Marks Electrical Group plc

Annual financial results for the year ended 31 March 2022

Significant growth, robust profitability and positive trading momentum

Marks Electrical Group plc ("Marks Electrical" or "the Group"), a fast growing online electrical retailer, today announces its audited results for the year ended 31 March 2022 ("the year" or "FY22").

Financial highlights

• Record full year revenue with growth of 44% to £80.5m
• Maintained strong profitability resulting in a full year Adjusted EBITDA⁽¹⁾ of £7.2m at 9.0% margin
• Underlying profitability of the operating model underpinned by a ROCE⁽²⁾ of 57%
• Free cash flow of £5.7m, representing a free cash flow margin of 7.1% and resulting in a closing net cash position of £3.9m
• Adjusted EPS 5.01p⁽³⁾, statutory EPS 3.22p
• Proposed maiden final dividend of 0.67p per share, reflecting Group's strong cash position and confidence in trading, to be paid (subject to shareholder approval at the AGM) on 18 August 2022 to shareholders who are on the register at the close of business on 15 July 2022

Operational highlights

• IPO on AIM successfully completed on 5 November 2021
• Growth in Major Domestic Appliances ("MDA") market share from 1.2% in FY21 to 1.6% in FY22, with our share in the online segment of the market (our primary addressable market) growing from 1.5% to 2.6%⁽⁴⁾
• Strong performance driven across all categories but specifically in televisions, cooking appliances and tumble dryers
• Improved inventory holding and expanded operating capacity, whilst also expanding product range, variety and availability for customers
• Strengthened our commitment to sustainability, achieving carbon neutral operations in FY22
• Maintained industry leading Trustpilot score of 4.8, demonstrating the strength of our customer proposition

Current trading and outlook

• Continued positive trading momentum in the first months of FY23, with revenue growth exceeding 20% year on year
• Disciplined approach to margin management, capital allocation and cash conversion demonstrated in FY22, provides the Group with solid foundations to deliver our financial targets and strategic objectives in the year ahead

Mark Smithson Chief Executive Officer, commented:

"We achieved record revenue in FY22, with growth of 44% against a strong comparative of 78% in the prior year. This is testament to the hard work and commitment of the entire team. I'm particularly proud to have achieved this while maintaining our disciplined focus on margin, capital allocation and cash generation.

While we are conscious of the challenges raised by the cost of living crisis in the UK and its impact on consumer confidence, our low-cost and execution-focused model leaves us well positioned to manage operationally, and with still only 1.6% market share of the £5.4bn UK MDA market⁽⁴⁾, we see significant scope and opportunity for growth.

Recognising the current impact on the consumer and thanks to our strong brand partnerships, we have been able to expand our range of products, across price categories, as well as introducing new credit solutions and interest free options with our finance partners. We have continued to achieve market share gains and strong revenue momentum in the months since the financial year end, as our leading customer service and free next day delivery continues to provide a compelling and unique offering that sets us apart from the competition.

We remain well positioned moving forward to execute on our clear strategy of growing brand awareness, delivering exceptional customer service, and expanding our offering to new customers across the UK."

^Notes

^{(1)   Adjusted EBITDA is a non-statutory measure defined as earnings before interest, tax, depreciation, and amortisation and adjusted for exceptional items, share-based payment charges and revaluation of investments.}

^{(2)   Return on Capital Employed (ROCE) is defined as Adjusted EBIT / (Total Assets - Current liabilities)}

^{(3)   Adjusted EPS is a non-statutory measure of profit after tax, adjusted for exceptional items, share-based payment charges and revaluation of investments, over the total diluted ordinary number of shares in issue. The number of ordinary shares as at 5 November 2021 through to 31 March 2022 have been used as the basis for the current and prior periods adjusted  earnings per share calculation. The shares in issue since IPO  represents an indication of the future weighted average number of ordinary shares for evaluating the performance of the Group}

^{(4)   Based on the Group's analysis of GfK Market Intelligence sales tracking GB data;}

^{(5)   Operating cash flow for cash conversion is defined as cash generated from operations less outflows for lease payments and exceptional items}

^{(6)   Net cash/(debt) represents cash and cash equivalents less financial liabilities (excluding lease liabilities).}

Results presentations

An in-person presentation for sell-side analysts hosted by Mark Smithson, CEO, and Josh Egan, CFO, will take place at 09.00am this morning. Please contact markselectrical@dentonsglobaladvisors.com for further information.

