8 December 2022

Seraphine Group plc

("Seraphine" or the "Company")

Interim Results

Resilience against difficult economic backdrop

Seraphine Group plc, the international digitally led maternity and nursing wear brand, today issues its interim results for the 26 weeks ended 2 October 2022 (the "Period"). Despite top line results reflecting a highly challenging environment for the broader retail sector, our focus on profitability and strengthened skillset have driven an improvement in a number of important operational KPIs.

Period Financial Results

-       Product revenue declined by 12.1% CCY to £18.9m (HY22: £20.8m), due to the highly challenging retail trading environment as noted by the retail sector as a whole

-       Own digital platform product revenue declined 12.2% CCY as inflation in marketing costs impacted efficiency

-       Digital partner product revenue declined 34.4% CCY as the business manages this channel with a focus on profitability

-       Own retail store product revenue grew +22.9% CCY

-       Product gross profit margin marginally improved during the period as we carefully balanced a higher promotional stance with price increases

-       Adjusted EBITDA is, as expected, a loss of £1.5m (HY22: £2.9m) due to a decline in revenue, increased marketing costs and additional overheads following our planned investment in senior personnel

-       Net debt £3.6m (HY22: net cash £1.3m) with cash and cash equivalents of £3.3m.

Operational Highlights

*      Non-financial KPIs reflect the impact of higher marketing costs and customer behaviour patterns returning to pre-pandemic levels

-       Average basket value grew +13.5% at £153 (HY22: £135)

-       Traffic declined 3.6% to 7.4m (HY22: 7.7m)

-       Conversion rate declined 0.3% to 2.6% (HY22: 2.9%)

-       Returns rates increased but have not exceeded pre-pandemic levels

*      Strategic review of partnership with Zalando in order to improve contribution

*      Launch of new 'Curve' range, increasing the appeal and accessibility of our product

*      United States, the Group's largest individual country market, remained resilient

*      Strengthened senior team and enhanced skillsets

-       Group finance function upskilling continues with investment in senior resource

-       Appointment of Trading Director

-       Appointment of Performance Marketing Director

Post Period End

*      Marketing spend continues to be strategically reallocated in response to increased marketing costs with the recruitment of a Performance Marketing Director to further review and improve marketing spend metrics

*      Patent filed for an innovative new type of baby carrier, developed in-house and expected to come to market in 2023

Current Trading and Outlook

*      Trading for the first 9 weeks of H2 has been in line with management's expectations, with own Digital Platform sales improving to broadly flat YoY (CCY), versus -12.2% (CCY) in H1, helped by a better-than-expected Black Friday period

*      The profit contribution from Digital Partners is broadly in line with last year but on significantly reduced sales volumes, as a result of our plan to focus on profitability over growth in this channel

*      Our Retail Stores continue to trade behind pre-pandemic levels and trading in the first 9 weeks of H2 has been softer than H1   

*      Net debt continues to be consistent with the position at H1, with the benefit of the stock unwind expected to reduce net debt during FY24. We have also agreed revised debt covenants with our lender, who continues to be supportive of the business

*      Overall the group has traded in line with management's expectations for the first 9 weeks of H2, however we continue to be mindful of the challenging economic environment

David Williams, Chief Executive Officer, commented:

"Today we are reporting Product Revenue in H1 to be £18.9m versus the previous half year at £20.8m, in line with the updated guidance given a few weeks ago. The period was challenging, as seen across the broader retail sector, with the combined headwinds of the macro-economic backdrop and inflation in marketing costs.

"Despite these challenges we are pleased to report improvement in some key operational KPIs, in line with our renewed focus on profitability and the actions we have taken to streamline and sharpen our internal business functions. We have achieved higher basket sizes and improved gross product margin versus the previous year, reflecting our resilient demographic and careful balancing of promotion and price increases.

"We remain focused on our strategy of bringing our innovative and stylish product to more customers worldwide and have been encouraged by the growth of our new markets. In the short term, we will pause the rollout of further international markets and focus on product innovation and improving our service proposition in existing markets. We have some exciting new products planned for the months ahead - including a highly innovative baby carrier- and with a niche yet loyal customer demographic, whose custom is often non-discretionary, we are confident that we are building a strong platform for the future."

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About Seraphine

Seraphine is an international digitally-led maternity and nursing wear brand with a diverse range of innovative maternity and nursing products serving an under-competed global market.

 Seraphine was founded in 2002 with the vision of creating desirable clothes which women would want to wear even if they were not pregnant, and this ethos remains true to this day. The Group has 20 years' experience designing and developing maternity and nursing wear for women from first trimester to post-partum and nursing products.

