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Edited Transcript of BWNG.L earnings conference call or presentation 25-Jun-20 9:00am GMT

·39 min read

Full Year 2020 N Brown Group PLC Earnings Call Manchester Aug 11, 2020 (Thomson StreetEvents) -- Edited Transcript of N Brown Group PLC earnings conference call or presentation Thursday, June 25, 2020 at 9:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Craig Lovelace N Brown Group plc - CFO * Rachel Izzard N Brown Group plc - Incoming CFO * Stephen Johnson N Brown Group plc - CEO ================================================================================ Conference Call Participants ================================================================================ * Clive W. Black Shore Capital Group Ltd. - Head of Research * John Stevenson Peel Hunt LLP - Analyst * Matthew Neil McEachran Nplus1 Singer Capital Markets Limited - Senior Research Analyst of Retail * Simon Bowler Numis Securities Limited - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, welcome to the N Brown Full Year Results Conference Call. My name is Kelly, and I'll be coordinating your call today. (Operator Instructions) I will now hand you over to your host, Steve Johnson, CEO of N Brown. Steve, please go ahead. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [2] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to our FY '20 results and Q1 trading update conference call. I hope you are all safe and well and adapting to the circumstances as a consequence to COVID-19. I'm joined by Craig Lovelace, our CFO; and Rachel Izzard, our incoming CFO, who I'd like to welcome to N Brown. As this will be Craig's last results presentation with us, I would like to take the opportunity to thank Craig for his contribution over the past 5 years at N Brown, and we wish him every success in the future. I hope you've been able to watch the webcast of our presentation. But before we go into Q&A, I'd like to give a brief overview of the year and Q1 and also give you the highlights of our refreshed strategy. So turning to the full year results. In line with our well-progressed strategic plan to reduce unprofitable nondigital and digital sales, revenue declined 6.1% in the year. Product revenue, excluding stores in U.S.A., declined 5.7%, and Financial Services revenue was down 2.7%. Operating costs were down 9.9% due to our strategic focus on the cost base. Adjusted profit before tax declined to GBP 59.5 million driven by a lower gross profit and a lower-than-expected IFRS 9 provision benefit. We have delivered a statutory profit before tax of GBP 37.5 million, a material impact (technical difficulty) Where are we now? We have strategically restructured our business and have made significant steps in the transformation from being a traditional retailer to being a true digital retailer, which takes us towards building sustainable, long-term value. We have closed our entire store estate and have focused on developing our digital proposition. 91% of our customers are digital. We have over 1 million social media followers and over 844,000 app downloads. We are a top 10 U.K. digital clothing and footwear retailer, serving customers in an underserved market. Our markets are large and in structural growth, and importantly, our refreshed strategy will quadruple the addressable market with which we serve. Our Financial Services offering enables us to offer our customers a convenient way to shop and engender loyalty. Why we will win. Inclusivity and our desire to serve the underserved are key to our existence. We serve these customers across 3 key areas: plus size, underserved credit and more mature customers. We are already #1 for womenswear sizes 20 plus, and we believe we can gain share in this growing market. We also have a long history of serving the underserved credit market. Today, 80% of our customers from C, D and E socioeconomic groups. Almost 50% of our credit customers are not in work due to retirements or unemployment. And just over 1/3 of our credit customers are over 60 years of age. So how will we do it? We have finished our restructuring phase, and we have now launched our accelerate phase, driven by a clear strategic framework and 5 growth pillars. Number one, distinct brands to attract a broader range of customers. We undertook a thorough review of markets in which we operate. This highlighted that we serve a specific set of customers well but that we need to extend our reach to a broader set of customers to drive growth. The approach quadruples our addressable market to over GBP 20 billion. We will move to 4 core apparel brands: Simply Be, Jacamo, Ambrose Wilson and JD Williams; and one new mainstream digital home brand, Home Essentials. Number two, improved product to drive customer frequency. We are now focused on making sure each brand develops its own distinctive product handwriting with product designed for their specific target customer, delivering the right trends at the right time. We will also renew our good/better/best architecture to make it well defined, adaptable and responsive. Number three, new home offering for customers to shop more across categories. Although N Brown has historically sold home products, we've always done these through our primarily fashion-focused websites and hasn't had a clear proposition. We've addressed this with the launch of a stand-alone website, Home Essentials, in a growing market with a clear proposition and target markets. Number four, enhanced digital experience to increase customer conversion. A strategic priority is the delivery of a new front-end website which will deliver a range of benefits, including improved SEO and conversion rates. This is important because our current natural search ratings are poor and there is significant scope for improvements. Number five, flexible credit to help customers shop. Our credit proposition is a key differentiator for us, enabling customers to shop through inclusive lending whilst providing appealing, convenient and personalized integrated offers to customers. N