RNS announcement

2 June 2010

Topps Tiles Plc

INTERIM MANAGEMENT REPORT FOR THE 27 WEEKS ENDED 3 April 2010

HIGHLIGHTS

·        Group revenue £91.4 million (2009: £87.6 million *)

·        Group like-for-like revenue increased by 2.0% (2009: decline of 18.5%)

·        Gross margin of 58.8% (2008: 60.4% *)

·        Operating costs of £43.5million (2009: £42.0 million *)

·        Operating profit £10.3 million (2009: £10.9 million *)

·        Adjusted profit before tax and discontinued operations ** £7.8 million (2009: £8.7 million *)

·        Profit before tax and discontinued operations £7.4 million (2009: £1.3 million *)

·        Adjusted earnings per share *** 3.01p (2009: 3.30p)

·        Basic earnings per share of 3.39p (2009: 0.11p )

·       No interim dividend declared in order to focus on reducing the level of net debt and to improve financial flexibility (2009: 0.00p)

·        Net debt position of £57.7 million (2009: £85.0 million)

* Comparative numbers are presented after restating the income statement to reflect the Dutch business as a discontinued operation, further information is provided in note 4.

** Adjusted profit before tax excludes exceptional charges for the impairment of plant, property and equipment of £0.2 million (2009 : £0.6 million) and a £0.2 million charge relating to the interest rate derivatives the Group has in place (per IAs39) (2009: £6.9 million).

*** Adjusted for the post tax effect of the interest rate derivatives charge detailed above, exceptional items, and the impact of discontinued operations.

**** Net debt is defined as bank loans, before amortised issue costs (note 7) and less cash and cash equivalents.

Please note this interim management report has been prepared for the 27 weeks ended 3 April 2010 and the comparative period has been prepared for the 26 weeks ended 28 March 2009. With the exception of the Group like for like revenue measure which is comparable, the highlights are presented on this basis and are not entirely comparable.  The impact of the additional week is to increase revenue by £3.6 million and operating profit by £0.4 million.

Commenting on the results, Matthew Williams, Chief Executive said:

"The economic environment remains challenging for retailers, with consumer confidence and discretionary spending continuing to show signs of weakness.  In light of this backdrop, our business has performed robustly; growing sales and continuing to keep a tight control on costs.  As the market-leading brand with a distinct focus on outstanding customer service and value, we believe the business is well placed to benefit when consumer confidence returns."

For further information please contact:

Topps Tiles Plc

Matthew Williams, CEO                                                                          020 7861 3232

Rob Parker, Finance Director                                                                   020 7861 3232

Pelham Bell Pottinger

Rosanne Perry/Duncan Mayall                                                                 020 7861 3232

RESPONSIBILITY STATEMENT

Cautionary statement

This Interim Management Report ("IMR") has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed.  The IMR should not be relied on by any other party or for any other purpose.

The IMR contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

This interim management report has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to Topps Tiles Plc and its subsidiary undertakings when viewed as a whole.

INTERIM MANAGEMENT REPORT

Please note this interim management report has been prepared for the 27 weeks ended 3 April 2010 and the comparative period has been prepared for the 26 weeks ended 28 March 2009. Unless otherwise stated, numbers are presented on this basis and are not entirely comparable.  The impact of the additional week is to increase revenue by £3.6 million and operating profit by £0.4 million.  Comparative numbers are stated after representing the income statement to reflect the Dutch business as a discontinued operation, further information is provided in note 4.

Income statement

We are pleased to report our financial results for the first 27 weeks of the 2009/10 financial year.

The UK economy continues to be a challenging environment for retailers and in particular those dependent on discretionary spend and consumer confidence.  During the first half of our financial year we have seen the uncertain economic outlook affect consumer confidence and in turn impact business trading patterns.

Overall revenue increased by 4.3% to £91.4 million (2009: 87.6 million), and when restated on an equivalent reporting period to last year total revenue increased by 0.2%. Like-for-like revenues have increased by 2.0%.  Overall gross margin for the Group was 58.8% compared to 60.4% last year.  Whilst overall gross margin has fallen compared to the prior period we have generated an increase when compared to the second half of the last financial year when UK margin was 58.1%.  This has been driven by some improvement in the value of sterling and our ongoing work to ensure we continue to buy at the very best cost prices, both favourably impacting our cost of imported goods.