 The Group has achieved global brand recognition through its rapidly growing digital platform, which in the year to 3 April 2022, contributed to approximately 84% of Product revenue. The Group currently exports products to customers in over 120 countries globally, with the Group's largest markets being North America, EU and the UK.

Chief Executive's Report

First half total product revenue declined by 12.1% on a constant currency basis (CCY) to £18.9 million (-9.1% at variable currency rates), with the Group experiencing the combined headwinds of the challenging macro-economic climate and significant inflation in marketing costs, as noted across the broader retail sector. Our most resilient market was North America, which declined 2.1% CCY (8.5% growth at variable currency rates) and within this the United States remains the largest individual country market for Seraphine.

Despite the disappointing top line results, a number of key KPIs improved through the period, providing the business with a stronger foundation for the future:

·      Gross basket sizes, the amount customers spend on their order, increased YoY and whilst returns rates increased in parallel, they have not exceeded pre-pandemic levels.

·      Inflation in CAC, whilst still a challenge, softened with Q2 at c. +43% YoY, down from c. +60% in Q1.

·      Gross product margin improved by 8 basis points as we carefully balanced increased promotional activity with price increases.

·      The high continuity mix of our product collection allows us to take a more considered view of stock unwind than many in the sector.

We remain focused on our strategy of bringing our innovative and stylish product to more customers worldwide and have been encouraged by the growth of our new markets. In the short term, we will pause the rollout of further international markets and focus on product innovation and improving our service proposition in existing markets. To that end we have taken steps to address our number one customer complaint - returns processing times - through the launch of a new returns portal and reverse logistics solution, the benefits of which will start to be seen in the next few weeks. We are also reviewing our current single distribution centre model to ensure this is the best fit for our current and future regional requirements.

Channel Review

The period saw a normalisation of customer behaviour to pre-pandemic levels, including a further shift back into higher price point workwear and occasion wear products, resulting in slightly lower conversion rates offset by higher basket sizes. Return rates also increased in line with product mix change but as previously noted did not exceed pre-pandemic levels. The largest drag on our eCommerce business was traffic, which declined 3.6% on the year, reflecting the much higher cost of acquisition in our primary channels.

We also reviewed our strategy with respect to Digital Partners, taking learnings from the recent launch on Next and applying these to Zalando. By reducing the product set offered and reviewing pricing and promotional activity we are now delivering a significantly higher contribution margin from lower sales YoY. We believe that this is the right foundation from which to grow this business further.

Trading in our 7 owned retail stores showed growth for the first time since FY20 but still lags behind pre-pandemic levels. Again, we are optimising this channel for profitability with the closure in the period of our Madison Avenue store in New York balanced against small capital investments in some of our other stores. Our concession arrangement with Macys delivered pleasing results in the period and we are reviewing further opportunities for that model.

Digital Marketing

The biggest impediment to our growth in the period was the continued inflation in marketing costs, primarily resulting from higher CPMs (Cost Per Thousand impressions) on Facebook. Whilst we have seen cost inflation reducing through the second quarter, average CAC for the half was still £25.27 vs £16.54 in the previous year. We have begun a three-part strategy to address this 1) optimisation of existing channels, 2) diversification into new channels and 3) more investment in up-funnel / brand marketing. We have also recruited a Performance Marketing Director and, from 1^st January 2023, will bring full management of key channels in-house, which we believe will deliver both a cost saving and overall performance improvement.

Product Strategy

In the period we launched the first products in our new Curve range, which further extends the accessibility of our brand into the plus sizes with dedicated designs. We also launched baby grows with unique zip access for easier nappy changing, and introduced six-in-one premium babywearing coats. Product innovation continues to be at the heart of what we do at Seraphine, and we are excited about our product pipeline - including an innovative, patent pending, baby carrier.

Sustainability

In the period we established a new internal cross departmental working group to coordinate all of our ESG activities and delivered:

·      The deployment of a number of plastic reducing and improved recyclability initiatives on all new inbound product

·      The creation and democratisation of a Modern Slavery Statement

·      The first phase of internal data collection for Scope 3 reporting

·      Usage of the HIGG Index to begin to collect Scope 3 data for our supply chain

Sustainability continues to be at the heart of all new product development and we continue to identify further opportunities within our existing operations and supply chain.

People

In the period we appointed an experienced Trading Director to our Executive Board who has driven our pricing and promotional strategy resulting in an improvement in gross product margin versus the year before despite difficult trading conditions. Post period end we were joined by a Performance Marketing Director with a remit to enhance and in-house our performance marketing investments.

