greater accuracy. We offer appropriate and timely financial products such as life assurance, house and contents insurance and personal loans, where we believe there is significant opportunity and which we are developing with existing home shopping customers and new recruits. Recognising this, we have complemented our existing management team with specialist appointments from the credit industry. Governance We have further promoted the practice of risk management in a positive way throughout the group and this is now an integral part of our planning and management thinking. We also fully accept our social and ethical responsibilities and are continuing to develop our approach to this important issue. Prospects The improving trend seen in the second half has continued into the current year, with turnover in core home shopping for the first nine weeks being 14% ahead of last year. This reflects the benefits of our continuing investment in customer recruitment, database activities and product development. In addition we have benefited from a range of measures taken to contain costs. Given the excellent start to the current year, the loyalty of our customers and the service and value we provide to them, I am confident in our ability to perform well again this year. Management and staff On behalf of the shareholders, I would like to thank all of our management and staff for their continued outstanding contribution in achieving record results. Sir David Alliance CBE 10 May 2001 CHIEF EXECUTIVE'S REVIEW I am delighted with the further progress made this year, with group turnover up by 12.9% to £400.5m and profit before tax up by 11.5% to £53.1m. A higher rate of growth in the second half reflects an improved demand for our clothing ranges, allied to increased contact with carefully selected customers to introduce them to our new ranges of household and electrical products. This was achieved notwithstanding the impact of the fuel dispute in September. HOME SHOPPING Financials The core home shopping business achieved a full year increase in turnover of 12.3% to £396m and operating profit rose by 14.1% to £57m. Lower markdowns have offset the effect of a significant increase in sales of the traditionally lower margin household and electrical products to produce an overall improvement in gross margin from 55.8% to 56.4%. Distribution costs were up by 10.7%, which is lower than the 14.0% increase in the volume of sales. We have made further investments in marketing to increase the retention and spending of our established customers, which accounts for most of the rise in sales and administration expenses of 13.9%. These factors have contributed to an improved operating margin of 0.3% to 14.4%. Markets Our main competition is from the high street, where there has been no growth in clothing and footwear sales over the year, although household and electrical products have shown a modest increase. The home shopping sector reflects this trend except for menswear and footwear which have been less successful. This sector is repositioning itself away from large catalogues carrying all inclusive prices to more focused, direct publications with unbundled pricing where separate charges are made for credit and other services. Sales mix Womenswear sales increased by 9% to £221m, a result which strengthened towards the end of the year. Menswear sales rose by 3% to £33m reflecting a good recovery of 9% in the second half after a fall of 3% in the first half. There was a similar trend in footwear sales where the second half increase of 7% resulted in growth of 1% for the year. Tougher market conditions in apparel have led us in recent years to increase our investment in household and electrical products. This is now paying dividends and, taking into account the £5m of turnover generated this year by Teleview Direct, our electrical consumer products subsidiary, the 28% increase in sales of these products for the first half has continued at the same rate for the year as a whole. The excellent growth in household and electrical products has increased their share of total turnover to 27%. Womenswear, however, at a 56% share is still our major product category, with footwear at 9% and menswear at 8%. Brands We have a wide and growing portfolio of catalogue brands focused on different groups of customers. The younger sector of our market are those women in the 30 - 45 years age group to whom we target the publications Fashion World, Classic Combination and, more recently, Simply Be. More marketing and recruitment activity has been directed at this group to produce an above average growth in sales of 16% to £77m, increasing its share to 19% of overall turnover. Catalogues fulfilling the aspirations of mid range customers, who are generally aged between 40 - 65 years, include J D Williams, Oxendales, Ambrose Wilson and Fifty Plus, all providing merchandise in a wide range of fittings and sizes. This is the largest customer group, representing 70% of sales which increased