In addition, management will also provide a live online presentation for investors at 10.30am on 10 June 2022. The online event is open to all existing and potential shareholders and registration is free. Questions can be submitted during the presentation and will be addressed at the end. To register, please go to: link to sign up.

A recording of the presentation will be available shortly after the event at this link: Marks Electrical content page.

Enquiries:

Marks Electrical Group plc                                                                                Via Dentons Global Advisors:

Mark Smithson, CEO                                                                                                            Tel: +44 (0)20 7664 5095

Josh Egan, CFO                                                                                                                  

Dentons Global Advisors (Financial PR)

James Styles                                                                                                                          markselectrical@dentonsglobaladvisors.com 

Fern Duncan                                                                                                                          Tel: +44 (0)20 7664 5095

Panmure Gordon (NOMAD and Joint Broker)

Oliver Cardigan, Ailsa Macmaster (Corporate Finance)                                                        Tel: +44 (0) 207 886 2500

Erik Anderson (Corporate Broking)                                                                                   

Berenberg (Joint Broker)

Matthew Armitt / Michelle Wilson / Jack Botros (UK Investment Banking)                             Tel: +44 (0) 20 3207 7800

About Marks Electrical

Marks Electrical is a fast growing, highly scalable, technology driven e-commerce electricals retailer which sells, delivers, installs and recycles a wide range of household electrical products. The Group was founded in Leicester in 1987 by Mark Smithson and has scaled up into a nationwide online retailer with a compelling growth track record, thanks to its vertically integrated, low-cost, high-quality operating model, supported by the ongoing structural shift of consumers to purchase online. The Group operates within the UK Major Domestic Appliances (MDA) market, estimated to be worth approximately £5.4 billion.  

Primarily through its simple, clear and intuitive website - markselectrical.co.uk - the Group offers over 3,500 products from over 50 leading brands across its main product categories, which include Cooking, Refrigeration, Washers & Dryers, Dishwashers and Audio-Visual. These products are sourced from UK distributors of the brands, with whom the Group maintains strong and direct relationships. Marks Electrical delivers direct to customers in its owned and branded vehicles, operated by the Group's skilled team of delivery drivers, who are also able to offer installation and recycling services.

For further information, visit the Marks Electrical corporate website: https://group.markselectrical.co.uk and its retail website: https://markselectrical.co.uk/.

Cautionary statement

This report contains certain forward-looking statements with respect to the financial condition, results of operations, and businesses of Marks Electrical Group plc. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, Marks Electrical Group plc has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

Group CEO review

I am delighted with the performance we have achieved in FY22. We've navigated challenging industry dynamics with supply chain complications, achieved a record revenue performance with good profitability and successfully listed on the London Stock Exchange's AIM market. All this has been achieved whilst increasing our employee base by 49%, expanding our warehouse capacity, enlarging our delivery fleet, appointing a plc Board and adopting a new governance structure, and welcoming new shareholders. This however is just the beginning!

When I reflect on the past year, I am truly proud to work with such a hard-working, talented and committed team of colleagues across all our operations. Without them we wouldn't be where we are today and we wouldn't have prospered in the last 12 months, where others have struggled.

Financial performance

We continued our growth trajectory during the period with year-on-year revenue growth of 44% from £56.0m to £80.5m, building on the 78% growth delivered in FY21. Our Adjusted EBITDA was £7.2m at a 9.0% margin as we invested in advertising & marketing and in driving the operational excellence of the business.