Current Trading and Outlook

The summer months have been particularly challenging, as they have been across the entire retail sector. However, a number of KPIs have improved through the period as we have executed on our stated plans to strengthen the business.  The start of the Autumn/Winter season was encouraging and Black Friday exceeded our expectations, but we expect trading to be volatile.

The group continues to be exposed to marketing spend inflation but has been identifying new opportunities through alternative channels to performance marketing. Post the half year end, an in house performance marketing team has been established which will provide an overall net benefit to costs vs our previously outsourced model. Bringing the team in house will also ensure this spend is as efficient as possible.

We expect volatility in trading to continue throughout FY23 but believe H2 will be an improvement on H1 as we start to annualise against normalised returns rates and higher marketing costs and take benefit from seasonally higher basket sizes and lower return rates. As a result, we expect H2 to be profitable on a post-IFRS16 Adjusted EBITDA basis. However, we are mindful of the challenging  economic environment and the impact on consumer confidence and disposable incomes.

The Board is confident on the Group's ability to maintain sufficient liquidity throughout the year.

Financial Review

Revenue

During the first half, product revenue reduced by (9.1)% (12.1% CCY) to £18.9m on the previous year, mainly driven by a combination of the headwinds of the macro-economic climate and significant inflation in marketing costs in what was a very challenging period for the sector.

Our own digital platform sales declined (8.8)% YoY, (12.2% CCY), primarily driven by a 3.6% decline in traffic on the year, reflecting the much higher cost of acquisition in our primary channels as well as higher return rates in line with the change in product mix towards more work and occasion wear. Our European platforms have declined more than our other regions, with France and Germany being particularly challenging YoY.

Our Digital Partner revenue, as expected, was lower by 34.2% (34.4% CCY) as we increased the focus on improved profitability in that channel by reducing range and reviewing pricing and promotional activity driven by the customer profile.

Trading in our retail stores was encouraging, delivering +24.0% growth in the period (+22.9% CCY), but we remain behind pre-pandemic levels. In May we closed our Madison Avenue location in New York City, with our SoHo store and Macy's Concession maintaining a physical presence for our customers in the city. Our retail stores continue to be a very small part of our overall business.

Gross Margin

On a statutory basis the company delivered a total gross profit, including both product and other services, of £13.3m (H1 FY22: £14.6m), achieving a gross profit margin of 67.2%, in line with the previous year. Product gross profit of £12.4m and 65.7% was slightly ahead of the previous year at £13.6m, 65.6%, with our additional promotional activity being funded by some price increases. This is in line with pricing activity in the wider market.

Adjusted EBITDA

An adjusted EBITDA loss of £(1.5)m was significantly below the prior year EBITDA profit (H1 FY22: £2.9m), driven by reduced sales as well as increased administrative costs driven by increased acquisition costs, payroll, and professional fees in line with the increased costs of being a listed business.

Overall operating costs (excluding exceptional items) at £17.0m (86.3% of total turnover) increased by 17.7% on the year (H1 FY22: £14.5m) with the main increases being driven by customer acquisition costs and central payroll costs, with a reduction in distribution costs offsetting some of the increase.

At a statutory level we delivered a loss after taxation for the group of £(3.3)m.

Total revenue

For the six months to October 2^nd 2022, Total Revenue at £19.7m (FY22: £21.8m) was a 9.3% reduction on the prior year. Product Revenue of £18.9m (FY22: £20.8m) was a 9.1% (12.1% CCY) reduction on the prior year. We separate our Total Revenue into Product revenue and Income from other services which is mainly delivery revenue. Income from Other Services has reduced on the prior year by 12.8%.

Own digital product revenue

Own digital product revenue fell to £16.1m (FY22: £17.7m) a reduction of 8.8% (12.2% CCY).

Digital partners

Our digital partners channel, which includes wholesale customers, also saw declining sales with product revenue of £1.2m across the 6 months (FY22: £1.9m), a reduction of 34.2%. The focus in the year has been to be maintain profitability over revenue growth which has necessitated focus on the best combination of products, pricing and promotion by territory and partner.

Retail stores

Our retail stores in France, the UK and the US, have continued to build sales since reopening, increasing revenue by 24.0% (22.9% CCY) on the prior year to £1.5m (FY22: £1.2m), as well as benefitting from 6 months of the French stores being open compared to 5 months in the prior year. As footfall continues to improve following the pandemic, we hope to see this continue as we are still below pre-pandemic volumes.

Product revenue by geography

North America

Following a strong performance in FY22, the North American market has continued to grow in GBP terms due to the strengthening of the USD during the period, delivering £6.6m of product revenue across the period, an improvement on the prior year of +8.5% % (-2.1% CCY). With the closure of our Madison Avenue store in New York City in May 22 our remaining New York City store together with our Macy's concessions in New York City and Los Angeles have continued to trade well.

