24th Mar 2006 10:18
Sherwood Group PLC24 March 2006 SHERWOOD GROUP PLC Preliminary results for the year to 31 December 2005 Sherwood Group plc ("Sherwood" or "the Group") is a designer and supplier ofladies' intimate apparel, with a portfolio of brands comprising Lepel, MissLepel, Discover Mademoiselle, Urban Nights and Ted Baker Intimates HIGHLIGHTS • Significant expansion of branded operations, with the addition of Ted Baker Intimates to the portfolio • Total turnover of £21.7m (2004: £27.3m) • Profit before tax £0.9m (2004: Loss of £3.7m), after non-recurring items • Cash resources of £9.5m to be retained for development of the business • Sale of Borrowash site expected to add at least a further £3.2m to cash resources Michael Hobbs, Chairman, comments: "Sherwood has been going through major changes over the last few years, but hasbeen so focused on restructuring and dealing with the decline of its PrivateLabel business, that it has not had time to fully develop a growth strategy. TheGroup is now well positioned for growth and is focusing on developing its branddistribution strategy." 24 March 2006 ENQUIRIES: Sherwood Group plc Tel: 0115 946 1070Michael Hobbs, ChairmanCarol Duncumb, Chief ExecutiveLaurence Ford, Finance Director College Hill Tel: 020 7457 2020Gareth David Chairman's Statement This is a challenging time in the life of the Sherwood Group and I am extremelypleased to have taken on the role of Chairman. Whilst we are not presenting astrong set of results for last year's continuing business performance, I ampleased by the steps that the group has taken to transform itself and preparefor the exciting opportunities ahead. Total sales for the year fell by 21% to £21.7m (2004: £27.3m), reflecting ourprogressive and planned withdrawal from Private Label supply. The operatinglosses from continuing operations before one-off pension advisory andre-organisation costs were £249,000 (2004: profit of £723,000) but the one-offsale of fixed assets and net interest income enabled us to achieve a pre-taxprofit for the year of £911,000 (2004: loss of £3.68m). Earnings per share were0.6p (2004: loss of 3.5p). I am however pleased to announce that a smalloperating profit on continuing activities, before pension advisory andreorganisation costs, has been achieved in the second half of the year, asindicated in the Interim Report. One of the key factors in my decision to take on the role of Chairman, and buyshares in the group, was the absolute clarity shown by our Chief Executive,Carol Duncumb, as to what needs to be done to sort out the business. With theloss of two major customers, Allders and Littlewoods Stores, the morechallenging retail environment for Private Label suppliers and greater pressureon China-based sourcing, the business needed to take a long hard look at itselfand establish a clear raison d'etre. Ongoing Strategy There are a number of major changes that the business has made in the last sixmonths to re-focus and re-align its operation: • To re-position the group as a brand-led and focused operation (the addition of Ted Baker to our portfolio of brands has given us confidence in this respect). • To only undertake Private Label supply with retail customers if the business is complementary and profitable. • In light of the change in emphasis and a reduction in total group sales of 21%, the workforce has been completely reviewed and a significant reduction in personnel has occurred. This has created a much stronger, more focused platform to take the business forward. All parts of the organisation have been included, from the Board to the operational teams. We have seen a headcount reduction of 29% and a corresponding reduction in employment costs. • To support the reduction in the workforce, we have continued to invest in our key IT systems, processes and logistics function to help us work smarter and more efficiently. These changes, even though difficult for those affected, have had an energisingeffect on the remaining organisation. Not surprisingly, the shift to being abrand-led business has had a positive halo effect on the Private Labeloperation. We are now saying 'No' to marginal and often unprofitable business.On occasions the retail customer has come back to us prepared to accept moresensible terms rather than lose us as a supplier. This renewed confidence is making us more attractive! We are recognised as aspecialist Private Label supplier that can add value, especially through designand our technical function. However, we are continually fighting againstongoing price deflation and changes in trading terms that will always make thePrivate Label business