Operating costs were £43.5 million, compared to £42.0 million in the prior year.  The additional week we have accounted for in the current financial period equates to approximately £1.6m of additional costs and when adjusting for this costs are broadly flat year on year.  Within the total operating costs we have increased payments under the employee profit share category by approximately £0.9 million compared to the prior year.  These payments reflect the amounts paid to store staff for sales commissions and bonuses.  The additional costs have been offset by savings across a number of other areas.  During this period the business traded from an average of 309 UK stores compared to 319 in the prior interim period.

Operating profit for the period was £10.3 million (200: £10.9 million), a decrease of 6.1% year-on-year. 

There were no property disposals in the period (2009: none).

The net interest charge for the Group was £2.7 million (2009: £2.8 million).

The adjusted profit before tax and discontinued operations was £7.8 million (2009: £8.7.million).

In addition to the interest charge above there is a fair value (non-cash) loss on the movement in the interest rate derivatives of £0.2 million (2009: £6.9 million).  This charge has reduced significantly compared to the prior year reflecting the relative stability we have seen in the outlook for interest rates.  Due to the nature of the underlying financial instruments, IAS39 does not allow hedge accounting to be applied to these losses and hence this charge is being applied direct to the income statement rather than offset against balance sheet reserves.

Including these charges and the exceptional items detailed on page 1 the profit before tax and discontinued operations for the Group is £7.4 million (2009: £1.3 million)

The effective rate of corporation tax on continuing operations for the period was 29.6% (2009: 34.5%).  The effective tax rate has been favourably impacted as a result of an increase in the proportion of assets qualifying for capital allowances and lower levels of non deductible losses generated from the disposal of fixed assets.

Following the decision to withdraw funding from the loss making Dutch subsidiary in December 2009 and subsequent administration there has been a £1.0 million non cash gain in the period.  This gain reflects the final accounting entries relating to the Dutch subsidiary and includes the write down of the remaining balance sheet items, principally creditors, onerous lease provisions, stock and overdraft balances.  This has been presented in the consolidated income statement under "discontinued operations" and we have also adjusted the losses from the prior period into the same category.

Basic earnings per share were 3.39p (2009: 0.11p).  Adjusting for the post tax impact of the interest rate derivatives charge detailed above, exceptional items, and the impact of discontinued operations the revised basic earnings per share were 3.01p (2009: 3.30p).

Financial Position

The Group currently owns 6 freehold or long leasehold sites including two warehouse and distribution facilities with a total net book value of £13.4 million (2009: £16.0m).

Capital expenditure in the period amounted to £1.5 million (2009: £1.5 million).  We have opened 3 new stores in the period which continues to be lower than the levels of openings we have seen historically - this is the principal driver of the continued low level of expenditure.  We also continue to focus on maximising efficiencies and rationalising discretionary expenditure.

There has been no acquisition of freehold property in the first half (2009: none).

At the period end cash and cash equivalents for the Group were £37.0 million (2009: £17.3 million) and borrowings were £94.8 million (2009: £102.2 million).  The Group therefore has a net debt position of £57.7 million (2009: £85.0 million).

At the period end the Group had £26.1 million of inventories (2009: £31.6 million) which represents 125 inventory days cover (2009: 149 days).

Fund Raising

During the period the Company completed a successful accelerated bookbuild placing on 24 November 2009, raising gross proceeds of approximately £15.4 million. The placing was undertaken to help provide the Company with both additional financial flexibility in the event of a further downturn in consumer confidence and spending and also additional resources to support the Company's growth strategy as opportunities arise in the market. 

Key Performance Indicators

As set out in our most recent annual report, we monitor our performance implementing our strategy with reference to clear targets set for key performance indicators ("KPIs").  These KPIs are applied on a Group wide basis.  Performance in the 27 weeks ended 3 April 2010 is set out in the table overleaf.  The source of data and calculation methods are consistent with those used in the 2009 annual report.