Europe

The EU market decline of (18.8)% (17.9% CCY) to £7.2m (FY22: £8.9m) has continued to be impacted by the Ukraine war and its ongoing effects on EU customers in terms of sentiment and cost of living. The two Paris stores have traded relatively strongly, though the warmer than normal weather across Europe in the summer months did have some impact on footfall and consequently revenue.

UK

UK Product revenue declined 11.7% to £4.3m, across the digital platform, the four UK stores and our Digital Partners. Within this decline we did see growth in our UK stores and in our partnership with Next which is new in this half year, partly offsetting the decline in our main digital platform.

Rest of World

A continuing decline in the Rest of World territory was disappointing in the first half, being driven by the Australian market, delivering £0.8m Product revenue (FY22: £1.0m), a decline of (18.8% (22.4% CCY).  

Gross margin

The Company delivered product gross profit of £12.4m (FY21: £13.6m), achieving a product gross profit margin of 65.7% (FY21: 65.6%). The gross profit improvement of 8 basis points has mainly been achieved within our own digital channel due to price increases offsetting promotional activity as well as some product mix benefits from having our full range of products in stock.

Distribution Costs

Distribution costs for the period reduced by £0.4m to £4.1m (FY22: £4.5m) partly in line with volume. As a proportion of revenue distribution costs remain broadly flat YoY. The improvement in costs is volume driven.

Administrative Expenses

Direct operational costs within Administration have been impacted by general inflation increases over the period as experienced globally.

Customer acquisition spend as part of our administrative expenses increased 33.5% in the period to £5.1m (H1 FY22: £3.8m), reflecting the continuing rate increases, though at a reduced level to that previously experienced in H2 of FY22.

Other head office costs have increased within payroll as the business has significantly upskilled following the IPO in July 21, as well as increased professional costs as part of the initial audit and other support activity.

Adjusted EBITDA

The adjusted EBITDA loss of £1.5m (-7.8% of product revenue) is considerably lower than the prior year profit of £2.9m (13.8% of product revenue).

The fall in EBITDA was a result of:

·      £1.2m due to the decline in sales volumes

·      £1.3m of increased marketing costs in the form of digital marketing rates

·      £1.0m of increased payroll costs reflecting an investment in people

·      £0.6m of legal and professional fees reflecting the increased costs of operating as a PLC

·      £0.5m of head office running costs and operational costs

Interest

Net finance costs in the period were £0.1m which is considerably below the previous year due to the ownership structure prior to the IPO in July 2021. 

Tax

For the current period, a tax rate of 19% has been used, which is in line with HMRC guidelines. The tax has been adjusted for non-deductible items. 

Earnings per share

Basic loss per share at 2 October 2022 was 6.4p

Adjusted loss per share at 2 October 2022 was 3.6p

Balance sheet

Inventory

Inventories at £17.6m showed an increase of 91.3% on the year (H1 FY22: £9.2m) reflecting the continued intake of inventory as sales began to slow. This stock build reflects the strategic investment in inventory to reduce the reliance on timely shipments, building in a level of latency to minimise trading impacts brought about by issues within the supply chain. This stock build is being utilised to drive performance in FY23 with future buys being restricted to reduce stock to more normal levels during FY24.

Trade and other receivables increased by 48.8% to £2.2m (H1 FY22: £1.5m) with an overall reduction in trade debtors being offset by tax refund from HMRC which was repaid in early October 2022.

The increases in inventory brought with it an increase in Trade Creditors to £14.8m (H1 FY22: £7.6m), an increase of 94.1%. Borrowings of £1.4m represents a trade finance facility that is being utilised for incoming inventory.

Cash and cash equivalents at the half year-end were £3.3m while borrowings are £6.9m consisting of £5.5m drawn down on our RCF together with £1.4m of borrowings on a trade finance facility. Net debt is therefore £3.6m

Cash flow

The cash outflow from operating activities for the period £2.7m vs £1.8m in the prior period.

Cash flow has been impacted by the working capital impact of increasing the level of stock in the business to offset any future delays to inbound stock and the subsequent increase in stock holding, while partly offset by the increase in creditors. The higher inventory levels are also impacted by lower than expected sales over the period.

Free cash flow for the period was (£1.7m). The management team will continue to prioritise and proactively manage our inbound stock position, reducing future purchases to reflect the current high stock levels.