less attractive and more challenging. We will continue toreview where this part of the business sits in our overall scheme but expectthat it will continue to reduce as a proportion of total sales. We are developing our long term strategic plan and believe that with soundinvestment and careful stewardship we can return the business to sensible profitperformance through the ongoing trading operations and from careful and targetedinvestment, including mergers and acquisitions. I am pleased to confirm that following the year end on 17 March 2006 our firstacquisition took place with the purchase of the brand and assets of the CharnosLingerie business from the Administrators of Nelson I.A. Limited for a cashconsideration of £585,000. This brand is a good fit for Sherwood and will giveus additional distribution channels to exploit. The brand had sales of £4.3million in the financial year to 31 December 2005 and made a small operatingprofit of £0.1m. (Source: Unaudited management accounts from Nelson I.A.Limited). The acquisition is being funded out of cash resources and the considerationrelates to the purchase of the Charnos Lingerie brand and its associatedtrademarks plus the transfer of 44 staff. The consideration comprises goodwill,stock and fixtures and fittings. We worked quickly to secure this opportunity,completing the deal in nine working days. The operational team are now workingon the integration of the two businesses and are optimistic about the future. We believe a change of name for the Group will be an important indicator to allthat we are developing a different business. We will share the proposed namesoon and be looking for shareholder support to make this change at theforthcoming AGM. Pension Fund and Share Buy-Back One of the key decisions that the Board has made in the last month is in respectof the share buy-back and subsequent cash injection into the pension fund. The Board has decided not to follow through with the proposal indicated in thestatement of 10 January 2006. For the company to return approximately 3p (£3.2m)to shareholders we would have to make an additional contribution to the pensionfund of over £7.5m. This would have reduced the ongoing potential of thecompany. We have discussed the proposal with our largest shareholders and have nowdecided to hold all the available cash in the business, so that it can be usedto grow the company and invest in its long term future. We will work with thepension trustees, and initial discussions have already begun, to secure longterm funding for the pension, through the Scheme Specific Funding exercise andwork on growing the business so that our pension liabilities are graduallydiminished over time. We fully recognise our liabilities and commitments in respect of the pensionfund but believe we have a wider commitment to all our stakeholders in thecompany, shareholders, employees and pension members alike to grow the businessfrom its current position. We will take on a much more active role in managing our obligations to thepension fund and, where possible, offer appropriate cash transfers to thosedeferred members that wish to take more control of their own affairs. We willwork with the pension trustees to achieve this as economically as possible andget more involved in all pension matters, including investment strategy. Werecognise the need to actively manage this liability to the company and expectthat as the business grows the corresponding magnitude of the liability willreduce. Sherwood is a company with a future and ambition. By retaining the cash reserveswithin the business, meeting our obligations to the pension fund over a longerperiod through Scheme Specific Funding and then utilising the remaining funds toprofitably grow the business through a combination of organic growth andsensible mergers and acquisitions activity, the future looks much brighter forall stakeholders. Borrowash Building The sale of the Borrowash building, whilst delayed by planning complexities, isnow approaching completion. The proceeds from the sale are expected by the endof June 2006 and cash resources should be improved by at least £3.2 million. Prospects Sherwood has been going through major changes over the last few years, but hasbeen so focused on restructuring and dealing with the decline of its PrivateLabel business, that it has not had time to fully develop a growth strategy. TheGroup is now well positioned for growth and is focusing on developing itsbranded distribution strategy, whilst continuing to bring ongoing tradingperformance back to an acceptable level. MICHAEL HOBBSChairman 24 March 2006 CHIEF EXECUTIVE'S REVIEW