Results for the 27 weeks ended 3 April 2010

Highlights

Dividend

In line with the Board's view at the end of the last financial year we have decided not to pay an interim dividend for the year (2009: no interim dividend).  The Board remains focussed on reducing the level of net debt and re-weighting the Group's capital structure.  The dividend policy will continue to be closely reviewed on a bi-annual basis and the Board will look to reinstate a dividend when it has a sufficient level of confidence in the economic outlook.

Strategic Intent

The Group strategy is focussed around delivering outstanding service and value to our customers.  The key elements to the success of this strategy are customer service, store locations, store layout, product choice and availability.  This strategy has underpinned our resilient business model and we believe it will continue to serve the company and its many stakeholders well.  It will continue to enable the business to withstand periods of weakness in consumer confidence, as well as to benefit when economic conditions improve.

Key operational objectives

·      Deliver customers outstanding value for money and service to ensure they always "return and recommend"

·      Maintain our market leading position

·      Manage the store estate prudently, and only open new stores where excellent opportunities arise that complement the existing portfolio

·      Continued development of our in store customer offer to maintain our competitive advantage

·      Continued development of our transactional website to further improve our service offer to customers

·      Ongoing review of the store portfolio to ensure our estate is keeping track with consumer shopping patterns and our cost base is as efficient as possible

Financial objectives:

·      Primary focus on increasing revenues and cash generation, maintaining tight cost control and maximising net debt reduction

·      Maximising earnings per share and shareholder returns, including review of our dividend policy on a bi-annual basis

·      Ongoing supplier tendering & benchmarking of non-stock suppliers

·      Manage the Group's exposure to fluctuations in foreign exchange rates

·      Maintaining a capital structure which enables an appropriate balance of financial flexibility and capital efficiency

Operational review

We are focused on trading as effectively as possible through the ongoing challenging economic cycle.  Our primary objectives continue to be centred on optimising returns from the existing estate, managing our cost base very carefully and improving our financial flexibility.  The Board is satisfied with performance during the period which has again demonstrated the resilience of the business model.  Net debt continues to reduce and the business remains cash generative (when adjusting for different period lengths) despite the difficult retail trading environment.

As discussed in the financial review, we continue to maintain a close focus on costs and have reported that underlying costs are in line with the previous year, in which we generated savings of around £9.0 million.  We will continue to monitor the economy very closely and in particular signs of a sustained recovery in levels of consumer confidence.  When the board considers it appropriate we would expect to re-invest some of the savings we have generated over the last 2 years into two key areas of the business - staffing and marketing.  Staffing will need to increase as and when we see a sustained improvement in customer footfall to ensure that our service levels are maintained.  Marketing remains at a low historical level and we plan to return to a higher level of spend once sufficient certainty in the outlook exists.

As previously indicated we have adopted a prudent approach to expansion of our store estate and will only consider those opportunities that are an excellent fit with the existing portfolio.  In the UK, since September 2009 we have opened 3 new stores and closed 3 stores, 2 of the 3 openings being related to relocation of existing stores.  At the period end the Group was trading from a total of 309 stores in the UK (March 2009: 317 UK stores and 22 Dutch stores), 267 Topps and 42Tile Clearing House.  As discussed further on page 8, the Group no longer trades from any stores in Holland.

The Group's e-commerce business, which launched in 2008, continues to make good progress.  Our website enables customers to research their project and browse our range in advance of a potential purchase and then either locate their nearest store, or, where customers prefer, complete their purchase on-line.  This extension to the existing store estate continues to grow in popularity and has seen a steady increase in sales such that it is now equivalent to one of our best performing stores.  In addition we are continuing to embrace new technologies wherever possible and have recently launched a mobile phone version of our product catalogue and store locator.

We continue our commitment to community relations through sponsorship and charitable initiatives.  We work closely with local communities and sponsor over 300local football teams through our youth football initiative, where each store sponsors a junior football team providing them with new kits and equipment.  We work with the British Association of Modern Mosaic and sponsor two national Mosaic competitions which focus on primary schools and community workshops.  We are also proud to support our nominated charity Help for Heroes, which we have been doing since 2008, and which we hope to make Topps' biggest ever fundraising campaign.

Holland

During the period the Board took the decision to withdraw support and funding for its loss-making Dutch subsidiary, as announced on 18 December 2009.

