McColl's Retail Group plc Final Results

Data : 18/02/2019 @ 08:00
Fonte : UK Regulatory (RNS & others)
Titolo : Mccoll's Retail Group Plc (MCLS)
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McColl's Retail Group plc Final Results

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RNS Number : 2895Q

McColl's Retail Group plc

18 February 2019

Preliminary audited results and trading update

18 February 2019 - McColl's Retail Group plc, the UK convenience retailer, ("McColl's" or "the Group") today announces its preliminary results for the 52 week period ended 25 November 2018, and a trading update for the 11 week period to 10 February 2019.

Financial Summary:

-- Total revenue up 8.1% to GBP1.24bn (2017: GBP1.15bn(1) ) reflecting the annualisation of the 2017 acquisition

-- Total like-for-like (LFL) sales(2) down 1.4%, impacted by supply chain disruption, but showing an improving trend through the year, with Q4 FY18 sales flat and Q1 FY19 up 1.2% to date(3)

-- Continued progress towards our strategic target of increasing grocery and alcohol sales; now representing 34% of total sales (2017: 32%)

-- Adjusted gross margin(4) 26.0% (2017: 26.8%, 2018 gross margin 25.9%), reflecting supply chain challenges and mix effect of strong tobacco sales

   --      Net cash from operating activities GBP61.8m (2017: GBP54.2m) 
   --      Adjusted EBITDA excluding property-related items(5) GBP35.0m (2017: GBP44.0m). 
   --      Net debt materially better at GBP98.6m (2017: GBP142.2m) 
   --      Profit before tax GBP7.9m (2017: GBP18.4m) 
   --      Basic earnings per share 5.9p (2017: 12.3p) 

-- Proposed final dividend of 0.6p per share, bringing FY18 total to 4.0p per share (2017: 10.3p)

Operational and strategic highlights:

-- Transition to Morrisons supply in 1,300 stores(6) completed in mid-August, three months ahead of original schedule

-- Investment in estate continued with 59 convenience store refreshes completed in the year, delivering sustained average sales uplifts above 5%, and 11 new convenience stores added

-- Ongoing estate optimisation programme advanced with 66 under-performing newsagents and smaller convenience stores divested in the year

   --      Banking terms revised, providing additional flexibility 
   --      Appointment of Robbie Bell as Chief Financial Officer; commenced role on 17 January 2019 

Jonathan Miller, Chief Executive, said:

"2018 was undoubtedly a challenging year, marked by supply chain disruption following Palmer & Harvey's entry into administration and the accelerated transition to our new supply partner Morrisons.

"Despite this disruption, we continued to make progress against a number of our key strategic plans. We completed the rollout of 1,300 stores to Morrisons supply in less than nine months, which represents a considerable achievement and provides us with a more secure supply chain and a higher quality chilled and fresh offer. We also continued to invest in our estate, with 59 convenience store refreshes completed in the year and 11 new stores acquired.

"We are a profitable and cash generative business, and our priority for the year ahead is to rebuild operational momentum and we remain confident in delivering our strategic plans."

Current trading and outlook:

Early trading in FY19 has seen a sales improvement with total LFL sales for the 11 week period ended 10 February 2019 up 1.2%. Total sales increased 0.4%.

In FY19 we expect to acquire a small number of new convenience stores, and plan to complete 20-30 more convenience store refurbishments as part of our successful store refresh programme. We will continue to grow our convenience offer, increase our neighbourhood presence and give great customer service.

In line with the financial guidance previously disclosed on 3 December 2018, we continue to expect adjusted EBITDA for FY19 to be a modest improvement on FY18.

Notes:

The business uses a number of non-statutory or alternative performance measures (APMs) (for example, LFL, adjusted EBITDA, adjusted EPS and net debt) because management believe that these - placed with equal prominence alongside other statutory measures - help to better explain the underlying performance of the business and its key dynamics. These are kept under continuous review and are defined and used consistently, or explained otherwise. The Group has defined and outlined the purpose of its alternative performance measures, including its key measures, in the glossary of terms. Details of the GBP(2.6)m of gross (pre-tax) adjusting items are set out in note 3 and described in the financial review.