During the past year, all our divisions have been through the turbulence ofrestructuring. This has been driven amongst other things by changes ofownership on the high street, resulting in a need to accelerate the pace of thestrategic change previously identified and initiated in our clothing divisions. Total group sales on continuing operations were down by £4.7 million (18%). Theimpact described above was felt early in the year in both our Branded andPrivate Label divisions with the closure of the Allders department stores. Thiswas followed during the Spring by the decision of our major swimwear supplier tosupply direct to retailers resulting in a further loss of order book and arequirement to reduce overhead during the mid part of the year. By early July the announcement of the sale of Littlewoods Stores to Primarkresulted in further loss of pre-Christmas turnover together with a pressingrequirement to significantly reorganise our Private Label divisions. I have always recognised the need to take control of the environment in which wefunction and this has resulted in a strategy based around the development andgrowth of intimate apparel brands whilst operating a controlled exit fromunprofitable Private Label sales. In the financial year ended 31 December 2005,Branded sales accounted for approximately 33% of total sales, reflecting ourcontinuing transformation (25% 2004). In the current financial year, we expect a greater shift towards Branded salesas we deliver benefits from our recent brand acquisition of Charnos Lingerie. With the challenges of 2005 behind us, we have aggressively addressed costs.Where possible, we have retained experienced Private Label staff. The process ofimproved cost controls remains ongoing, however we will be stepping up the levelof investment behind our brands which include marketing, PR and exhibitions. Brands I am pleased to report that our Branded turnover for 2005 increased by 10%.Highlights by brand are as follows:- • Lepel - is considered a leading co-ordinated lingerie house. Duringthe year, our relationships with major retailers strengthened as we worked hardto establish continuity in key styles and reduce leadtimes. At the same time,we have identified the need to improve our service to specialist independent andsmaller store groups. Whilst remaining committed to our key strengths ofdesign, product quality and attention to detail, we also successfully launched anightwear collection, which, through the Autumn, featured in all the premierdepartment stores. However, Lepel's swimwear ranges suffered a downturn inturnover largely due to poor Spring weather and we are working on new ranges toaddress this with the addition of accessorised co-ordinates. • Ted Baker Intimates - we continue to be delighted with our licencepartnership with Ted Baker. As expected, we have had a strong and positivereaction from many of Ted Baker's trustees (Ted Baker retailers and wholesalecustomers) as well as a significant number of new accounts. In particular, ourSpring 2006 swimwear collections have generated a great deal of PR activity andearly indication is for a positive retail sell-through. The recent HarrogateLingerie Exhibition also witnessed a strong reaction to our Autumn 2006 lingerieand nightwear ranges. As previously reported, the benefits from Ted Baker will not be felt until 2006whilst there has been a requirement for substantial upfront costs of £180,000impacting the 2005 result. The management at Ted Baker have been very supportiveand we expect to learn a great deal from this very well run business. • Charnos Lingerie - since the year-end, the acquisition of this leadingheritage bra and co-ordinates business marks a significant turning point for theSherwood Group and acts as a perfect complement to our current stable of brands. Charnos captures a sophisticated consumer and appeals to more high endretailers than currently available to us through our other divisions. Moreover,we gain further exposure to its strong independent customer base, both in the UKand Eire. During the rest of this trading year, we will concentrate on a well managed andcontrolled integration whilst taking advantage of the obvious synergies and costsavings. Private Label The Private Label sales were down £5.3 million (27%) on last year. This is as aresult of the group's continued exit from low margin Private Label business andthe forced reduction of supply through changes in the high street. Relentlessexpectations by retailers in their need to lower prices whilst improving grossmargins has inevitably led to a conclusion where third party operators, such asthe Sherwood Group and