in the year by 11% to reach £277m. The needs of our older customers, many of whom are in retirement, are met by the catalogues of Sartor, Bury Boot & Shoe and, more recently, Special Collection. Sales from this group have increased by 9% to £26m. Channels to market - Catalogues The larger bi-annual catalogues account for half of our turnover, with smaller specialist brochures, sent out each month, generating an increasing share. In this way we can tailor the size and content of monthly publications to the natural selling time for products within the season. This flexibility enables us to create an exciting and frequent contact strategy with our customers, recognising their personal preferences and patterns of buying. In addition, we can regulate the level of our marketing investment to take into account a number of factors including profitability and market forces. Our approach also allows us, where appropriate, to adjust our prices so that they remain competitive with other retailers. - Telephone Almost 80% of all sales are now received by telephone and direct customer contact allows us to offer other products and services during the call. This order-building activity contributed £9m of sales, having grown in the year by 22 %, and we feel encouraged that, with further planned investment, this activity will continue to grow in the medium term. We have been pleased with the reaction of those customers who have received calls from our out-bound telemarketing teams offering a range of products and promotions, which has added £11m to sales. The investments we have made in text, queuing and other support systems should lead to further tangible benefits. - Internet We are delighted with the increasing number of our customers who are using the internet. We have a web site for each of our main brands, providing a user- friendly way of navigating through the product range which displays a full description and image of each item. These sites were enhanced last April to provide near-time information on stock availability and permitting secure access to a customer's personal account. They are fully integrated with the company's order processing systems, thus reducing transaction costs on sales through this channel. Sales in the year were £2.2m but the current annualised rate is in excess of £11m, giving us confidence about the importance of this channel in the future. We have found that customers using the internet are generally our more active younger customers and our current assessment is that around half of these sales are fully incremental. - Publications and TV Newspapers, magazines and direct response television are all channels which we use to recruit new customers and, in many cases, act as a prompt to encourage existing customers to buy from the advertisement or refer back to their catalogue. - Door to door House of Stirling operates as a door to door service for the collection of weekly payments, which is popular with a significant proportion of consumers for whom credit is not generally available. The business has improved its profitability on sales which have increased by 13 % to £11m with the benefit of an improved sales force, management controls and systems. Customer base The number of active established customers has increased during the year by 5.5% to 2.1 million, with an increase in their average spending of 6.5%. We have maintained our investment in customer recruitment at a time when the market has seen a reduction in media spend. Our direct home shopping formula provides us with greater flexibility and has enabled us to make further marketing investments to established customers on our database. This has encouraged more customers to buy from one of our catalogues and the frequency of their spending has also increased. One of the keys to our success over the last decade has been the level of our investment in database management systems and people, which has materially improved our ability to match customers with offers of the right products and services. Price deflation Some severe price deflation has been evident in the market over the last two years, caused by a combination of lower buying prices, discounting to clear stocks and an increasingly value conscious customer. The impact of this situation has been less severe for us but there has still been a fall in the selling price of clothing products of around 3% compared with last year. However, an increase in sales of higher priced household and electrical products has reduced this to an overall reduction of 1.6%. The recent weakness of Sterling has had the effect of stabilising selling prices but our medium term planning reflects having to trade in an increasingly competitive marketplace. Credit One of the benefits of home shopping is that customers can take advantage of a variety of flexible credit plans to enable them to more effectively manage the cost of their purchases. We are continuously developing credit propositions which match the customers' requirements to the