1 To better reflect the core operations of the Group, Post Office revenue, previously included in other operating income, is now recognised in statutory sales. In order to ensure comparability 2017 full year revenue, gross margin, gross profit and other operating income have been restated - see note 2.

2 LFL sales reflect sales from stores that have traded throughout the current and prior financial periods, and sales include VAT but exclude sales of fuel, lottery, mobile phone top up and travel tickets.

3 Q1 LFL sales to date are for the 11 week period ended 10 February 2019.

4 Adjusted gross margin is gross profit before adjusting items divided by revenue - see the glossary of terms.

5 Adjusted EBITDA excluding property-related items shows the Group's Earnings Before Interest, Tax, Depreciation and Amortisation adjusted for both property gains and losses and other adjusting items.

6 McColl's' total store estate is comprised of c.1,550 stores. The c.300 stores McColl's acquired from the Co-op in 2017 are under a separate supply contract with Nisa.

Results presentation

A copy of this announcement is available at www.mccollsplc.co.uk/investor.

A meeting for analysts will be held today at 9.30am at Numis Securities, London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. Access will be by invitation only. All presentation materials will be available on our website.

Enquiries

Please visit www.mccollsplc.co.uk or for further information, please contact:

 
 McColl's Retail Group plc           Media enquiries: 
  Jonathan Miller, Chief Executive    Headland 
  Robbie Bell, Chief Financial        Lucy Legh, Rob Walker, Charlie 
  Officer                             Twigg 
  Naomi Kissman, Head of Investor     +44 (0)20 3805 4822 
  Relations 
  +44 (0)1277 372916 
 

Notes to editors

McColl's is a leading neighbourhood retailer, with an estate of c.1,550 managed convenience stores and newsagents. We operate McColl's branded convenience stores as well as newsagents branded Martin's across the UK, except in Scotland where we operate under our heritage brand, RS McColl. Our dedicated colleagues serve five million customers every week, and we are the largest operator of Post Offices in the UK, with c.600 in-store counters/branches.

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. They appear in a number of places throughout this announcement and include statements regarding our intentions, beliefs or current expectations and those of our officers, Directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. Unless otherwise required by applicable law, regulation or accounting standard, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

Chairman's statement

A year of transition

It's been a challenging year as the McColl's team have navigated their way through unprecedented supply chain disruption. Having transitioned 1,300 of our stores to a new wholesale supply partner, the business can now look forward to rebuilding momentum and capitalising on the opportunities that lie ahead.

The business began the 2018 financial year with great confidence, having successfully integrated a major acquisition and signed a new wholesale supply agreement with Morrisons. However, just days into the new year we experienced a significant setback following the sad failure of Palmer & Harvey (P&H). The loss of supply to 700 stores created major disruption and required us to put in place an interim supply solution for nine months, during which we accelerated the transition of 1,300 stores to Morrisons supply.

Moving to a new wholesale supply partner, at a much faster pace than anticipated, created its own challenges and severely disrupted our plans for the launch of Safeway. We are working with our partner Morrisons and remain confident that together we can develop an optimal range and promotional offer for the future.

Strong cash performance and new financing arrangements provide flexibility

Whilst the considerable supply chain disruption we suffered held back like-for-like (LFL) sales and profit, the business continues to generate very strong cash returns. In the year, we have benefited from significant working capital improvements as we've transitioned to our new wholesale supply partner.

We have also realised proceeds from the sale and leaseback of a number of freeholds we acquired as part of our acquisition in 2017. This has allowed us to continue to invest in our strategic initiatives that will drive future growth, such as new store acquisitions and our store refresh programme, as well as pay down debt more quickly than anticipated.