significantly Far East manufacturers, have needed tore-evaluate routes to market. We are introducing a firm policy of supplying under a partnership rule thatincludes adherence to lead times and margin requirements. The impact of the China quota confusion in the Autumn also further erodedprofits as we sought alternatives at short notice whilst having to acceptcancellations from customers who used the situation to manage their stockrequirements in difficult trading conditions. There is some caution once againsurrounding quotas for later in the year. However, we are putting a great dealof effort in protecting ourselves from a repetition by widening our sourcingbeyond China. Despite the difficulties faced, I am pleased to report a good performance in theyear from our Halle nightwear division. Whilst ongoing turnover will beaffected by the loss of Littlewoods Stores, the division, through tightmanagerial control and improved supplier relationships, delivered a commendableresult. Outlook This is an exciting time for the business and we are in line with expectationsto deliver growth in our branded divisions. Moreover, with a re-focused andwell managed Private Label operation, we expect to improve our performance thisyear. Carol DuncumbChief Executive 24 March 2006 Financial Review Profit and loss account The financial statements reflect a number of key factors associated with thestrategic refocusing of the group towards its Branded operations. The processwas accelerated during the year by deterioration in Private Label sales, withadditional costs being incurred as part of the reorganisation programme thataddressed the associated cost base. The share buy-back approval process alsoincurred significant expense whilst the continuation of asset realisations fromdiscontinued activities has continued to bolster profitability. The group made an operating loss of £909,000 for the year ended 31 December 2005(2004: loss of £945,000). Profits from asset realisations and interest generatedfrom cash balances contributed to a profit after tax of £609,000 (2004: Loss£3.9 million after recycling £4.5 million of goodwill). Continuing operations Despite an increase of 10% in Brand sales, a major decline in Private Labelsales of 27% has caused turnover to reduce to £21.7m (2004: £26.4m). Furthermoregross margins have fallen to 20.7% (2004: 22.7%). The margin reduction stemmedparticularly from price pressures and higher supply costs in the Private Labelsector, although this has been partly countered by the positive effects of ahigher Branded sales mix and a favourable US dollar exchange rate. Continuing activities reported an operating loss of £1,006,000 (2004: profit£655,000, before the share of associate company losses). Action taken tocounteract the significant reduction in turnover has resulted in £509,000 ofreorganisation costs being incurred, which includes the costs of redundancies,termination costs of former directors as well as the legal and professionalcosts of transferring to AIM. A further £248,000 of costs has been incurred aspart of the process of seeking Pension Regulator approval for a share buy-back. Discontinued operations Discontinued operations produced an operating profit of £97,000 (2004: Loss£1,267,000) including the release of an impairment provision of £343,000. The process of asset realisation from the group's discontinued Lace activitieshas also continued with the sale of the last of the group's lace knittingmachines. Proceeds of the sale of £1.9 million generated a profit of £1.6million. The one major outstanding item in the asset realisation programme isthe sale of the Borrowash property. During the year further costs have been incurred with regards to the closure ofthe discontinued operations and also on clearance of the Borrowash site in orderto provide vacant possession to the purchaser, David Wilson Homes Limited.Whilst planning permission for residential use is still to be finalised we nowanticipate that, in the absence of further planning complexities, the sale willbe completed at the end of June 2006. Accordingly the property has beenreclassified on the balance sheet as an asset held for resale. Proceeds of thesale should exceed £3.2million and as a consequence an impairment provision of£343,000 relating to a previous valuation of the property has been released tothe profit and loss account. The group's associated company, Guy Birkin Limited, is in the process of beingwound up. Whilst a number of assets will be realised as part of this process,and no further liabilities are likely to be incurred by the group, the group'sshare of any potential distribution cannot