McColl Retail : Financial Review

McColl's Retail Group plc Annual Report and Accounts 2020

Financial review

Strategic report

Governance

Financial statements

Chief Financial Officer

We have delivered strong revenue growth and a robust underlying performance.

The past 12 months has brought about a fundamental change in how consumers have shopped in our stores as a result of the COVID-19 pandemic. Our stores were a lifeline to local communities during the national lockdowns, with customers choosing to shop closer to home. This brought about changes to sales patterns, product mix and the cost to operate that affected the financial results.

While we expect shopping behaviour to somewhat normalise as the pandemic subsides, some patterns such as a sustained element of remote working are likely to continue. This will continue to influence our financial performance and the decisions we take in responding to the changeable conditions.

In the period, our like-for-like revenues accelerated from broadly flat in the first quarter, to a double-digit performance in the remaining three quarters. For the year as a whole, like-for-like revenues rose by 12.0%. Consumer preferences switched to lower margin take home and value packs. Below margin, incremental COVID-19 related costs were offset by continued cost discipline and business rates relief received in the period.

Our financial priorities in 2020 included strengthening our balance sheet, mitigating cost inflation and further optimising our estate. While there remain a number of challenges, we have demonstrated our resilience this year with a robust underlying performance.

£m	FY 2020	FY 2019	Change
Sales	1,258	1,219	+3.2%
Gross Profit	301	316	-4.7%
Gross Margin %	23.9%	25.9%	-200bps
Adjusted EBITDA	57.9
(post IFRS 16)	-	-
Adjusted EBITDA	29.1
(pre IFRS 16)	32.1	-9.3%
Loss after tax	(2.7)	(95.9)	-
Net Debt (post IFRS 16)	(281.8)	-	-
Net Debt (pre IFRS 16)	(89.6)	(94.1)	+4.8%

New accounting standards

IFRS 16 'Leases' became effective for the Group from

25 November 2019 and replaces the requirements of IAS 17 'Leases'. The Group has adopted IFRS 16 using the modified retrospective approach under which the cumulative effect of adoption is recognised through reserves, with comparatives continuing to be reported under IAS 17.

IFRS 16 removes the distinction between operating and finance leases - all leases of more than 12 months are now recognised on a lessee's balance sheet, except for some limited exceptions. This leads to an increase in leased assets and financial liabilities on the balance sheet of the lessee. There is also a corresponding increase in operating profit and EBITDA because lease expenses are reclassified as interest and depreciation instead of operating expenses.

Adapting to a rapidly changing environment.

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McColl's Retail Group plc Annual Report and Accounts 2020

Financial review continued

Revenue

£1,258bn

£1,219m 2019

Adjusted EBITDA1

£29.1m

£32.1m 2019

Net cash from operating activities2

£49.0m

£20.0m 2019

Net debt1

£89.6m

£94.1m 2019

1. Numbers on a pre IFRS 16 basis.
2. The adoption of IFRS 16 has led to an increase in depreciation and interest expense. As a result, net cash from operating activities has increased by £30.6m in FY 2020.

As a result of adopting the new accounting standard for the 12 months ended 29 November 2020, the Group's Adjusted EBITDA was £57.9m and Net Debt was £281.8m as at the period end. On a consistent, pre IFRS 16 basis, Adjusted EBITDA for the period was £29.1m (2019: £32.1m) and Net Debt reduced to £89.6m (2019: £94.1m) as at the period end.

See notes 6 and 21 for a reconciliation of the IFRS 16 adjustments impacting EBITDA and Net Debt.

Revenue

Revenue for the 53-week period ended 29 November 2020 was £1,258m, compared to £1,219m for the 52 week period ended 24 November 2019. On a comparable 52-week basis, revenue grew by 1.4% to £1,236m.

The revenue performance during the year reflects a number of trends with strong demand since the start of the COVID-19 pandemic, offset by reduced services revenues and an acceleration in divestments and store closures made during the year. Overall, we closed 179 stores in FY20, up from 120 stores in FY19.

On a like-for-like basis (and comparable on a 52-week period), revenues grew by 12.0% during the period (2019: 0.0%). The growth was a result of strong demand following the onset of the COVID-19 pandemic, as consumers chose to shop locally during lockdown restrictions. Strong growth in grocery, BWS (beers, wine, spirits), tobacco and multipack products, came at the expense of impulse products (crisps and snacks, soft drinks, confectionery) and food-to-go.