In addition, in the second half of the year we engaged with our banking syndicate, and have amended our financing arrangements to give us more flexibility to execute our business plans.

Dividends

We need to give careful consideration to our cash allocation, striking the right balance between investing in the business, reducing our debt and providing returns to shareholders.

The Board is recommending a final dividend of 0.6 pence per share, making a total dividend for the period of 4.0 pence, as part of our commitment to provide returns to shareholders. This dividend will be paid on 6 June 2019, to shareholders on the register at the close of business on 26 April 2019, subject to approval at the forthcoming Annual General Meeting. Our policy of a 50% payout ratio to profit after tax (before adjusting gains but after adjusting losses) is unchanged.

Strengthening the Executive team

I'm delighted that after a rigorous and extensive search, Robbie Bell has recently joined the business as Chief Financial Officer. Robbie has over 20 years of finance and retail experience, most recently as CEO of Welcome Break, and previously in senior finance roles at Screwfix, Travelodge and Tesco. He is a great addition to the Board and as he settles into his new role I am confident that the business will benefit from his extensive experience and expertise.

We have made a number of additional senior appointments during the year, including Tim Fairs, our first Customer Director, and Greg Goodwin who joined us in the newly created role of Head of Buying. We are committed to bringing in commercially focused talent to support the business in the future.

I'd also like to thank Simon Fuller for the significant contribution he has made during his time as CFO at McColl's.

Looking forward

Jonathan and the team have shown enormous strength, determination and resilience in the face of immense challenges, and after an exceptionally difficult 2018 we begin 2019 with a more secure supply chain.

In the coming year, the business can move forward with a renewed focus on customers and the core elements of convenience retailing, to rebuild confidence and momentum.

Ensuring a strong balance sheet will be imperative and we will maintain good capital discipline, exploring opportunities to take further action to reduce our debt whilst maintaining appropriate levels of investment in the business.

Whilst it may take longer than anticipated to deliver the benefits of the Morrisons partnership this will be important to our continued transition to a food-led convenience offer. With the distribution network firmly established we can continue to enhance our offer, through further development of Safeway as we realise further value from the relationship.

Although Brexit and the current political environment continues to create uncertainty for businesses and consumers, food and grocery retail has a history of resilience during economic downturn and long-term social and lifestyle trends support growth in the convenience channel.

The Board remains committed to our strategy and, as we get back on track, we can look forward to a brighter future.

Angus Porter

Chairman

Notes:

(1) Information regarding the Group's assessment of risks related to Brexit can be found in note 1 and the principal risks and uncertainties.

Chief Executive's Review - Getting back on track

In approaching 30 years in the business I have never known a year as challenging as 2018. However, I couldn't be prouder of the McColl's team and how we have all pulled together in the midst of unprecedented supply chain disruption. We move into 2019 with a more stable and secure distribution network, and we remain a profitable, cash generative business. As we work to get back on track there are plenty of opportunities to grow.

We began the new financial year with the business in great shape. We had just surpassed the milestone of GBP1bn of annual revenues, with an improving sales trend and a strengthening product mix and margin. We were also excited to begin working with our new wholesale partner, Morrisons, and were making preparations for the launch of Safeway. However, just 48 hours into the year we received the sad news that P&H, the wholesale supplier to 700 of our convenience stores and newsagents, had entered into administration and deliveries would cease immediately.

In those early weeks, in the build-up to the busy festive period, we experienced significant availability issues as we established an interim supply solution with the help of our existing wholesale supply partner, Nisa, and our new partner, Morrisons. We are extremely grateful to both of them for their support.

Whilst we were able to largely ensure continuity of supply within a number of weeks, the interim solution was complex and more costly. It also diverted management focus from some of our wider strategic initiatives as we prioritised securing the supply chain.

Morrisons enabled us to re-establish tobacco supply within a week and agreed to accelerate the planned transition of 1,300 stores in 2018. This completed in August, three months ahead of schedule.

