AIM: CFX

28 January 2020

COLEFAX GROUP PLC

("Colefax" or the "Group")

Half Year Results

for the six months ended 31 October 2019

Colefax is an international designer and distributor of furnishing fabrics & wallpapers and owns a leading interior decorating business. The Group trades under five brand names, serving different segments of the soft furnishings marketplace; these are Colefax and Fowler, Cowtan & Tout, Jane Churchill, Manuel Canovas and Larsen.

Highlights

David Green, Chairman, said:

"The Group's performance over the last six months reflects difficult trading conditions in most of our major markets. This was not entirely unexpected given Brexit uncertainty and the low level of high end housing transactions in the US and the UK. In addition our Decorating Division returned to more normal levels of activity following an exceptional performance last year.

"During the period we were able to benefit from the Brexit related weakness of Sterling against the Dollar which may not continue in the future. In the US a strong stock market is usually positively correlated with sales but we have yet to see a significant improvement in trading. Following the decisive UK election result we detect an improvement in business confidence but sales prospects in the UK and Europe are still linked to the outcome of trade deal negotiations with the EU.

"The Group has a strong balance sheet with cash of £11.09 million. Although we expect trading conditions to remain relatively challenging we are well placed to take advantage of any improvements in market conditions and will continue to invest with confidence in our portfolio of luxury brands and our worldwide distribution network."

This announcement contains inside information within the meaning of the Market Abuse Regulation.  The person responsible for arranging release of this announcement on behalf of Colefax Group plc is Rob Barker, Finance Director.

Enquiries:

CHAIRMAN'S STATEMENT

Financial Results

Group sales for the six months to 31 October 2019 decreased by 5.3% to £42.98 million (2018: £45.38 million) and by 7.4% on a constant currency basis. Pre-tax profits decreased by 20.4% to £2.88 million (2018: £3.62 million). Earnings per share decreased by 14.3% to 23.9p (2018: 27.9p). The Group ended the first half of the year with cash of £11.09 million (30 April 2019: £9.46m).

The main reason for the decrease in profits in the first six months was a reduction in profit from our Decorating Division which made profits of £255,000 compared to £738,000 last year. In our core Fabric Division sales declined by 1.1% and by 3.8% on a constant currency basis reflecting challenging trading conditions in most of our major markets.

Our interim results for the current period reflect the adoption of IFRS 16 'Leases'. As permitted, prior year comparatives have not been restated. Although IFRS 16 has no impact on the Group's cash flow it does significantly alter the content of the Group's income statement and balance sheet. Property leases which were previously expensed as rent on a straight line basis over the life of the lease are now recorded in the balance sheet as a right of use asset and a corresponding lease liability. Rent expensed in the income statement has been replaced by an amortisation charge on the right of use asset and a notional finance charge on the lease liability. The impact of adopting IFRS 16 is an increase in operating profit of £514,000 but a decrease in profit before tax of £129,000.

In line with our progressive dividend policy the Board has decided to increase the interim dividend by 4.0% to 2.6p per share (2018: 2.5p). The interim dividend will be paid on 9 April 2020 to shareholders on the register at the close of business on 13 March 2020.

Product Division

·     Fabric Division - Portfolio of five brands: "Colefax and Fowler", "Cowtan and Tout", "Jane Churchill", "Manuel Canovas" and "Larsen".

Sales in the Fabric Division, which represent 85% of the Group's sales, decreased by 1.1% to £36.50 million (2018: £36.89 million) and by 3.8% on a constant currency basis. Profits decreased by 5.4% to £2.64 million (2018: £2.79 million).   

Sales in the US, which represent 62% of the Fabric Division's turnover, increased by 1.5% in reported terms but declined by 3.0% on a constant currency basis. The profit impact of the decline in sales was largely offset by a strong US Dollar versus Sterling exchange rate which averaged $1.25 compared to $1.30 for the prior year  The overall US economy is healthy with a buoyant stock market and low unemployment. We believe that the relatively difficult trading conditions we have experienced are linked to a decline in luxury home transactions driven by reductions in mortgage interest relief and other property tax deductions. The impact varies by state and is reflected in greater regional variations in sales performance.