type of product purchased. There was an increase of 7% to 1.5 million in the number of customers operating credit accounts, which are mostly interest bearing. The average account balance at the year end increased by 6% to £136. FULFILMENT Investment We have made further investments during the year, principally in an additional warehouse in Rochdale, an extension to the high bay at our main warehouse in Shaw and improvements to our distribution sorting systems. The total capital expenditure relating to fulfilment activities for our core business and that of third party clients is £12m. Zendor We continue to develop and offer all of the skills and resources that new entrants to the e-commerce market need in order to establish themselves and succeed. Principally this comprises order and payment processing, customer services, catalogue design and distribution, database management, warehousing, delivery and handling returns. Our 25% partner, GE Capital, contributes its wide knowledge of consumer credit and account management. We believe Zendor to be in a very strong position to provide these skills to those companies who might otherwise take many years, at a substantial investment, to develop themselves. Zendor is now working with a number of clients in industries ranging from retailing to leisure. Home shopping sales, which Zendor will fulfil on behalf of clients, have been estimated by those clients to be in excess of £30m in their first full year of operation. Last August we acquired a 60% controlling interest in Eunite, the e- convergence company and a leading provider of multi channel e-commerce solutions. The cost of this acquisition was £7m and we are able to acquire the remaining 40% over the next two years at prices which are geared to the achievement of profit targets. This acquisition adds to Zendor's fulfilment strengths, furthering its ability to provide clients with a complete end to end service solution. Financials In addition to the capital investment, we have continued to spend actively on people and other resources in order to achieve success for this business in the medium term. As a result, Zendor's operating loss for the year is in line with our plan at £0.7m and the post-acquisition losses of Eunite are £0.7m, again as expected. FINANCIAL SERVICES The financial services division which operates as First Financial began trading in 1998 and has grown organically as a commission based intermediary between principals and customers on our home shopping database. Sophisticated information on its own database includes such data as lifestyle surveys, insurance renewal dates and dates of birth. The operating profit was £1.6m, an increase of 21% on last year. We have recognised the significant opportunity in developing personal loans and other consumer financial services and to meet this challenge we have reinforced our existing management team with new appointments from the industry. THE WAY FORWARD The strength of our core business lies in the particular sector in which we have chosen to operate, which reflects the favourable demographics of an ageing and generally more affluent population. We have an outstanding team of people who are fully committed to our strategic direction of further developing our core direct home shopping as well as the complementary businesses of fulfilment and financial services. I would like to thank all of them for their excellent contribution. I believe we have a sound strategy in place and look forward to the future with confidence. Jim Martin 10 May 2001 GROUP PROFIT AND LOSS ACCOUNT for the 53 weeks ended 3 March 2001 53 weeks 52 weeks % ended ended Increase 3 March 26 Feb 2001 2000 Note £'000 £'000 Turnover 1 400,492 354,733 12.9% --------- --------- Operating profit 2 57,154 51,208 11.6% Profit on partial sale of subsidiary - 3,802 Share of associates' operating profit/(loss) 253 (132) Income from listed investments 44 53 Interest payable (4,398) (3,564) 23.4% --------- --------- Profit on ordinary activities before taxation 53,053 51,367 Tax on profit on ordinary activities (15,332) (14,366) 6.7% --------- --------- Profit on ordinary activities after taxation 37,721 37,001 1.9% Equity minority interests 427 115 --------- --------- Profit for the financial year 38,148 37,116 2.8% Dividends 3 (15,135) (13,187) 14.8% --------- --------- Retained profit for the year 23,013 23,929 -3.8% --------- --------- Earnings per share 4 13.14p 12.85p 2.3% --------- --------- Diluted earnings per share 4 13.04p 12.72p 2.5% --------- --------- Adjusted earnings per share 4 13.14p 11.53p 14.0% --------- --------- Adjusted diluted earnings per 4 share 13.04p 11.42p 14.2% --------- --------- Dividends per share 3 5.20p 4.55p 14.3% GROUP BALANCE SHEET as at 3 March 2001 2001 2000 £'000 £'000 Fixed assets Intangible assets 9,307 2,885 Tangible assets 70,826 62,758 Investments 3,441 3,199 --------- --------- 83,574 68,842 Current assets Stocks 37,814 35,467 Debtors 244,860 202,806 Cash at bank and in hand 3,710 