Setting up a national distribution network from scratch was an enormous undertaking and accelerating this process understandably created some operational issues which have impacted availability. This is improving week by week and we expect these issues to further improve as we move through 2019.

Prioritising the transition has also set back some of our wider plans including range development, and improving some of our cost prices. We are working together to develop an optimal range and promotional programme for our customers.

In the year, these supply chain impacts, in addition to the dilutive effect of a robust performance on tobacco, have weighed down on our gross margin, which has declined by 0.8%.

Increase neighbourhood presence

Following the major acquisition of 298 convenience stores in 2017, we resumed our single store acquisition programme. There is no shortage of opportunities, with around three-quarters of the UK's 46,000 convenience stores remaining independently owned.

However, given the challenges we have faced, we scaled back our programme, acquiring 11 new convenience stores during the year, and we expect to complete a small number in 2019.

Increasing our presence is also about fostering strong links with the communities we serve. Our neighbourhood locations and local colleague base provides us with regular opportunities to connect with customers.

In the last five years we have supported well over 500 local good causes, including scout groups, schools, hospitals and local charities. All of these have been chosen by colleagues and customers in our stores.

In addition, the recent launch of our social media channels (Facebook, Twitter and Instagram) is giving us new ways to engage with customers and get valuable feedback.

Growing convenience offer

We have taken an important step in growing our convenience offer with the launch of Safeway. The range of around 350 fresh, chilled and ambient groceries, and household products is now available in the majority of our stores and over time it will roll out to the entire estate. We are delighted with the quality of the products and customer feedback so far has been excellent.

We have seen good growth in a number of categories following the launch, including fresh meat and fruit and vegetables, but this has been offset to some extent by deflation as we've introduced lower price points on popular lines, such as eggs, microwave rice and soft drinks.

The accelerated transition to Morrisons supply led to a more rapid launch of Safeway than we had originally planned and constrained our ability to fully establish and promote the new range. As a result of this, and some challenges with availability, we have yet to see the meaningful increase in overall store performance that we would ultimately expect.

Despite this we have made progress towards our strategic target for grocery and alcohol to be our biggest sales category. It now represents over a third of our sales, and as we develop the Safeway range over the coming months we expect this to increase further. We are also commencing a full range review process, to respond to customer trends and get the most out of our newly established supply chain.

We have seen good growth in our average basket size which was up by 37p to GBP5.99. This was supported by the EUTPD2 regulations, introduced in May 2017, banning the sale of smaller packs of tobacco, and by growth in top-up shopping as we have grown grocery sales.

Food-to-go remains a small but growing category with lots of potential, as more meals are eaten outside of the home. We've extended our offer during the year and now have approaching 400 stores with a hot food-to-go offer and around 600 with a coffee unit. We now have 23 Subways trading, including the first of the new fresh forward concept.

Our store refresh programme presents a tremendous opportunity to grow our convenience offer and unlock the value inherent in our existing estate. During the year, we completed 59 refreshes, redesigning the store layout to provide more refrigerated space for chilled foods and new food-to-go fixtures. These stores support a broader range of convenience products and we are seeing sustained sales uplifts of over 5%. In 2019, we plan to continue with our refresh programme and expect to complete a further 20-30 stores.

Excellent customer service

Our biggest strength has always been our warm and friendly colleagues and this year has been no different. We continue to score very highly in terms of colleague friendliness and helpfulness, and their dedication and hard work has meant that in a recent survey we have improved on every single customer metric, despite the challenges of the last 12 months.

A great shopping trip at McColl's also involves access to a range of useful neighbourhood services. It is a growing part of our offer and customers are twice as likely to visit our stores for this reason. We now have around 850 internet collection and return points and we've cemented our position as the UK's largest operator of Post Offices. We've opened over 25 in the year and plan to open another 20 in the year ahead.