We delivered an Adjusted EPS of 5.01p and are recommending a final dividend of 0.67p per share, representing a payout ratio of 20%, with the 0.67p being a typical two-third share of the annualised amount.

Market share - a significant growth runway

As a business we are predominantly focused on the Major Domestic Appliances (MDA) market and have also been expanding our footprint in the Consumer Electronics (CE) market, primarily in the television category.

During the year, the markets for both MDA and CE were turbulent, with the first quarter (April to June) showing strong growth dynamics compared to the prior year, followed by three further quarters of year-on-year declines. Despite this, we grew our market share from 1.2% in FY21 to 1.6% of the overall MDA market in FY22. Our share in the online segment of the market (our primary addressable market) grew from 1.5% to 2.6%, and we also doubled our market share in the television segment of the consumer electronics market, albeit from low levels.⁽¹⁾

It's these statistics that are truly exciting; we have a tiny share of an enormous market and therefore a huge runway to grow profitably. Our market-leading customer service, free next day delivery offering and competitive pricing, gives us a serious customer proposition and position of strength to take further market share across the UK.

We are enormously excited by this opportunity and that's why I took the step to float the business in November 2021, to improve our brand awareness and obtain access to capital markets to assist in fueling our growth. As we have grown, we have also continued to enhance our standing and relationships with both existing and new brand partners, which in turn has been supported by our listed status.

Capacity expansion and operational excellence

During the year, we increased our driver-installation headcount and vehicle fleet, materially increasing capacity. This demonstrates the strength and scalability of our vertically integrated delivery model which is so vital to delivering the best service for our customers.

We also expanded our warehouse footprint by making investments in additional mezzanine flooring capacity allowing us to increase our stock holding and future proof our site for higher revenue levels and maintain high returns. Our focus on controlled capital allocation and profitable expansion has resulted in a ROCE of 57%⁽³⁾.

We welcomed 66 new joiners in the year across all areas of the business, our largest increase was in driver-installation team members where we had 38 new recruits. In addition, I also welcomed Josh Egan to join the Board as Chief Financial Officer, as well as a number of other senior hires to strengthen our executive and operational teams.

Brand awareness

During the year we carried out a brand awareness study⁽²⁾ which demonstrated that only 7% of the population in England had heard of Marks Electrical - interestingly only 4% of people in London had heard of the brand, yet London is our biggest delivery market on a daily basis. This demonstrates the vast opportunity we have to scale-up and raise brand awareness.

Our marketing activities are geared towards developing our brand and we are deploying a range of both digital and non-digital campaigns to strengthen our proposition and capture more attention.  

We truly believe that our market-leading service drives strong repeat business, and once we have acquired the customer, they will continue to purchase from us. This is exemplified in our strong repeat customer rate improving further in FY22 to 25% from 24% in the prior year.

Outlook - well placed to deliver profitable market share growth

I am delighted by our performance this year, with year-on-year growth of 44% and continued momentum throughout the year against particularly strong comparatives due to Covid-19 acceleration of online shopping trends. When you combine this with our 4.8 Trustpilot score and completion of a demanding IPO process, I believe our team have done exceptionally well.

With nationwide concerns surrounding the cost of living and reduced consumer spending, we believe that our current share of the £5.4bn⁽¹⁾ UK MDA market of 1.6%, provides significant scope and opportunity for growth. Our market-leading customer service and free next day delivery, provides a compelling and unique offering, that sets us apart from the competition, and we have seen continued market share gains and strong revenue momentum in the months since the financial year end.

At present, 80% of our revenues come from distressed purchases, providing the Group with a defendable position during a cost-of-living crisis. Recognising the current impact on the consumer and thanks to our strong brand partnerships, we have been able to expand our range of products, across price categories, as well as introducing new credit solutions and interest free options with our finance partners. Our ancillary services, including add-ons and warranties, make up a very small proportion of our revenue, mitigating any impact on the Group should customers cut back on these options.