The Dutch subsidiary comprised 12 stores and accounted for 4% of the Group's revenue in 2009, but made a loss of £5.0 million during the last financial period. The Board undertook an extensive review of the Dutch business during 2008 and 2009 during which time the management team of the Dutch business was reorganised and it became apparent that significant structural issues needed to be addressed.  The restructuring of the business on a financially sustainable basis was not successful and the business faced increasing challenges as financial performance declined, in part driven by the difficult economic climate.  The business had been loss making since 2008 and trading continued to be significantly behind revised financial targets set by the local management team.

As a consequence of the notification of the withdrawal of support, the local management team took the decision to cease trading and appoint an administrator.  We anticipate that the administration process will be completed over the coming months.

This series of actions and subsequent removal of the Dutch business from the Group's consolidated financial statements has resulted in a £1.0m one off non cash gain.  This gain reflects the final accounting entries relating to the Dutch subsidiary and includes the write down of the remaining balance sheet items, principally creditors, onerous lease provisions, stock and overdraft balances. This has been presented in the consolidated income statement under "discontinued operations" and we have also adjusted the losses from the comparative periods into the same category.

The UK business was not impacted by this decision.

Risks and uncertainties

The 2009 Annual Report and Accounts highlighted that the Board's primary focus when reviewing key risks and uncertainties are:

·      The ongoing weakness of the UK economy and the anticipated impact of this on business performance

·      Impact on sourcing costs due to the weakness of sterling in comparison to the Euro and US dollar currencies

·      Ensuring an appropriate capital structure and availability of future funding requirements

This continues to be the case and the Board's response to these risks is articulated throughout this report.  This includes:

·      Ongoing improvement in our existing retail operations, including regular review of our product offer and customer service to ensure that we are maximising the opportunity to deliver sales

·      Review, and reduction, of costs across all areas of the business to offset as far as possible a softening in revenues

·      A prudent approach to further expansion, and consequent reduction in capital expenditure

·      Tight management of cash and reduction in net debt to improve financial flexibility

·      Ongoing review of the Group's sourcing strategy to enable us to deliver greater value for money whilst maintaining returns

Approximately 20% of our cost of goods sold are sourced in either US dollar or Euro.  Sterling has continued to trade against these currencies at historically weak levels which has resulted in an increase in our cost of goods  To counteract as much of this impact as possible we will continue to   review our sourcing policies to look for opportunities to reduce cost prices. 

The Group's loan facility contains financial covenants which are tested on a bi-annual basis.  Based on current trading and the Board's current expectations for the next 12 months the Board expect that the Group will be able to continue to operate within its current financial covenants.  The current loan facility expires in January 2012 and the Board has a policy of having at least 12 months of committed facilities available.  As a consequence the Board anticipates renewing the current loan facility over the course of the next 12 months.

During the period the Company completed a successful accelerated bookbuild placing on 24 November 2009, raising gross proceeds of approximately £15.4 million. The placing was undertaken to help provide Topps Tiles with both additional financial flexibility in the event of a further downturn in consumer confidence and spending and also additional resources to support the Company's growth strategy as opportunities arise in the market.

The Board remains confident that the business will continue to be both profitable and cash generative and as such will not require any additional funding.

In addition to the above risks the Board considers other key risks include its relationship with key suppliers, the potential threat of new competitors, the risk of failure of key information technology systems, loss of key personnel and development of substitute products.

The Directors will continue to monitor all of the key risks and uncertainties and the Board will take appropriate actions to mitigate these risks and their potential outcomes.

Going concern

Based on a detailed review of the above risks and uncertainties, the financial facilities available to the Group, management's latest revised forecasts and a range of sensitised scenarios the Board believe the Group will continue to meet all of its financial commitments as they fall due and will be able to continue as a going concern.  The Board, therefore, consider it appropriate to prepare the financial statements on a going concern basis.

Related party transactions

There have been no material changes in the related party transactions described in the last annual report.

Current trading

In the first seven weeks of the current period overall Group revenues decreased by 5.1%.  Like-for-like revenues across the Group decreased by 4.3%.

Outlook

There remains uncertainty over the economic environment and whilst this continues we expect consumer confidence to be weak and trading in the retail sector to remain challenging. 