Gross profit and margin

Gross profit fell to £300.9m FY20, compared to 2019 (£315.7m). This represented a gross margin of 23.9% (2019: 25.9%), a decline of 200 basis points over the period. The fall in gross margin reflects the changing mix of sales during lockdown, as customers moved away from higher- margin impulse purchases to lower margin take home products as well as multi-buys and value items. In addition, we took the active decision to selectively invest in essential food pricing to maintain good value to existing customers and build loyalty amongst the incremental shoppers in our stores.

Operating expenses/overheads

Administrative expenses, excluding the impact of adjusted items, fell by 6.5% to £286.8m (2019: £306.6m) during the period, due to stronger cost discipline and the impact

of our store optimisation programme. On a pre IFRS 16 basis, adjusted administrative expenses as a percentage of revenue were 23.2% (2019: 25.2%).

We experienced a number of underlying cost pressures and worked hard to mitigate the impact of National Living Wage inflation. Additional direct COVID-19 related costs amounted to £5.9m, which included the personal protective equipment (PPE) necessary to keep our colleagues and customers safe, additional card charges, cleaning equipment and colleague costs. This was partially offset by a number of government support measures in the period amounting to £9.4m in total. These government support measures included business rates relief and use of the Coronavirus Job Retention Scheme for furlough of our most vulnerable employees.

Going forward we expect cost headwinds related to COVID-19 to continue. We will also maintain focus on our store optimisation programme in order to improve the quality of our estate, focused on the divestment and closure of under-performing stores. We are pleased with the implementation of the store optimisation strategy so far, with 179 stores closed during the period, moving away from low margin newsagents and targeted towards larger, food- led convenience stores.

EBITDA and operating profit

Group Adjusted EBITDA was £57.9m in the period including the impact of IFRS 16. On a consistent, pre IFRS 16 basis, Adjusted EBITDA for the period was £29.1m, a fall of 9.3% over the same period last year (2019: £32.1m). The year-on- year decline is due to lower gross profit, lower contribution from Services and ongoing net COVID-19 costs.

Depreciation for the year was £38.0m (2019: £15.8m), which includes a depreciation on right-of-use assets in relation to IFRS 16 of £24.2m (2019: nil). Amortisation for the year was £1.0m (2019: £0.8m).Adjusted operating profit increased to £18.7m (2019: £15.4m). Statutory operating profit was £12.3m (2019: loss of £90.4m).

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McColl's Retail Group plc Annual Report and Accounts 2020

Strategic report

Governance

Financial statements

Adjusting items

Certain items are identified and separately disclosed as adjusting items. These adjusting items are excluded from the Group's adjusted profit measures due to their size and nature in order to better reflect management's view of the performance of the Group.

Adjusting items totalled £3.4m in FY20 (2019: £102.4m). These costs primarily reflected expenses related to business restructuring and the store optimisation programme, where the Group has undertaken a material number of store closures.

Adjusting items in FY19 totalled £102.4m, where the majority of this amount related to a goodwill impairment of £98.6m. The write-down was due to rebasing of financial projections, based on lower underlying gross margin, National Living Wage and retail cost inflation pressures.

Net property-related adjusting items in FY20 were £2.4m (2019: £6.0m). This included £5.5m of costs associated with our store optimisation programme, and a net gain on disposal of £3.4m in relation to the sale of our head office. Total proceeds were £7.3m, with £2.3m received by the year- end, with the remaining balance expected to be received by end of March 2021.

Interest and tax

Net finance costs in the year were £17.6m (2019: £8.2m). The increase over the prior year primarily reflects a £9.1m finance charge under IFRS 16.

The tax credit for the year was £2.6m (2019: credit of £2.7m). The comparable effective rate of tax in 2020 excluding the impact of non-deductible adjusting items was 36.4% (2019: 12.4%). The difference between the current and statutory rate of 19.0% in the period is due principally

to a prior year adjustment for losses carried back and adjustments in respect of prior years.

Earnings per share

Basic loss per share was 2.3 pence (2019: loss of 83.3 pence). On an adjusted view, basic earnings per share was 0.6 pence (2019: 5.6 pence).

Balance sheet and net debt

Total shareholder funds at the end of the year were £19.9m (2019: £38.7m).