Brown's credit proposition to us is what NextPay is to Next. These 5 strategic pillars are underpinned by 3 key enablers. On people, over the past 18 months, we have made significant changes to the executive and the senior leadership team. On data, the 18 months have focused on putting in place foundations, including building out a new internal data science function, developing customer lifetime value models to drive average order value and average order frequency, as well as improve our forecasting. On our cost base, historically, our marketing expenditure has been significantly higher than peers. Our spend has been inefficient and in many cases unprofitable. This is changing. So where does this strategy place N Brown in 3 years' time? We will be a retail-led business with strong brands operating in structurally growing markets. Our improved product will drive increased frequency from our customers, and we will continue to attract new customers. The investment in digital capabilities will create a great customer experience, further driving loyalty and frequency. Our FS capability will be transformed with a new platform, offering broader, more relevant products, and importantly, the impact of recent regulatory changes will have been absorbed. We are excited about our future in N Brown and look forward to delivering our new strategic plan for the benefit of all stakeholders. And with that, I will pause and hand over for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We do have a question from Matthew McEachran. -------------------------------------------------------------------------------- Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited - Senior Research Analyst of Retail [2] -------------------------------------------------------------------------------- Can I just check if you -- clear line? Are you able to hear me okay? -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [3] -------------------------------------------------------------------------------- Yes, yes. Good morning. -------------------------------------------------------------------------------- Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited - Senior Research Analyst of Retail [4] -------------------------------------------------------------------------------- Great. I've got 3 questions, if that's possible. The first one just relates to an area of the business which has been challenging over the last couple of years, which is in relation to the noncore brands. I'm just wondering if you could elaborate very briefly on the plans for the noncore (technical difficulty) and also the related debtor book. Question number one. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [5] -------------------------------------------------------------------------------- Yes. Do you want to give me the 3 questions, Matthew, and I'll sort of try and sort of deal with them (multiple speakers) -------------------------------------------------------------------------------- Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited - Senior Research Analyst of Retail [6] -------------------------------------------------------------------------------- Yes. Sure. Yes. The second question relates to the very impressive cost performance year-to-date, and I'm just wondering how much of this is likely to be a permanent reduction either in fixed costs or through improved efficiencies. And for example, in marketing, roughly how much was the spend on print in FY '20? Because I'm pretty sure that's an area where you'll be reining back the spend. That's question two. And then third question relates to the securitization under FCA guidelines. Obviously, there's an allowance or treatment for customers that are affected by COVID-19. I'm just wanting to check if the lender is happy to treat them as ongoing customers rather than remove them from eligibility. And if that's the case, how long that would last for before you end up having to fund the difference through the RCF. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [7] -------------------------------------------------------------------------------- Sure. Okay. So I will take those questions, Matthew. I'll give you a sort of high-level answer, and I'll probably hand over to Rachel to give you a bit more detail on the sort of cost side of things. Look, in relation to noncore brands, since I have been leading this business, the one big question I've been asked is where does this business go? What does it look like in the future? And in the future, we will have 5 brands. What we are going to do with our noncore brands, which we have already built into our internal plans, is to effectively either sort of move them across as a product brand. So for example, Figleaves could be sold through JD Williams as a sort of boutique brand. It could also be sold under Simply Be. And we do see our customers buying into that product already. So the Figleaves brand would sort of disappear but still be sold through our 5 fascias as a sort of product brand within our business. So it's important to sort of recognize that we're not walking away from all of that in the sense of your question about the sort of debtor book and things along those lines. There will be 1 or 2 brands that we will wind down, but that is already in our thinking and in our plans and actually the right thing to do. And in terms of cost performance, how much of it can we expect to sort of go forward? Well, look, I mean one of the big things that we've been doing and what we've been able to do as a result of the pandemic is accelerate our strategy. Our strategy was always about moving out of our noncore marketing and moving into channels that you would expect a digital retailer to operate from, lower-cost channels. So we're very pleased with our sort of social media. Following an uptake, we're very pleased with our app downloads. And in fact, on Simply Be, 15% of our entire trading in Simply Be is coming through our apps now. So that is increasing at quite a fast pace. And what that enables us to do is talk to our customers in