Trading Statement

24 March 2016

Findel plc (the "Group")

Pre-close Trading Update

Findel plc, a market leader in the UK home shopping and education supplies markets, today issues a trading statement ahead of entering the close period for the 52 weeks ending 25th March 2016. Full-year results are expected to be announced in early June 2016.

Commenting on the update, David Sugden, Executive Chairman said:

"We are pleased to report an improvement in recent sales performances of our two businesses, trends which position the Group well in the coming year. With respect to the current year, we expect to report a profit before tax* broadly in line with current market expectations.

"Our thematic reviews of past product sales are increasingly thorough and, whilst it is disappointing that we continue to find additional areas where customer redress is appropriate, shareholders should take comfort from the fact that we are now identifying inappropriate products for which sales ceased in 2006 and taking active steps to ensure that all issues identified are properly dealt with.

"Looking further ahead, we remain confident that Express Gifts' strategy will yield significant medium-term profit growth and Education is well placed to benefit from the actions we are taking."

Group Performance

The Group expects to report a profit before tax and exceptional items broadly in line with current market expectations. The recent sales performances of both businesses has improved, with Express Gifts seeing product sales growth of around 8.5% in the last 9 weeks of the year compared to 2.2% for the year as a whole. Findel Education saw sales in the same period decline by around 7.4% compared to a decline of 7.8% for the year as a whole, with active customer numbers stabilising after several years of decline and a strong performance from the higher margin classroom brands. These are encouraging sales trends to take into the new financial year.

Divisional performance

Express Gifts

After a relatively low rate of sales growth in the first nine months of the year, the business has seen a strong recovery in recent weeks, with the Spring/Summer main book launched in January performing particularly well across a range of categories. The stock issues that suppressed sales in December have not recurred, giving us the confidence of being able to increase the rate of new customer recruitment in FY17 to at least maintain the current rate of product sales growth of around 8.5%.

The business has continued to see lower retail margins as a result of both the weakness of Sterling affecting the price of its imported goods and competitive pricing. These currency headwinds in particular are expected to continue into FY17. Until now, the Group's hedging policy has been to only cover exposures occurring within the current financial year. In keeping with sector peers, currency hedging will now be undertaken on a rolling 12-month basis, which will lead to period-end valuation gains/losses on future hedges being reported separately on the Group's Income Statement.

The financial services activities have performed strongly throughout the year, with improvements in the credit quality of the receivables book driving lower bad debt charges, higher service charge income and a greater level of customer retention. We continue to monitor the balance between maintaining tight underwriting standards and growing product sales closely to ensure the right outcome for customers. The business initiated a programme of risk-based pricing for its credit offer in November 2015 focussed initially on those established customers who present a higher than average level of risk. This programme will be rolled out to new customers in the coming months which should generate additional financial services revenue in FY17.

Overall, we expect that Express Gifts and our Overseas Sourcing office will report an operating profit* for FY16 approximately £2m lower than the £33.6m reported in FY15, reflecting a currency impact of around £3m as previously reported.

Findel Education

Findel Education has continued to see challenging market conditions, with spending levels from schools remaining constrained. However, the business has managed to stabilise its market share in its key UK Schools brands after several years of decline. This has produced an annual sales decline of 7.8% for the year as a whole to around £95m (FY15: £102.8m), although this narrowed slightly to around 7.4% in the final 9 weeks of the year with the trends on customer numbers improving.

The changes to the operating structure of the business, to integrate the teams responsible for each sales channel (our "Go To Market" strategy) have been implemented. The teams are currently reviewing the optimal timing for each channel's main catalogue launch, having undertaken tests on the main Classroom brand in recent weeks which have shown encouraging results. The objective is to achieve a stabilisation of sales in FY17.

The business has successfully managed product margins and operating costs during the year, which has mitigated the impact of the £8m sales decline to produce an operating profit* of around £1m below the £4.2m reported in FY15.

The process to integrate the Education business's two warehouses into one site is progressing well. The staged migration of the Enfield brands to Nottingham is underway with one brand already successfully transferred and remains on track to be completed by the end of the year. We remain confident that this will produce significant cash and net profit benefits of £2-3m p.a. from FY18 onwards.

Financial Position

The Group's net bank debt at 25th March 2016 is expected to be approximately £87m, in line with last year's position. In addition to the normal growth in debt supporting Express Gifts' income-bearing credit receivables, this has been a year of significant capital investment for the future, particularly in respect of the Findel Education's warehouse consolidation project and the development of new digital facilities for Express Gifts that were launched this week. The greater levels of clothing ranges and inventory support for higher levels of planned growth in FY17 have also contributed to a higher level of working capital within Express Gifts at the period end.

Exceptional Items

Financial Services redress

In November 2015, the Group highlighted that Express Gifts had established that there was a flaw in a financial services product. As stated, a provision of £2m was recorded in the 26 week period ended 25 September 2015 to cover potential customer redress. This provision was made on the basis of information available at that time. Since then, we have had further discussions with both the FCA and the product underwriter to establish the appropriate basis for redress, which have led us to reach our present view that the redress provision should be increased from £2m to £10m under our latest assumptions. This provision incorporates redress for another smaller product sold between 2005 and 2006 that management also identified. It is possible that work being currently undertaken could result in more information becoming available which could lead management to revise this estimate. Any such changes would be accounted for as a revision to an accounting estimate and would be recognised in the period in which the estimate was revised.

Warehouse consolidation project

Having completed the employee consultation related to the warehouse consolidation in our Education business and taken steps to vacate the Enfield property by the end of March 2017, an onerous lease provision of £5-6m will be recognised in the full-year accounts as an exceptional item. This provision will cover the cash rental shortfall that will potentially occur spread over the remaining 12 years of the lease. This will bring the total exceptional costs arising from this project to £6-7m.  

Other exceptional items

The successful refinancing of our bank and securitisation facilities in November 2015 for a four-year period to December 2019 means that the unamortised fees that were paid in respect of previous refinancing exercises in May 2014 and January 2015 totalling around £0.9m will be recognised as an exceptional finance charge in the full-year results in line with accounting standards.

As reported in the Interim Report, the business has also incurred exceptional restructuring costs totalling around £1m during the year. The legal dispute with the Group's former subsidiary, Kleeneze Ltd, was settled in February and the £1m exceptional provision noted at the half-year has largely been credited back through exceptional items.

There will also be exceptional items relating to the disposal of Kitbag in February 2016.

Outlook

We expect FY17 to be a year of further investment in pursuit of the Group's medium-term strategy building on the recent encouraging sales trends, with new online capabilities coming on stream at Express Gifts and higher levels of customer recruitment driven by an upcoming TV campaign focussing upon the value proposition. Findel Education is targeting a stabilisation of both sales and profits from its improved product offering and more effective marketing.

Looking further ahead, we remain confident that Express Gifts' strategy will yield significant medium-term profit growth and Education is well placed to benefit from the benefits of the planned stabilisation of sales and the migration to the new facility in Nottingham mentioned above.

* from continuing operations before exceptional items

Enquiries

Findel plc David Sugden / Tim Kowalski0161 303 3465

Tulchan Communications LLPStephen Malthouse / Giles Kernick020 7353 4200