Following the completion of the transition of 1,300 stores to our new wholesale partner we are now refocusing on the core elements of neighbourhood retailing and prioritising what is most important to our customers. We have launched our Customer Champions - four characters that represent our four priorities - making sure all customers get a warm greeting, that our shelves are well stocked, that we highlight great offers and promotions, and that the shopping trip is quick and easy.

Driving efficiency and maintaining financial flexibility

Like all retail businesses, we have had to manage cost pressures during the year, the increase in the National Living Wage being the most significant. We remain focused on driving in-store efficiency and have made a number of improvements during the year, including the introduction of automated bake plans for hot food-to-go. We are also exploring new technological solutions. For example, we have recently introduced biometric scanners that monitor colleague time and attendance to ensure we can more accurately manage our payroll.

Cost pressures are expected to intensify in 2019, with a further increase in wage rates, energy inflation and an increase in our annual rent following our sale and leaseback activity. In light of this we continue to review our estate, assessing how future cost increases impact profit forecasts. During the year, we have closed or sold a number of underperforming stores and we expect to make further disposals in the year ahead.

We have completed a number of sale and leaseback deals on the freeholds we acquired as part of the major acquisition in 2017. The proceeds from these sales have helped to fund a number of strategic projects, including the store refresh programme and pay down debt to a significantly lower level than anticipated.

Whilst our existing financing is in place until mid-2021, to ensure that we maintain flexibility to execute our strategic plans, last summer we initiated discussions with our banking syndicate and a number of improvements have been made to the terms.

Looking ahead

Over the coming months the grocery sector will remain intensely competitive as we experience ongoing political and economic uncertainty making consumers cautious about spending. We will need to ensure that we manage cost pressures and maintain competitive retail pricing. But as we work through the issues we've experienced in 2018 there are exciting opportunities ahead. We remain confident in our strategy and will continue to enhance our convenience offer, through developing the Safeway range; increase our neighbourhood presence through stronger engagement with our communities; and continue to provide excellent customer service by focusing on the core elements of convenience retailing.

Finally, I would like to take this opportunity to thank all of my colleagues at McColl's for their continued hard work and commitment.

Jonathan Miller

Chief Executive

Notes:

(2) HIM! Convenience Tracking Programme 2018

Financial Review - A focus on capital discipline

Our financial performance in 2018 was inevitably impacted by the unprecedented disruption the business faced following the failure of a major supplier and the transition to a new wholesale supply partner. I am delighted to have joined the McColl's Board at this crucial time for the business. As we begin to recover from a difficult period we are focused on strong capital discipline and careful cost management to enable the business to rebuild momentum and return to sustainable value creation.

Annual revenue growth supported by 2017 major acquisition

Full year revenue grew to GBP1.24bn (2017: GBP1.15bn() , an increase of 8.1%. This year-on-year growth was driven by the major acquisition we completed in 2017 which has added around 30% to our total sales.

Like-for-like (LFL) sales performance was impacted throughout the year by the supply chain disruption we experienced following the collapse of P&H and continued operational challenges as we established our new partnership with Morrisons. Full year LFL sales were down 1.4%, but improved during the year, with sales in the final quarter being broadly flat.

Across the industry tobacco continues to face long-term structural decline. However, it currently remains our largest category and we saw strong sales growth during the year. It was the most resilient part of our supply chain and sales were supported by significant inflation as a result of manufacturer and duty increases. Sales in our other traditional categories, principally news and confectionery, continue to decline as expected.

We have, however, seen good overall growth in a number of key grocery categories, including fresh food, bringing us closer to our strategic target for grocery and alcohol to be our largest sales category. It now represents 34% of our total sales, an improvement of two percentage points year-on-year, and from 27% before the major acquisition in 2017.

Gross profit margin impacted by supply chain challenges

With the evolution of our sales mix towards higher margin products we would typically expect to see an improvement in gross profit margins. However, adjusted gross margin has declined by 0.8% year-on-year to 26.0% (2017: 26.8%(3) , 2018 unadjusted gross margin 25.9%). This is partly a result of the adoption of temporary supply terms as we implemented an interim distribution solution and a robust performance on tobacco, which is a low margin category.