a much cheaper way, of course, than the historical ways that the business operated. So that's why I'm sort of pleased to be calling time on the sort of restructuring. And we've got a solid foundation to build from. And I would expect to enable us to see those cost efficiencies continue because that's what we're trying to do at a strategy level. But I'll allow Rachel, when I'm finished on the final piece, to sort of cover that sort of question in a bit more detail. On securitization, effectively, you're asking the question, I think, are we giving sort of forbearance to customers who are requesting help. And the answer is yes. And from my perspective, our job here is to keep our customers shopping and support them to improve the customer outcomes at all time. And our financial service business is working with customers already, and will continue to do so. It's certainly not new for us in our business. And frankly, we've been able to adopt the already well-laid-out policies and processes to support customers at this time, which we're very happy to do. So that's the sort of high-level view and hopefully answers the question. But I'll hand over to Rachel to give a bit more perspective around some of the cost pieces particularly. -------------------------------------------------------------------------------- Rachel Izzard, N Brown Group plc - Incoming CFO [8] -------------------------------------------------------------------------------- Thank you, Steve. And to be fair, you covered it really well. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [9] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Rachel Izzard, N Brown Group plc - Incoming CFO [10] -------------------------------------------------------------------------------- So I'll just put a little bit more color on it for you. So you asked how much is permanent, Matthew. For me, what good looks like in this is not that our cost base is a fixed less of operating costs that we treat as a fixed element, that it moves with the size of our business. So I would expect it to be ramping down if we see demand come off, but I'd also expect it to be flexible to move up as our demand comes back. But if you look at our guidance, what we said for the full year is we expect the full year cost savings to be considerable, not just quarter 1, because we obviously went hard in quarter 1 in light of the volatile market. We were really successful with that. And you can see we offset a considerable amount of the gross margin pressure through 43% reduction in operating costs. That wasn't just marketing, it was across the board. And it wasn't just blanket savings, it was targeted. So within that restructuring of the cost base in marketing, for example, year-on-year, we've more than doubled the proportion of our marketing spend that is based on social media because, obviously, that matches our strategy in terms of digital incredibly well and is a very effective form of marketing. So we've restructured through the cost base, and we would consider that level of restructure to be permanent, but we would see our costs flexing in line with volume. And we will be introducing a little bit more marketing as we go through the year but nowhere near back to the levels of unprofitable marketing that we were doing before. And so significant progress, and we believe it is sticking. In terms of the how much is print, we are still spending some money on print because, as Steve said, we still have a range of customers, and we're doing that in a profitable way. Is there a little bit more room to be had with that strategically over the next 18 months to 2 years? Absolutely. But a large chunk of the restructure has already happened. So really good progress has put us in considerably better shape. And has left -- I say thank you to Craig because he's left me with a considerably more flexible cost base that's well matched to our new refreshed strategy as a digital player. So with that, I think I'll hand over to Craig on the lending question. -------------------------------------------------------------------------------- Craig Lovelace, N Brown Group plc - CFO [11] -------------------------------------------------------------------------------- Yes. Just to reiterate what Steve said, to your point, Matthew, the facility is structured with our lenders who understand the business very well, and it specifically recognizes the period of FCA forbearance which has been in place. And we called that out in our May announcement as well. So we have the support of lenders. They recognize the forbearance, and that's part and parcel of our solution. -------------------------------------------------------------------------------- Rachel Izzard, N Brown Group plc - Incoming CFO [12] -------------------------------------------------------------------------------- And then maybe you've seen in our relatively long prelim RNS, and you can see within that, we've called out the level of customer balance that we've got on forbearance at the moment, which was GBP 17 million at the point we got the RNS out of a gross loan book of GBP 600 million. So well managed, we're meeting the guidance. We're meeting what we need to do, and we're supporting our customers but at a relatively low level at the moment compared to our overall gross loan book. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [13] -------------------------------------------------------------------------------- Okay. Hopefully, that answers your questions, Matthew. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Our next question is from John Stevenson of Peel Hunt. -------------------------------------------------------------------------------- John Stevenson, Peel Hunt LLP - Analyst [15] -------------------------------------------------------------------------------- I've got 3 questions as well, if I can. Just following on from Matthew actually on the marketing side of things. I mean I don't know if you could maybe comment on how you think about a normalized like marketing cost as a percentage of sales. Or maybe you could even touch on the improvement in the cost of acquisition from the work you've been doing and obviously that push towards digital. Second question was on customer behavior over Q1. I don't know if you could comment on how it differs across the brands. I don't know if it's helped in terms of the online transition of the older customer base, so particularly Ambrose Wilson. And then final question, just on the persistent debt regs. Can you comment on how material this is for N Brown? But like what proportion of credit customers are in sort of minimum you sort of camp and how it's going to affect you. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [16] -------------------------------------------------------------------------------- Sure. So I'll pick up the second question in terms of customer behavior, and then I'll hand over to sort of Rachel and Craig for the marketing cost question and persistent debt, if that's okay. So look, I mean in terms of customer behavior, we saw quite significant drop-off, which we announced initially in our first RNS, down sort of 40-odd percent. And that has been sort of improving ever since and continues to do so, which we've been clear in terms of highlighting. And actually, when we sort of stand back from it for a sort of sales of 75% on a like-for-like basis when we've effectively taken 80% out of the marketing budget, we believe that's a reasonably credible performance. And the -- what's happened is really a couple of things. So first and foremost, the clothing side of the business did step backwards. We've made that clear. People stopped purchasing clothing. We've seen that sort of improve a little bit since. And the other thing that sort of happened is people sort of shop more into Home & Gift particularly. So our desk wares and things that's sort of home office were up 200-odd percent. We sold a lot of stuff for the garden, et cetera, et cetera. And that's been sort of quite helpful. Particularly pleased we've been able to launch from a remote perspective a new business, which is really sort of factored in and really helped us match the customer demand at the time. So on the perspective of what have they been buying, it really has been a sort of pivot towards sort of Home & Gift, but we are seeing clothing starting to recover. On a sort of customer behavior question, is it sort of different brands? We actually sort of would look at it on the basis of age. So we've seen sort of -- certainly, our younger customer population shop more, and our older customer population shop less. And that is reflective as to whether or not they are sort of digital or telephony-based consumers. Simply, we've seen that in our sort of stats, and therefore, you can sort of take a read across to the businesses that we sort of operate. So hopefully, that sort of gives you a steer, John. And I will hand over to Rachel to pick up on the marketing cost piece and maybe Craig on the persistent debt. -------------------------------------------------------------------------------- Rachel Izzard, N Brown Group plc - Incoming CFO [17] -------------------------------------------------------------------------------- So from a marketing perspective, I think -- I laugh at the phrase normal because I think there was -- I don't think anybody found anything normal about quarter 1. So it was a great opportunity for us to really [trial] some of the theories coming to this. So for me, I saw COVID in quarter 1 as the opportunity to accelerate the strategic change that Steve was talking about and let the team try things and see what works and really implement some of the improvements we've put through in terms of, for example, on the data side, customer lifetime value informing our marketing. So we understand with guardrails what good looks like in terms of how much we could or should spend and where it's not worth spending, where it is worth spending. There was a lot of that kind of trial that was happening through quarter 1 which was incredibly effective for us in terms of learning. So I think we'd take that learning out of quarter 1 into the back end of the year, and it will stabilize at a level. Do I think it's too early to just call a number on that? Yes. It will be significantly lower as a percentage of revenue than we've trended out before in last year, for example, John. I think it will be slightly higher than quarter 1 obviously, but it will be considerably down. And I think we can continue learning through the year to see where that lands. And then as we're accelerating to the strategy and build over time, you can really see, in particular in the 5 pillars, improved product and enhanced digital experience. For me, that's actually great for the customers, but it's also great for the marketing efficiency because at the point where we've got enhanced digital product and digital experience, our natural search should kick in more, but I won't have to buy the search as much, and we'll get a second wave of improvement on our marketing efficiency. Similarly with the products, when you've got a really strong product out there, your customer retrade rate, your customer loyalty is there naturally. You're not having to again buy it with the marketing. So I think we will settle into a good level at the back end of this year and then look to push off the back of the strategy accelerating through with products and digital coming in. In particular, over the next 18 months, we should be able to drive some more changes as well. And then all the way through that, we'll continue to iterate the use of data to inform what we do with marketing rather than spec on what we do with marketing. So it's definitely a step change this year. And then looking ahead, looking forward, I think as we accelerate into the strategy, we can reassess it again. -------------------------------------------------------------------------------- Craig Lovelace, N Brown Group plc - CFO [18] -------------------------------------------------------------------------------- And John, just briefly on persistent debt. I mean we've