During the period we completed the main phase of our Los Angeles showroom refurbishment and expect the remaining work to be finished by February. Over the next year we will focus on moving the majority of our US warehouse operation into our new UK warehouse facility. Although this will involve some one-off costs it will improve our operational efficiency and result in significantly lower premises costs in New York.

Sales in the UK, which represent 17% of the Fabric Division's turnover, declined by 5.8% during the period. Trading conditions have been challenging and we mainly attribute this to a very subdued high end housing market caused by high rates of stamp duty and Brexit uncertainty. Whilst our business is not wholly linked to high end housing transactions it does tend to lag changes in activity levels. The result of the recent General Election has removed political uncertainty and improved confidence but it will take time for this to feed through to our business.  

Sales in Continental Europe, which represent 19% of the Fabric Division's turnover, decreased by 2.6% on a reported basis and by 2.8% on a constant currency basis. Trading in most of our European markets has been weak and this reflects a lack of confidence in the wider economy. In France, which is our largest market in Europe, sales were down by 7.7% due to a significant contract order in the prior year. Sales in Germany declined by 2.7% but Italy increased by 4.3%. Overall sales in Europe have shown a gradual decline over the last three years and we think this trend is likely to continue in the short to medium term. Brexit uncertainty has not helped business confidence and a free trade deal with the UK is very important to the Group because there are no simple solutions for mitigating the effect of a hard Brexit.

Sales in the Rest of the World, which represent 2% of the Fabric Division's turnover, decreased by 14.4% on a constant currency basis. Our major markets comprise the Middle East, China and Australia and for different reasons all of these markets experienced difficult trading conditions. We expect the Rest of The World to remain a relatively small proportion of Fabric Division sales.

·      Furniture - Kingcome Sofas

Sales for the six months to October 2019 decreased by 8.1% to £1.25 million (2018: £1.36 million) and the Company made an operating profit of £51,000 compared to £102,000 in 2018. The majority of furniture sales are made in the UK, especially London and the decline in sales and profit reflects a weak high end housing market and Brexit uncertainty. Currently the order book is slightly ahead of last year and we believe that the decisive election result will have a positive impact on future trading.

Interior Decorating Division

Decorating sales, which account for just over 12% of Group turnover, decreased by 26.8% in the period to £5.23 million (2018: £7.14 million) and generated a first half profit of £255,000 compared to a profit of £738,000 for the same period last year. This performance was in line with expectations and follows an exceptionally strong performance by the Decorating Division last year. Decorating sales vary according to the timing of projects and can sometimes change for reasons beyond our control. Currently decorating deposits are significantly down against a strong prior year comparative and trading in the second half of the year is likely to be weaker than previously expected.

Prospects

The Group's performance over the last six months reflects difficult trading conditions in most of our major markets. This was not entirely unexpected given Brexit uncertainty and the low level of high end housing transactions in the US and the UK.  In addition our Decorating Division has experienced lower levels of activity following an exceptional performance last year.

During the period we were able to benefit from the Brexit related weakness of Sterling against the Dollar which may not continue in the future. In the US a strong stock market is usually positively correlated with sales but we have yet to see a significant improvement in trading. Following the decisive UK election result we detect an improvement in business confidence but sales prospects in the UK and Europe are still linked to the outcome of trade deal negotiations with the EU. A free trade deal is particularly important to the Group because we have significant European imports and exports. Our business is highly operationally geared and needs modest sales growth to prosper. Our response to difficult trading conditions has been to focus on cash flow and run the business in a conservative manner. Over the next twelve months the consolidation of most of our US warehouse operations in the UK will help offset significant increases in premises costs and improve business efficiency.

The Group has a strong balance sheet with cash of £11.09 million. Although we expect trading conditions to remain relatively challenging we are well placed to take advantage of any improvements in market conditions and will continue to invest with confidence in our portfolio of luxury brands and our worldwide distribution network.

David Green

Chairman

* The increase in finance expense is due to the adoption of IFRS 16 'Leases'.  We have used the modified retrospective approach and as a result, the prior year comparatives have not been restated.

 

* The figures for ROU assets, lease liabilities and the absence of deferred rent are due to the adoption of IFRS 16 'Leases'.  We have used the modified retrospective approach and as a result the prior year comparatives have not been restated.