Auditors' appointment

PricewaterhouseCoopers LLP was appointed as independent auditor to the Company and in accordance with section 485 of the Companies Act 2006, and their re-appointment was approved at the AGM in September 2022.

NOTES TO THE FINANCIAL STATEMENTS

For the 26 weeks ended 2 October 2022

1.    General information

Seraphine Group Plc ('the Company') and its subsidiaries ('the Group') is a global retailer and wholesaler of maternity wear through Seraphine online, retail standalone stores, franchise stores and digital partners. The Company is a public limited company which is listed on the London Stock Exchange (LSE) and is incorporated and domiciled in the UK. The address of its registered office is 265 Tottenham Court Road, London, W1 7RQ.

2.    Basis of preparation

These interim unaudited consolidated financial statements for the 26 weeks to 2 October 2022 have been prepared in accordance with IAS 34 Interim Financial Reporting.     

The interim consolidated financial statements are prepared in sterling, which is the functional currency of the Group. Monetary

amounts in these financial statements are rounded to the nearest £1.

3.    New or amended Accounting Standards

There are several standards and interpretations issued by the IASB that are effective for financial statements after this reporting period. Of these new standards, amendments and interpretations, there are none which are expected to have a material impact on the Group's consolidated financial statements

4.    Going Concern

The Directors have considered Seraphine Group Plc and its subsidiary undertakings' (together "the Group") cash flows for period to December 2024 along with the current trading and forecast liquidity. The Directors have also considered the net asset position of £17.0m and the loss for the period to 2 October 2022 of £3.3m. The Directors have prepared their detailed forecasts and plans taking into account their experience of trading in the period to 2 October 2022, including the global economic crisis on profitability and cash flows.

The Group has, at the date of approval of these interim consolidated financial statements, sufficient existing financing available

for its estimated requirements for at least the next 12 months. The company has a £6,000,000 revolving credit facility with HSBC,

of which £5,500,000 was drawn down at 2 October 2022, letter of credit loans of £1.4m as well as the IFRS 16 lease liability.

The above, together with the ability to generate cash from the existing inventory provides the Directors with the confidence that the Group is well placed to manage its business risks successfully in the context of current financial conditions and the general outlook in the global economy. The Directors believe, after careful consideration of forecasted cash flows and expected trading performance that the Group will have sufficient cash to meets its liabilities as they fall due. The Directors have therefore concluded

that it is appropriate to adopt the going concern basis for the preparation of these historical financial information.

5.    Significant accounting policies

The interim financial statements have been prepared in accordance with the same accounting policies set out in the Annual Report and Accounts for the 52 week period ended 2 October 2022, with the exception of IFRS 15 'revenue from Contracts with Customers'. The interpretation of this accounting standard has been reviewed since its initial adoption in the financial year ending 3 April 2022 in relation to distribution income and costs, in which costs relating to the distribution to customers were reflected within cost of sales. Upon review, it has been determined that all distribution costs should be classified the same within the distribution costs in the Income Statement to better reflect the nature of these costs.

6.    Reporting period

The Company was incorporated on 14 June 2021 and on 16 July 2021 it acquired the entire share capital of Kensington Topco

Limited. The Seraphine Group Plc interim consolidated financial statements are prepared as a capital reorganisation which means that the financial statements are presented as if the company, and the subsidiary undertakings, had been combined since 21 December 2020, the date in which Kensington Topco Limited was incorporated.

These interim consolidated financial statements cover the 26 weeks ended 2 October 2022. The comparative period (unaudited) covers the 26 weeks to 3 October 2021.

7.    Segmental analysis

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision

Maker (CODM). The CODM has been determined to be the Board as it is primarily responsible for the allocation of resources to

segments and the assessment of performance of the segments. It has been determined that there is one operating segment in

the Group.

8.    Loss per share

Both the basic and diluted profit per share have been calculated using the loss after tax attributable to shareholders of Seraphine Group plc as the numerator. The calculation of the basic loss per share is based on the loss attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period. Dilutive share options relate to employee option schemes which are likely to vest to the extent they are dilutive. Options contingent on performance conditions are only included where performance conditions would have been met up to the reporting date.

There were no potentially dilutive shares, options or warrants in issue, hence fully diluted.

9.    Intangible assets

The amortisation charge for Brand Value, Trademarks and Website and Business Systems for the period are recognised within administrative expenses.

As at 2 October 2022, the Brand Value intangible asset, which relates to Seraphine, has a remaining amortisation period of 8 years 3 months.

The average remaining amortisation period of the Website and Business systems is 2 years 6 months.

10.  Property, plant and equipment - Owned assets

11.  Property, plant and equipment - Right-of-use

Alternative Performance Measures