obviously flagged it on an ongoing basis, especially since January and our Q3 update. We've continued to apply the communication protocols that we need to, which is getting in contact with customers who are deemed as being in persistent debt. But for clarity, that's where somebody over a period of 18 months has paid more in interest fees and charges than repay to their principal. So we haven't deliberately called out the quantums involved to be at an early stage in January as an assessment. We still continue to communicate to those customers. But I think a very important point is that when you look at the cash collections over the last 3 months, there was already a sort of natural attrition, a natural cure of customers in persistent debt if they continue to pay down their balance. So if they made payments and they weren't shopping that much, they'd often just self-cure themselves out of persistent debt. Given the quantum of cash collections being in line with prior year, there's a great danger in giving any views at the moment because, actually, many of those customers may well be taking themselves out of persistent debt by clearing their balances down. I certainly think that we'll be in a position in October to give greater clarity on this because you will be getting close to that December deadline, and that will certainly bring to the fore an impact that will be in FY '22. I think that's an important factor as well. Writing to customers, the next staging post is December. That still gives many options for customers to reduce their balances. But I think right here, right now, we're not giving statements on the quantum of balances if only because it's a moving feast with the amount. The debtor book is moving and reducing in size. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [19] -------------------------------------------------------------------------------- Hopefully, that answers the questions, John. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- We now have a question from Darren Shirley of Shore Capital. -------------------------------------------------------------------------------- Clive W. Black, Shore Capital Group Ltd. - Head of Research [21] -------------------------------------------------------------------------------- It's actually Clive Black, but Darren is with me. A few questions from me. Firstly, just bringing together the affordability, the customer credit limits and the persistent debt together, can you just sort of give a consolidated view as to what you think that means for the future of your Financial Services business? Secondly, you talk about developing the digital and technological capabilities of the business. Could you give an indication what that practically means for your customers in terms of the experience they receive? Thirdly, could you maybe say a word about returns given you're now an over 90% digital business? And then just lastly, in terms of your supply chain with a rationalized brand portfolio, what does that mean for the number of suppliers, maybe the average order size and perhaps your overall SKU count, please? Sorry for the list, but thank you. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [22] -------------------------------------------------------------------------------- Yes. Okay. Thanks, Clive. So yes, let's take them from the top and work through them. I may hand over to some of my colleagues for 1 or 2 of the answers. But fundamentally, if we start with the Financial Services changes, what's actually happened? So last year, we made changes to implement changes to our scorecards, which effectively was as a result of introducing new rules around affordability. And ultimately, what that's done is effectively sort of slowed down some sales. In the same way that when we introduced the second set of regulations, which was the credit limit increase program, we were effectively saying to customers, "Do you want a credit limit increase or don't you want a credit limit increase?" And some customers have said they don't want a credit limit increase. So again, in that situation, that has slowed down some of the sort of sales. And then as we come into this year, we announced that we were dealing with customers in persistent debt, and we have some customers that we're helping through that. And to Craig's point earlier, as he sort of suggested, if people are sort of paying down balances quicker, then ultimately, there will be less customers in persistent debt. But there are staging posts in how we have to sort of work with our customers to ensure they get a great outcome. We are at month 36 to work with these customers to help them and provide options and opportunities for them to sort of get out of persistent debt. And that's a range of different things. We can talk to them about paying more. We can talk to them about the charges that we've sort of given them. We can talk to them about taking a longer time. We can talk to them in all sorts of different ways to help those customers and keep them shopping. And that date is December 2020. It isn't a Sword of Damocles in the sense that every customer in December 2020 clearly will roll forward and annualize over the next year, but we do have those impacts in our planning, and we've been very clear about those in our RNS which we issued in January. In terms of does it sort of hold us back, it slows us down, it doesn't hold us back. But I'll pass over to Rachel when I'm finished, and we'll sort of talk a little bit more about that. In terms of digital capabilities, well, there's a massive amount in terms of what are we actually doing, from increasing sort of page speeds to increasing the sort of levels of personalization that exists within our sort of customer journey, to ultimately being able to show our product in a much more exciting way to ensure that our customers can see what it would look like to them and certainly in terms of size and fit given that's our USP. So all of those sort of advantages from a customer perspective, we believe, will engender more loyalty and repeat