In addition, as Morrisons establishes its wholesale operation this has initially resulted in higher than anticipated cost prices on certain convenience lines. These are expected to improve during 2019 as we leverage and benefit from our joint buying capabilities and our partnerships with suppliers.

In terms of overall value, total gross profit grew by 4.5% to GBP321.1m (2017: GBP307.4m(3) ), benefiting from the contribution of stores acquired in 2017. Within gross profit, partly offsetting the decline, is supplier income relating to both the wind down of a legacy contract and the transition to our new wholesale partner (recognised over the ongoing life of the contract).

Good cost management in the face of significant headwinds

We continued to face cost pressures during the year, the most significant being wage inflation as a result of further increases in the National Minimum Wage and National Living Wage, which since inception in 2016 have resulted in 4-5% annual inflation in our biggest cost line.

We have kept good control of costs and in aggregate administrative expenses, before adjusting items, as a percentage of revenue, were broadly flat year-on-year at 25.1% (2017: 25.0%).

This has in part been supported by ongoing investment in systems and processes, for example, the introduction of colleague time and attendance technology.

In the face of continued cost pressures it is also essential to keep our estate under review to ensure that we maintain a sustainably profitable network of stores. We continue to enhance the quality of the estate through both the acquisition of high potential convenience stores and the planned closure or disposal of underperforming stores. During the year, we acquired 11 convenience stores and closed or disposed of 66 newsagents and smaller convenience stores.

Operating profit impacted by supply chain disruption and transition to a new supply partner

Other operating income decreased by GBP1.0m to GBP6.8m (2017: GBP7.8m(3) ) reflecting a lower level of ATM cash withdrawals and lower commission rates in line with market trends.

Operating profit before adjusting items (see note 4 for definition), decreased to GBP18.3m (2017: GBP31.4m), impacted by the supply chain disruption and transition.

In total there were GBP(2.6)m of gross (pre-tax) adjusting items. This comprised GBP(14.5)m of costs and GBP11.9m of income. Net adjustments (post-tax) were GBP(0.8)m.

Adjusting items include GBP(1.7)m associated with the failure of P&H and GBP(4.9)m resulting from the set-up of our new partnership with Morrisons, which has now been expensed in 2018 rather than spread over the life of the contract. Included within this GBP(4.9)m cost is store set-up and merchandising, clearance of displaced product lines, new product establishment and other incremental store costs.

We also had adjusting items of GBP(0.6)m relating to pensions following the impact on our schemes of the GMP equalisation judgment made against Lloyds Banking Group and GBP(1.2)m of other adjustments, principally relating to fines for an historic health and safety incident and the cost of an HMRC ruling on minimum wage compliance.

In addition, we had GBP(6.0)m of costs associated with closures and impairment and a net gain of GBP11.9m in property profits following the acceleration of our sale and leaseback activity, which was materially larger in 2018 than had been anticipated. As well as releasing immediate value through this programme, the proceeds have allowed us to continue our capital investment programme including store refreshes, as well as reduce our net debt to a level materially better than expected. We expect the final tranche of sale and leaseback transactions relating to the major acquisition in 2017 to conclude in the first half of 2019.

Finance costs increased to GBP8.0m (2017: GBP6.7m). This reflects the increase in our average debt as we annualised the major acquisition in 2017.

Profit on ordinary activities before taxation decreased to GBP7.9m (2017: GBP18.4m). This was impacted by the GBP2.6m of adjusting items described above, alongside the impact of supply chain disruption on sales and gross margin, partially offset by transitional support. However, included within this profit measure was GBP6.1m of net property profits (being the combination of sale and leaseback gains, impairments and store closures).

Before adjusting items, profit before tax was GBP10.5m (2017: GBP26.3m).