be quantified at this time. Pensions The pension deficit on an FRS 17 basis has reduced to £6.7m (2004: £8.1m) beforethe related deferred taxation credit. The improved position is attributable toadditional company contributions as well as better than anticipated returns onthe scheme's investments during the year. Following the Board's decision not to undertake a share buy-back, it has alsodecided that it will not proceed with the accelerated funding required by thePensions Regulator as a condition of the share buy-back. Instead, the Boardintends to enter discussions with the Pension Scheme Trustees over the long-termfunding requirements required under the new Scheme Specific Funding regimeintroduced by the Pensions Act 2004. This process will be initiated as part ofthe triennial actuarial valuation of the scheme at 1 January 2006. Althoughthis process must be finalised by 31 March 2007, the Board intends to work withthe Pension Scheme Trustees to seek agreement on funding in the next few months. At the same time, the Board intends to make available additional funds toenable those former employees who wish to transfer their benefits out of theScheme to do so on suitable terms. Taxation The deferred tax charge reflects the utilisation of the group's tax losses andthe release of the associated deferred tax asset. Consolidated balance sheet Net assets have increased to £14.6m (13.9 pence per share) from £14.0m (12.6pence per share) due to the profit in the year and the reduction in the pensiondeficit. The 31 December 2005 cash balance is valued at 9.0 pence per share. Fixed assets During the year the group invested £151,000 in new warehousing and distributionsystems in order to cater for the increasing pick & pack processes demanded bythe expanding Branded operations. In addition, further investment has been madein Brand IT systems and expenditure has also been incurred on upgrading thegroup's sales showroom facilities, including the establishment of a showroom andsales office within the Ted Baker offices in London. Cash flow Net cash balances reduced by £240,000 in the year to 31 December 2005 to£9,495,000, with an operational cash outflow of £1,619,000, including pensioncontributions in excess of operating charges of £710,000, pension advisory costsrelating to the proposed share buy-back of £248,000 and reorganisation costs of£509,000, being major contributing factors. In addition, the Company also took advantage of market conditions to purchase5,547,000 (5%) of its own shares for a consideration of £590,000. Net cash flow was supported by the asset realisation programme, which generated£1.9million from the sale of lace knitting machines. The investment of cashbalances on deposit generated interest received of £406,000. Treasury activities and policies Treasury operations are managed within policies and procedures approved by theBoard. The main financial exposure risk is exchange rate movement on the valueof its purchases. The group entered into a number of forward foreign exchangecontracts based on forecast payments to suppliers. The amount of currencycovered at 31 December 2005 was US$12.0m. Impact of transition to International Financial Reporting Standards (IFRS) onconsolidated group financial statements. Following the company's transfer to AIM in May 2005 the requirement to complywith IFRS has been deferred until 1 January 2007. The group, however, is mindfulof the impact of the new financial standards on its results and will continue tomonitor very closely any developments. Annual General Meeting The meeting will be held at the company's registered office, Fields Farm Road,Long Eaton, Nottingham, NG10 1GT on 16th May 2006 at 10.30 am. LAURENCE FORDFinance Director 24 March 2006 Group profit and loss account Continuing Discontinued Continuing Discontinued operations operations operations operations Total Total 2005 2005 2005 2004 2004 2004 £'000 £'000 £'000 £'000 £'000 £'000Turnover 21,720 - 21,720 26,382 949 27,331 Cost of sales (17,231) - (17,231) (20,401) (1,773) (22,174)Gross profit / (loss) 4,489 - 4,489 5,981 (824) 5,157 Distribution costs (3,884) - (3,884) (3,590) (186) (3,776) Administrative expenses (1,611) 97 (1,514) (1,736) (257) (1,993) Administrative expensesinclude: (248) - (248) (38) - (38) Pension advisory costs (509) - (509) (30) - (30) Reorganisation costs - 343 343 - - - Impairment reversal (854) (246) (1,100) (1,668) (257) (1,925) Other Operating (loss) / profit (1,006) 97 (909) 655 (1,267) (612)Share of operating loss of - - - (333) - (333)associateTotal operating (loss) / (1,006) 97 (909) 322 (1,267) (945)profit including share ofassociate Profit