Internally, we continue to monitor our pay structures and the cost of living to ensure all our employees are well rewarded for their hard work, offering competitive salaries, commissions, and bonus structures across the board. The business may have my name on it, but it really is about teamwork, and I look forward to fostering our team spirit and family-orientated culture as we grow the business to become a go-to destination for premium electrical appliances in the UK.

Mark Smithson

Chief Executive Officer

^Notes

^{(1)    Based on the Group's analysis of GfK Market Intelligence sales tracking GB data;}

^{(2)    All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1,875 adults. Fieldwork was undertaken between 4 - 5 May 2022. The survey was carried out online. The figures have been weighted and are representative of all England adults (aged 18+).}

^{(3)    Return on Capital Employed (ROCE) is defined as Adjusted EBIT / (Total Assets - Current liabilities)}

Financial review

It's a pleasure to share our FY22 financial results following a record year for the business. We achieved record revenue, expanding our advertising spend to grow brand awareness, invested in the cost base to prepare the business for life as a public company, and delivered a strong operating cash conversion, resulting in a closing net cash position of £3.9m and a return on capital employed of 57%.

Revenue and gross margin

During the year revenue increased 44% to £80.5m (2021:£56.0m), which was an excellent result for the Group and provides assurance that our operating capacity development and investments in marketing, brand awareness and operational excellence are working.

Revenue growth was strong throughout the year, with 78% revenue growth in the first half, followed by 23% growth in the second half. The momentum continued throughout the period due to our increased focus on both online and offline marketing, with our increased paid media activity, improved approach to search engine optimisation and successful TV campaigns driving strong improvements in website traffic and brand awareness.

Gross profit margin was down 150bps from the prior year driven by strong product margins in FY21 as a result of supply constraints during the COVID-19 lockdown periods. As supply improved and competition increased, we saw an overall contraction of the gross product margin, but this was more in line with gross product margin levels seen in FY19 and FY20.

During the year, there has been significant market commentary around driver constraints and inflationary supply chain pressure; despite this, we were able to expand deliveries on our own fleet by 47%, add 38 additional drivers and minimise the impact on our cost of delivery per item to only a 5.2% increase year-on-year. This is despite fuel costs also increasing during the period by 15.8%.

We anticipate strong pricing competition in the market in FY23, however we continue to work closely with our suppliers throughout our categories and ranges, and are targeting a gross margin going forwards of between 19% and 20%.

Advertising and marketing costs

Advertising costs increased to 5.0% of revenue in FY22 versus 2.9% in FY21 as a result of additional investments made in both online and offline marketing activities.

In online advertising, we redefined our approach to both paid media and search engine optimisation, as well as adding conversion rate optimisation activities. The strategic direction we took and the investments made have resulted in materially improved search result rankings and improved online presence for multiple SKUs across our range.

In offline advertising, in order to improve our brand awareness, we carried out our first ever national TV campaign, whilst also carrying out both radio and print based activities. The national TV campaign was highly successful and drove a material uplift in website traffic whilst adding incremental sales. We carried out additional TV campaigns through other channels during the year and also started both YouTube and programmatic display activity.

We believe that the activities carried out in advertising during the year have significantly contributed to our revenue growth.

We anticipate a similar level of investment as a percentage of revenue in advertising & marketing in FY23.

Other operating expenses (excluding depreciation)

Other operating expenses were 5.8% of revenue in FY22 versus 4.6% in FY21 as a result of additional investments made to enhance the operational excellence of the business, in preparation for life as a public company and the planned growth journey ahead.

During the year the Group has made considerable investments in its operational base, with several key hires, including appointing a Group CFO, Head of Financial Reporting, Head of HR, Head of Operations and Head of Supplier Management, all of these roles being leadership positions within the business. These hires were necessary to ensure we have the capability to implement and maintain appropriate processes and controls, and deliver continued operational excellence whilst managing increased sales growth.