Our current trading figures demonstrate the challenges facing retailers, with ongoing pressure on consumer spending levels and confidence.  We will continue to focus on our financial and operational objectives, maximizing cash generation and maintaining a tight control on costs, as well as delivering outstanding customer service and value.  We believe this strategy will enable us to benefit as the economy recovers and consumer confidence returns.

Matthew Williams                                Rob Parker

Chief Executive Officer                           Finance Director

2 June 2010

*Comparative numbers are presented after restating the cash flow statement to reflect the Dutch business as a discontinued operation. Further information is provided in note 4.

1. General information

The interim report was approved by the Board on 2 June 2010.  The financial information for the 27 weeks ended 3 April 2010 and similarly the 26 weeks ended 28 March 2009 has neither been audited nor reviewed.  The financial information for the 52 week period ended 26 September 2009 has been based on information in the audited financial statements for that period.

The information for the 52 week period ended 26 September 2009 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006.  A copy of the statutory accounts for that 52 week period has been delivered to the Registrar of Companies.  The auditors' report on those accounts was unqualified, did not draw attention to any matter by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

This condensed set of consolidated financial statements has been prepared for the 27 weeks ended 3 April 2010 and the comparative period has been prepared for the 26 weeks ended 28 March 2009. The impact of the additional weeks' trading is to increase revenue by £3.6 million and operating profit by £0.4 million and the comparative amounts in the consolidated financial statements are not entirely comparable as a result.

Basis of preparation

The annual financial statements of Topps Tiles Plc are prepared in accordance with IFRSs as adopted by the European Union.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union.

Going concern

Based on a detailed review of the risks and uncertainties (see pages 5 and 6 of the interim management report), the financial facilities available to the Group, management's latest revised forecasts and a range of sensitised scenarios the Board believe the Group will continue to meet all of its financial commitments as they fall due and will be able to continue as a going concern.  The Board, therefore, consider it appropriate to prepare the financial statements on a going concern basis.

Accounting policies

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements, except  as described below.

In the current financial year, the Group has adopted International Financial Reporting Standard 8 "Operating Segments" and International Accounting Standard 1 "Presentation of Financial Statements" (revised 2007).

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Executive to allocate resources to the segments and to assess their performance. In contrast, the predecessor Standard (IAS 14 "Segment Reporting") required the Group to identify two sets of segments (business and geographical), using a risks and rewards approach, with the Group's system of internal financial reporting to key management personnel serving only as the starting point for the identification of such segments. As a result, the segmental information required by IAS 34 which is included in note 2 below is presented in accordance with IFRS 8. There has been no change in the basis of segmentation as a result of adopting IFRS 8.

IAS 1(revised) requires the presentation of a statement of changes in equity as a primary statement, separate from the income statement and statement of comprehensive income. As a result, a condensed consolidated statement of changes in equity has been included in the primary statements, showing changes in each component of equity for each period presented.

2. Business segments

IFRS 8 requires operating segments to be identified on the basis of internal reports about

components of the Group that are regularly reviewed by the Chief Executive to allocate

resources to the segments and to assess their performance. These segments comprise (a) Topps Tiles retail operations in the UK; (b) TCH retail operations in the UK; and (c) the Topps Floorstore operation in Holland, which was disposed of on 22 December 2009.

There has been no change in the basis of segmentation or in the basis of measurement of segment profit or loss in the period. Segment result represents the profit / (loss) earned by each segment without allocation of the central administration costs including Directors' salaries, other gains and losses, investment income, finance costs, fair value loss on interest rate derivatives and income tax expense.

Amounts reported for the comparative periods have been re-presented to conform to the requirements of IFRS 8. No inter-segment sales were made during the periods presented.

The following is an analysis of the Group's revenue and results by reportable segment in the 27 weeks ended 3 April 2010:

The following is an analysis of the Group's revenue and results by reportable segment in the 26 weeks ended 28 March 2009:

The following is an analysis of the Group's revenue and results by reportable segment in the 52 weeks ended 26 September 2009:

With the exception of the presentational changes required on adoption of IFRS8 and IAS1 (revised 2007), the accounting policies of the reportable segments are the same as the Group's accounting policies which are described in the Group's latest annual financial statements.

The measure of assets and liabilities between the Group's reportable segments is not regularly provided to the chief operating decision maker and accordingly is not presented in this half year report.

3. Taxation