shopping. And I'm really, really excited about the journey that we're going to go on. In terms of returns, look, we believe if we get our fit right on our apparel, that our returns would actually be lower than a market norm. But actually, we would encourage people to shop with us and try until they find the right fit. We understand for our customers that our market offering is absolutely set up to enable them to sort of find what's right for them, certainly initially. And this is where the credit accounts can play a massive role. Customers can order a few things to start, add them to the account and return them if they see that as okay. So I'm not objecting to sort of returns for new customers, but actually, what we find in the -- or medium term is our returns rate, we believe, is probably lower than the market norm. And that's as a result of our size and fit specialism. Once our customers like our products, they tend to come back, know what they want and keep buying. And on the final piece of the supply chain, does it mean a sort of rationalization of the supply chain? Yes. In fact, we've already rationalized the supply chain 50% over the last 18 months. And on top of that, we are bringing some supply closer to home particularly for our more trend-led brands and that's sort of U.K. and Europe. And on top of that, with our new good/better/best architecture, we will be absolutely sort of looking at every 1 of our 5 brands and making sure that we have the right curated set of products for our customers under each one of those brands. I do believe that will be a lowering of the SKU count. Until we go through that process, I haven't got the number, Clive, but I can definitely tell you it'd be a lowering of the SKU count. And I would like to see in the future our products under each 1 of those 5 fascias have absolutely with the handwriting for that brand and absolutely our customers finding exactly what she wants. And to get there, we've got a bit of work to do on the sort of product side, which is why we've just recently brought in the retail CEO who comes from a very, very strong product background. So I'm grateful for the questions. I can only see improvement in all of those areas and the strategy addresses them. Rachel, I don't know if you want to say anything specifically about the impact of the sort of Financial Services regulation. I think that's the only question I would pick up. -------------------------------------------------------------------------------- Rachel Izzard, N Brown Group plc - Incoming CFO [23] -------------------------------------------------------------------------------- The impact to -- I think almost going back to Craig's comment before, some of this is very hard to tell in terms of the double count versus what might be happening with COVID-19 as well and in terms of what will happen with customer behavior anyway as we trade through this year. So we obviously will be making an IFRS 9 provision this year looking forward about what's happening with the macroeconomics. I'd rarely point this out on an analyst call, but in terms of note 16, our post-balance sheet event, has quite voluminous information in there, walking through what we feel could be the COVID-19 impact. But at the moment, it really could be because, as Craig touched on earlier, customer behavior hasn't yet changed. Our collection rate is holding up with last -- this time last year. We're not seeing it yet hit collection rates. So our IFRS 9 bad debt provision, a lot of that is essentially looking forward and estimating what might happen with macroeconomics, what might happen with customer behavior. So you put that together with what Steve was talking through about what the known-knowns before coming into this period, I think there's a lot of monitoring and management that we will be doing with FS through the business through the year. And we've very carefully done that through Q1. And I've been really impressed coming in how much this is business as usual for Dan and the FS team rather than having to respond and find a process. We're used to dealing with and working with customers and supporting them through credit. So I think this is going to be one that will develop as we go through the year. If I touch on a couple of the other ones, Clive, in terms of the returns rate. For FY '20, the returns rate was broadly similar with FY '19. And then I might -- we come into quarter 1, and it stepped down quite considerably into quarter 1. Now, as I said, with the marketing efficiency, I'm not sure how much normality Q1 can be for any business at the moment, and some of that was our mix change towards Home & Gift, with Home & Gift obviously had a considerably lower return rate. Again, we saw a significant reduction in returns through Q1 and started to see -- as fashion and apparel is returning, we're starting to see it normalize back out but not at concerning levels, at pretty strong levels. So no concerns. And as I said earlier, if we bridge to Steve's view on the strategy, we can only see items getting better for that. As we improve the products, improve the fit and keep going with the FS offer, this should all play to a better offer for the customer, whether that's a digital product, a physical product or an FS product, and then an improved margin from our perspective and improved profitability from our perspective. So I hand back to Steve. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [24] -------------------------------------------------------------------------------- Great. So hopefully, that answers the questions, Clive. I mean I guess, frankly, we're really excited about how we can move forward from an accelerate perspective, and we think there's great opportunities for our business. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- (Operator Instructions) We have a question from Simon Bowler of Numis. -------------------------------------------------------------------------------- Simon Bowler, Numis Securities Limited - Analyst [26] -------------------------------------------------------------------------------- I was just wondering if -- I know it probably seems like a long time ago now, but if you could just kind of comment a bit on the trading patterns at the end of fiscal '20, the pros and cons on product sales and gross margin looks like, they perhaps came in quite a churn below your kind of previous expectations in January. So just wondering if you can kind of share a little bit of insight in terms of what you were seeing in the business pre-COVID. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [27] -------------------------------------------------------------------------------- Yes. I mean I think just at the highest possible level, Simon, so look, I mean as we came in sort of January, February time, there was clearly sort of news out there that was starting to sort of hit in terms of supply chains in -- particularly around sort of China area. So we chose to actually start to accelerate our strategy prior to year-end. We pulled back particularly in terms of relation to the marketing spend. So when we look at the sort of end-year from a sort of product perspective, we need to take that in the context of a sort of performance on operating expenses, which clearly was ahead of guidance. So we had already started to sort of step into that. It was a great sort of step into it. And then as we came into sort of March, clearly, we went full force at it. So that's the sort of high-level view when you're sort of looking at those 2 months particularly. But Craig, anything you want to add? -------------------------------------------------------------------------------- Craig Lovelace, N Brown Group plc - CFO [28] -------------------------------------------------------------------------------- Yes. Sure. So Simon, there's 2 slides for that. Obviously, in our Q3 announcement, we gave guidance of GBP 70 million or circa GBP 70 million, GBP 72 million. The simple bridge between that and the ultimate results of GBP 59.5 million, you largely had some IFRS 9 macro overlays. These were not COVID related, and I'll come back to that in a minute. They were actually more a recognition of an economic outlook that was more genuinely bearish than it had been in the past, but that's not COVID related. The practical fact is with the balance sheet dated the 29th of February, we cannot recognize COVID as an impact on that balance sheet because it hadn't been declared a pandemic until the 11th of March. So implications to the balance sheet were not hitting '20, they will hit '21 and, hence, the focus on the post-balance sheet event. But the 2 primary reasons: one, IFRS 9, recognizing a less beneficial macroeconomic overlook; and secondly, stock provisioning. And just coming to that, that was really recognizing that we expected pre-COVID, the markets still to be challenging, still to be discount focused and promotionally heavy, and we were taking a prudent approach in our stock. Since then, as you've seen, the stock numbers are actually really very encouraging, and the stock numbers in unit terms and value is substantially down again for the second year. So nothing of undue concern. It was a lead indicator. Those were the 2 primary indicators. The final point is, again, in the FS margin bridge year-on-year, you will have seen that the debt recovery markets into which we sell debt, the prices generally are lower. That is not unsurprising given the wider circumstances. So those 3 factors contributing to -- really to bridge that gap. -------------------------------------------------------------------------------- Simon Bowler, Numis Securities Limited - Analyst [29] -------------------------------------------------------------------------------- Okay. Great. And then kind of one other question, if I may. Just with regard to, I guess, the going concern statements and commentary that's within what you've released this morning, and kind of part of that talks kind of potential for asset sales. And I'm just wondering, beyond those that we can kind of see quite obviously on the balance sheet, can you give us a sense of what are the asset backing there may be within the group, whether there's kind of bits and pieces of property or anything like that we should be thinking about? And also perhaps kind of give, yes, to the extent possible, a sense on kind of time frame around renegotiation of both the RCF and securitization facilities. I realize that's a difficult question. -------------------------------------------------------------------------------- Craig Lovelace, N Brown Group plc - CFO [30] -------------------------------------------------------------------------------- No, no. So Simon, as I'm referencing, from a going concern perspective, we have a clean audit opinion, and I think that's really important. But the reality is, given we have facilities maturing in September and December '21, respectively, the worldwide uncertainty from COVID-19 means there's an inherent uncertainty into that approach. The flip side is you've seen the cash generation of the group as rapidly as Q1 getting net debt down to GBP 450 million. And actually, our facilities are significantly less drawn on than they have been in the recent past. So that provides, both with supportive lenders and that liquidity generation profile, a real cause for comfort around refinancing. And I think that's really the fundamental fact, the cash-generative nature of this business through the most recent period of time. So there's absolutely no reason to believe that a refinancing is absolutely normal part of the course. -------------------------------------------------------------------------------- Rachel Izzard, N Brown Group plc - Incoming CFO [31] -------------------------------------------------------------------------------- So I'd add to that as well. I'd just echo what Craig has said in terms of we obviously need to be appropriate to the foregoing concern review. Every company is doing that at the moment in conditions that we're all facing. That was a good, robust review, went through all management actions and a good conversation