on sale of fixed assets - 1,635 1,635 - 1,931 1,931 Loss on sale of operations - - - - (204) (204) Goodwill previously - - - - (4,522) (4,522)written-off Profit/ (loss) on ordinaryactivities before interest (1,006) 1,732 726 322 (4,062) (3,740) Other interest receivable andsimilar income 1,254 - 1,254 1,057 - 1,057 Interest payable and similar (1,069) - (1,069) (998) - (998)charges Profit / (loss) on ordinary (821) 1,732 911 381 (4,062) (3,681)activities before taxation Tax on profit / (loss) onordinary activities 188 (490) (302) (126) (91) (217) Profit / (loss) on ordinary (633) 1,242 609 255 (4,153) (3,898)activities for the yearAmount transferred to / (from) (633) 1,242 609 255 (4,153) (3,898)reserves Basic and diluted profit / (0.6p) 1.2p 0.6p 0.2p (3.7p) (3.5p)(loss) per share Group balance sheet 2005 2004 £'000 £'000Fixed assets Intangible assets 885 950 Tangible assets 1,942 3,789 2,827 4,739 Current assets Asset held for resale 1,996 - Stock 4,268 4,712 Debtors 4,656 4,967 Cash at bank and in hand 9,495 9,735 20,415 19,414 Creditors: amounts falling due within one year (3,910) (4,469)Net current assets 16,505 14,945 Total assets less current liabilities 19,332 19,684 Net pension scheme deficit (4,714) (5,658)Net assets 14,618 14,026 Capital and reserves Called up share capital 5,270 5,547 Share premium account 89 89 Capital redemption reserve 415 138 Profit and loss account 8,844 8,252Shareholders' funds 14,618 14,026 Statement of total recognised gains and losses 2005 2004 £'000 £'000Profit / (loss) for the year 609 (3,898) Currency translation differences on overseas net investment (28) (62) Actuarial gain / (loss) on pension scheme 859 (1,400) Movement on deferred tax asset relating to pension scheme (258) 278Total gains and losses recognised in the year 1,182 (5,082) Reconciliation of movements in shareholders' funds 2005 2004 £'000 £'000Opening shareholders' funds 14,026 14,586 Profit / (loss) for the year 609 (3,898) Other recognised gains and losses 573 (1,184) Goodwill previously written-off - 4,522 Purchase of own shares (590) - Net increase / (decrease) in shareholders' funds 592 (560) Closing shareholders' funds at 31 December 14,618 14,026 Group cash flow statement 2005 2005 2004 2004 £'000 £'000 £'000 £'000 Net cash outflow from operating activities (1,619) (660) Returns on investments and servicing of financeInterest received 406 274 Net cash inflow from returns on investments and servicing 406 274of finance TaxationOverseas tax - 108Net cash inflow from taxation - 108 Capital expenditure and financial investment Purchase of intangible asset - (968) Purchase of tangible fixed assets (373) (265) Sale of tangible fixed assets 1,936 5,084 Net cash inflow from capital expenditure and financial 1,563 3,851 investment Acquisitions and disposals Purchase of investment - (333) Net cash outflow from acquisitions and disposals - (333) Cash inflow before financing 350 3,240 Financing Purchase of own shares (590) -Net cash outflow from financing (590) - (Decrease)/increase in cash resulting from cash flows (240) 3,240 Reconciliation of net cash flow to movement in net funds 2005 2004 £'000 £'000(Decrease)/increase in cash resulting from cash flows (240) 3,240Net funds at 1 January 9,735 6,495Net funds at 31 December 9,495 9,735 Reconciliation of operating loss to net cash outflow from operating activities 2005 2004 £'000 £'000Operating loss (909) (612) Depreciation and amortisation 322 830 Impairment reversal (343) - Loss / (profit) on disposal of fixed assets 9 (1) Decrease in stock 444 1,708 Decrease /(increase) in debtors 155 (156) Decrease in creditors (587) (1,742) Pension contributions in excess of operating charge (710) (687)Net cash outflow from operating activities (1,619) (660) NOTES 1. The financial information set out above does not constitutethe Group's statutory accounts for the years ended 31 December 2005 or 2004. Theresults for the year ended 31 December 2005 have been prepared on the basis ofthe accounting policies set out in the accounts for the year ended 31 December2004. 2. The calculation of earnings per share is based on a profitfor the year of £609,000 (2004: loss £3,898,000) and the weighted average numberof shares in issue during the year of 107,527,238 (2004: 110,941,178). 3. Copies of the 2005 Annual Report and Accounts will be sentto all shareholders. Copies will be available from the Company Secretary atSherwood Group plc, Fields Farm Road, Long Eaton, Nottingham NG10 1GT andavailable on the website www.Sherwoodgroup.co.uk. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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