During the period we have added colleagues in all key areas; Sales, Customer Service, HR, IT, Procurement, Operations and Finance, and believe these additions will significantly strengthen our employee base. In addition, we have also now introduced a salary for the Group CEO which is also in the overhead base.

We have continued to control costs well during the period and have ensured that despite the changes implemented, we have minimised the increase in the cost base to 120bps.

With other operating expenses relatively fixed, excluding advertising spend, the Group expects to maintain an overhead base in the range of 5.5 - 6.5% of sales.

Adjusted earnings before Interest, Tax, Depreciation and Amortisation ("EBITDA")

The Group achieved Adjusted EBITDA for the period of £7.2m representing a margin of 9.0% (2021: £7.7m, 13.7%).

This decrease in Adjusted EBITDA margin year on year is a direct result of the following aforementioned points:

-   150bps reduction in gross margin due to strong product margins in FY21 as a result of supply constraints during the COVID-19 lockdown periods;

-  210bps reduction as a result of increased promotional activity and a differentiated approach to online and offline advertising activities to improve brand awareness; and

-    120bps cost increase as a result of investment in professionalisation of the business.

Despite the current market challenges, we anticipate maintaining a strong Adjusted EBITDA margin in FY23.

Statutory Profit after tax

During the year, Statutory profit after tax fell from £5.7m to £3.3m primarily due to exceptional costs.

Non-underlying (exceptional) items.

During the year the Group incurred exceptional one-off expenditure in administrative expenses in relation to historical tax arrangements (as disclosed in the Admission Document) and its admission to trading on the London Stock Exchange's AIM market. The nature of the costs incurred primarily relate to tax, legal and professional fees, linked to the various workstreams involved in the admission. This amounted to £2.7m and is non-recurring in nature and hence has been removed from Adjusted EBITDA to better represent ongoing trading performance, with costs directly related to the IPO reclassified to equity.

The Group also has an investment in its buying group, Combined Independents (Holdings) Limited. This investment is revalued annually, with its value increasing based on purchases made, and its value decreasing based on cash paid out to members in relation to their investments. We choose to exclude this fair value gain from Adjusted EBITDA as its nature is partially but not strictly related to the trading activities of the business.

Cashflow and statement of financial position

During the year the Group achieved cash flow from operations of £9.3m with an operating cashflow for conversion of £8.6m at 119% and free cash flow of £5.7m which after exceptional items results in a closing net cash position of £3.9m.

The Group spent £0.2m on a new mezzanine floor in the warehouse, adding an additional 29,000 sq.ft of warehousing space. This enables the Group to benefit from an improved layout as well as increased future revenue capacity.

During the period, the Group has also acquired 25 new vans on finance lease with a capital value of £0.9m, including a cash outflow for deposits of £0.3m. This enables the Group to meet higher sales demand.

On 5 November 2021, the Group successfully listed on London Stock Exchange's AIM market and in doing so raised primary proceeds of £4.7m after costs.

Primarily in the second half, the Group also made strategic investments in inventory in order to improve its SKU range and depth of product availability, increasing stock holding to £14.4m from £11.4m in 2021. Inventory days improved to 90 from 102 in the prior year, and working capital improvements were also made in trade payables, improving our overall days payable position to 52 days from 44 days in the prior year. The Group finished the period in a net cash position of £3.9m as at 31 March 2022 and has no long-term lending facilities outside of its finance leases.

Current trading and outlook

Competitor pressure has increased in FY23, coupled with a challenging market backdrop, but despite this, the business has continued its momentum, gaining market share and focusing on leveraging its cost base to maintain a strong Adjusted EBITDA margin.

Our disciplined approach to margin management, capital allocation and cash conversion demonstrated in FY22, provides us with solid foundations to deliver our strategic objectives in FY23.

Consolidated Statement of comprehensive income

Year ended 31 March 2022

All the results arise from continuing operations.