with the Board and with the auditors. But the fact that we're cash generative in Q1, we are already netting down our unsecured debt, and we have flexible secured debt with the loan book. We're in much better shape than year-end, and that's only 3.5 months since year-end. And we can see clear trajectory through this year to continue to net down that unsecured position. That's happening week on week on week. So we feel incredibly confident about coming into the back end of this year and the end of fiscal year '21. And at that point, we'll be back with our supportive lenders, having a very practical normal conversation about refi in a normal process rather than a COVID-19 process. So whilst we have a very voluminous going concern note in there, because that's only appropriate in these times, we're confident in our cash generation this year. We're confident in the improvement in our balance sheet and net debt. -------------------------------------------------------------------------------- Craig Lovelace, N Brown Group plc - CFO [32] -------------------------------------------------------------------------------- I mean I'd just finally wrap it up, Simon. The practical fact is we have very supportive, long-term lenders. We only have 2 banks in our facility. They know the business very well. And indeed, as was shown by the announcement in May, we work collaboratively with them on the CL build process and indeed on the securitization metrics. So they know our facilities very well. They know the strategy and they know the direction of the group. In terms of your final part of the question in terms of assets, we did call out in our previous statements about the nature of the balance sheet. Irrespective of the facilities, that is still a positive place to be in terms of freehold assets. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [33] -------------------------------------------------------------------------------- Good. Hopefully, that sort of covers the questions, Simon. Thank you for them. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- We have a follow-up question from Matthew McEachran of Nplus1 Singer. -------------------------------------------------------------------------------- Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited - Senior Research Analyst of Retail [35] -------------------------------------------------------------------------------- Yes. Could you just provide a little bit of background around the outflow from creditors? I'm assuming there's some timing differences around payables there. If you could just walk us through that, that would be very helpful. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [36] -------------------------------------------------------------------------------- So I will look to Craig to help answer on this question. Craig, do you want to pick this one up? -------------------------------------------------------------------------------- Craig Lovelace, N Brown Group plc - CFO [37] -------------------------------------------------------------------------------- Well, Matthew, are you cross-referencing a specific note in the back of the RNS? Because there's multiple categories of creditors, trade creditors, anything in particular? -------------------------------------------------------------------------------- Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited - Senior Research Analyst of Retail [38] -------------------------------------------------------------------------------- I'm referencing the GBP 41 million outflow overall for the year. -------------------------------------------------------------------------------- Craig Lovelace, N Brown Group plc - CFO [39] -------------------------------------------------------------------------------- I mean, in general terms, that's a mix of trade creditors. There may well be some tax creditors in there as well. Just let me have a quick look, Matthew. I can come back to that, but there's nothing untoward or unusual we've done in the management of creditors at all at the year-end at all. I mean there's obviously a lower level of purchases in general terms, but that's because we've been tightly managing our cash flows throughout the year, and obviously, operating expenditure was down 10%. -------------------------------------------------------------------------------- Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited - Senior Research Analyst of Retail [40] -------------------------------------------------------------------------------- Is it possible that the extra day, the year-end -- the timing of the year-end had an influence there? -------------------------------------------------------------------------------- Craig Lovelace, N Brown Group plc - CFO [41] -------------------------------------------------------------------------------- No, not absolutely. I mean there's no unusual nature there. And no -- I mean I can take that away, but there's nothing from a creditor's perspective that leads me to believe that -- or we certainly haven't done anything different at year-end on trade creditors. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [42] -------------------------------------------------------------------------------- Okay, Matthew. So I mean I think hearing Craig, there's no sort of -- there's nothing that is unusual in there. I think to get a sort of detailed answer, I think Craig would need to take that away. Hopefully, that's okay, Matthew. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- We don't have any further questions. -------------------------------------------------------------------------------- Stephen Johnson, N Brown Group plc - CEO [44] -------------------------------------------------------------------------------- Great. In which case, I just want to sort of thank you all for your time. We have had a couple of bumps in the road, but fundamentally, the business is improving. We've got a great refresh strategy, and we're excited about the future. Have a great day, everyone. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.