5,083 --------- --------- 286,384 243,356 Creditors Amounts falling due within one year (91,146) (88,471) --------- --------- Net current assets 195,238 154,885 --------- --------- Total assets less current liabilities 278,812 223,727 Creditors Amounts falling due after more than one year (78,193) (47,941) Provisions for liabilities and charges (3,725) (3,253) --------- --------- Net assets 196,894 172,533 --------- --------- Capital and reserves Called up share capital 29,298 14,634 Share premium account 4,919 18,714 Revaluation reserve 1,576 1,511 Profit and loss account 161,637 138,103 --------- --------- Equity shareholders' funds 197,430 172,962 Equity minority interests (536) (429) --------- --------- Capital employed 196,894 172,533 --------- --------- Gearing 40% 26% GROUP CASH FLOW STATEMENT for the 53 weeks ended 3 March 2001 2001 2001 2000 2000 £'000 £'000 £'000 £'000 Net cash inflow from operating activities 24,288 37,465 Returns on investments and servicing of finance Interest paid (4,674) (3,219) Interest element of finance lease payments (203) (246) Dividends received from investments 44 53 ------- ------- Net cash outflow from returns on investments and servicing of finance (4,833) (3,412) Taxation Corporation tax paid (12,427) (14,080) Capital expenditure and financial investment Purchase of tangible fixed assets (19,994) (14,174) Purchase of intangible fixed assets (100) - Purchase of fixed asset investment (117) - Sale of tangible fixed assets 45 175 Decrease in own shares held in trust 178 757 ------- ------- Net cash outflow from capital expenditure and financial investment (19,988) (13,242) Acquisitions and disposals Purchase of subsidiary undertakings (4,825) (866) Cash at bank and in hand acquired with subsidiary undertakings 291 71 Purchase of investment in associated undertaking - (9) Partial sale of subsidiary undertaking - 3,802 ------- ------- Net cash (outflow)/inflow from acquisitions and disposals (4,534) 2,998 Equity dividends paid (13,494) (12,270) ------- ------- Cash outflow before management of liquid resources and financing (30,988) (2,541) Management of liquid resources Purchase of current asset investments - (513) Sale of current asset investments - 1,021 ------- ------- Net cash inflow from management of liquid resources - 508 Financing Issue of ordinary share capital 147 535 Increase in bank loans 31,000 3,000 Capital element of finance lease payments (807) (858) ------- ------- Net cash inflow from financing 30,340 2,677 ------- ------- (Decrease)/ increase in cash in the year (648) 644 ------- ------- NOTES TO THE ACCOUNTS 2001 2000 % 1 Analysis of turnover £'000 £'000 Increase Home shopping 395,984 352,762 12.3 Fulfilment 2,354 - - Financial services 2,154 1,971 9.3 ------- ------- ------- 400,492 354,733 12.9 ------- ------- ------- 2001 2000 % 2 Analysis of operating profit £'000 £'000 Increase Home shopping 56,931 49,880 14.1 Fulfilment (1,385) - - Financial services 1,608 1,328 21.1 ------- ------- ------- 57,154 51,208 11.6 ------- ------- ------- 3 An interim dividend of 1.45p per ordinary share was paid on 5 January 2001 to shareholders on the register at the close of business on 1 December 2000. A final dividend of 3.75p per ordinary share is proposed to be paid on 20 July 2001 to shareholders on the register at the close of business on 22 June 2001. 4 The calculation of earnings per share is based on the profit for the financial year and the weighted average number of shares in issue during the year of 290,222,000 (2000: 288,924,000). For diluted earnings per share, the weighted average number of shares of 292,486,000 (2000: 291,832,000) has been calculated after adjusting for the potential dilution of outstanding share options. An adjusted earnings per share figure has also been calculated, which in the prior year was based on the profit for the financial year excluding the effect of the exceptional profit on the partial sale of the subsidiary undertaking Zendor.com Limited of £3,802,000. It has been calculated to help provide a clearer understanding of the underlying profitability of the group. The prior period comparatives for earnings per share and dividends per share have been restated to reflect the one-for-one bonus issue of shares on 7 July 2000 by way of capitalisation of a proportion of the share premium account. 5 The accounts have been prepared using accounting policies stated in the company's report and accounts for the 52 weeks ended 26 February 2000. The summary of results for the 53 weeks ended 3 March 2001 and 52 weeks ended 26 February 2000 do not constitute full financial statements within the meaning of section 240 of the Companies Act 1985. Full group accounts for the 52 weeks ended 26 February 2000 have been delivered to the Registrar of Companies in England and Wales with an unqualified auditors' report. Full group accounts for the 53 weeks ended 3 March 2001 will be delivered to the Registrar of Companies.

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