The book value of non-current assets increased by £170.5m to £417.4m (2019: £246.9m), where the increase reflects the introduction of right-of-use assets under IFRS 16 of £173.5m. The Group recognises right-of-use assets and lease liabilities for most leases, except for short-term leases and leases of low-value-assets.

Current assets at the end of the period decreased to £144.9m (2019: £163.3m), as a result of a decrease in cash and cash equivalents of £13.8m mainly due to repayment of debt as the term loan continues to be amortised at £10m a year and drawings on the revolving credit facility have reduced by £7m.

Current liabilities increased to £248.5m (2019: £229.2m), reflecting an increase in loans and borrowings of £21.1m over the prior year to £32.3m (2019: £11.2m). Non-current liabilities increased to £293.9m (2019: £142.3m) due to increased loans and borrowings of £152.8m over the prior year to £272.7m (2019: £119.9m). The increase relates to the inclusion of lease liabilities following the adoption of IFRS 16.

Net debt (total borrowings less cash and cash equivalents) at the end of the period was £281.8m. On a consistent pre IFRS 16 basis, net debt reduced to £89.6m (2019: £94.1m pre IFRS 16). The business remains focused on working capital and cash management to reduce business leverage. At the end of the year our net debt to EBITDA ratio was 3.1x on a rolling 12-month basis.

We have demonstrated resilience under challenging circumstances and maintained financial control.

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McColl's Retail Group plc Annual Report and Accounts 2020

Financial review continued

Pension schemes

We operate two defined benefit pension schemes, the TM Group Pension Scheme and the TM Pension Plan, both of which are closed to future accrual. Total assets across both schemes had a value of £141.7m at the period end date of 29 November 2020. The combined accounting surplus in the two defined benefit pension schemes operated by the Group decreased to £3.9m (2019: £7.9m). The last actuarial review of the two schemes in June 2017 concluded that the combined funding deficit was £12.6m, and the Group currently contributes approximately £2.1m per year, inclusive of fees and levies.

Cash flow and capital expenditure

The Group took, and continues to take, proactive actions to preserve cash, manage working capital, maximise liquidity, and phase capital expenditure appropriately, given the uncertainty relating to the impacts of demand and shopping behaviours from the COVID-19 pandemic, including increased cash collection from stores and reacting to changes in demand to manage stock. We have also prudently modelled a range of future downside scenarios, which we are confident we have the financial and operational flexibility to deal with.

Net cash provided by operating activities in the year was £49.0m (2019: £20.0m), reflecting the changes due to the implementation of IFRS 16, while pre IFRS 16 it was £18.4m. Cash outflows related to leases are no longer included within net cash from operating activities except for short- term and low-value leases. The cash position was also benefitted by a total amount of £15.2m from government support measures available to the Group following the onset of the COVID-19 pandemic. These measures included the job retention scheme, a deferral of VAT payments, and business rates relief.

Gross capital expenditure was £17.3m (2019: £14.4m).

Net capital expenditure, including property proceeds from the sale and leaseback of freehold properties, increased to £5.6m (2019: £2.9m).

Cash interest on bank loans and borrowings paid was £7.0m (2019: £7.4m), while the bank loans and borrowings interest expense was broadly in line with last year (see note 8).

Bank facilities

In March 2021, we announced that our banking arrangements have been revised in order to give us more certainty and flexibility to execute our strategy.

The amended credit facility agreement provides improved headroom against covenants, a realigned amortisation schedule and extends the maturity from May 2022 to February 2024. The updated facility consists of a £100m revolving credit facility and an amortising £67.5m term loan.

The facility has been arranged with our existing syndicate of six banks, comprising AIB Group (UK), Barclays Bank PLC, HSBC UK Bank plc, National Westminster Bank plc, Santander UK PLC, and Bank of Ireland. The continuing support of our banks reflects their confidence in the prospects of the Group.

See the Directors Report in the Annual Report for a further explanation of going concern in relation to the facilities agreement.

Dividends

The Board has not declared a dividend for the period ended 29 November 2020. We recognise that dividend payments are an important part of the Group's returns to shareholders and will keep the dividend policy under review with the aim of reinstating the payment of dividends at an affordable and sustainable level, once our strategic change programme gathers momentum and the Group deleverages.

Additionally, the Company is restricted from paying a dividend until certain conditions are satisfied in its banking facilities, including achieving Group leverage below 1.75x.

Giles David

Chief Financial Officer

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