Tax

The tax charge for the period decreased to GBP1.0m (2017: GBP4.2m), representing an effective tax rate of 12.9% (2017: 22.9%). The difference between the current statutory rate of 19.0% and the effective tax rate excluding the impact of non-deductible adjusting items of 26.6% in the period is due to the sale and leaseback and closure cost transactions, all of which are classified as adjusting items.

Earnings per share

Basic earnings per share reduced to 5.9 pence (2017: 12.3 pence). Adjusted earnings per share were 6.7 pence (2017: 18.3 pence).

Dividend per share

The Board has recommended a final dividend of 0.6 pence per share (2017: 6.9 pence). The total dividend for the period of 4.0 pence per share (2017: 10.3 pence), reflects our commitment to provide returns to shareholders. Our policy of a 50% payout ratio to profit after tax (before adjusting gains but after adjusting losses), is unchanged.

Improved payment terms drives an increase in current assets and liabilities

Total shareholder funds at the end of the year reduced by GBP4.4m to GBP141.5m (2017: GBP145.9m). This reflects a reduction in the book value of goodwill and other intangibles, property, plant and equipment by GBP7.4m to GBP345.1m (2017: GBP352.5m) following our store closure and sale and leaseback programmes.

Current assets at the end of the period increased to GBP147.7m (2017: GBP130.6m). This increase of GBP17.1m is a result of an increase in stock of GBP1.2m and trade receivables of GBP2.2m, plus an increase in cash and cash equivalents of GBP14.3.

Our current liabilities increased to GBP220.8m (2017: GBP173.4m), reflecting higher trade and other payables as a result of our improved payment terms.

Non-current liabilities reduced to GBP144.7m (2017: GBP177.6m), reflecting reduced borrowings.

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.

The combined accounting surplus (based on corporate bond yields) in the two schemes at the end of the period was GBP11.9m (2017: GBP10.3m), as a result of strong returns on assets.

The last actuarial review of the two schemes in June 2017 concluded that the combined funding deficit of our two pension schemes was GBP12.6m.

The Company currently contributes approximately GBP1.6m per year, inclusive of fees and levies.

Strong cash generation supports deleveraging and investment in strategic initiatives

Cash generation continues to support investment in our strategic plans, whilst reducing debt levels.

Net cash provided by operating activities increased in the year to GBP61.8m (2017: GBP54.2m). This was aided by the transition to our new wholesale supplier with more favourable payment terms, and proceeds from the sale and leaseback programme.

Adjusted EBITDA (see note 4 for definition), one of our key performance indicators, fell by GBP9.0 to GBP35.0m (2017: GBP44.0m), impacted by the supply chain disruption and transition.

We continue to invest in the business for growth, including our programme of store acquisitions and refreshes, alongside the development and extension of our services and food-to-go offer. In the period, alongside our acquisitions, we completed 59 store refreshes and delivered five new Subways in our stores.

After GBP26.3m of proceeds, predominantly from our sale and leaseback programme, net capital expenditure (which excludes the acquisition of stock), was GBP(1.0)m (2017: GBP20.3m).

Net finance expense of GBP8.0m was higher than the prior year, reflecting increased borrowings following the major acquisition that completed in July 2017. The interim and final dividends paid in the period totalled GBP11.9m.

Changes to banking terms provide flexibility

In 2016, we refinanced to support our major acquisition in 2017. This included a GBP100m working capital facility and a GBP100m repayment term loan. Both of these elements run through until July 2021, with the interest rate reducing as the business deleverages.

However, in light of the challenges we faced in the year, during the summer we initiated discussions with our banking syndicate to make a number of changes to the terms of our banking arrangements. These included increasing the covenant headroom and increasing flexibility in the facilities. All of these agreed changes will provide extra flexibility to deliver our convenience strategy.

Net debt at the end of the period was GBP98.6m (2017: GBP142.2m), representing 2.8 times adjusted EBITDA (2017: 3.2 times adjusted EBITDA).

At the end of 2018 the banking covenant on net debt:adjusted EBITDA was 3.0x and this is maintained throughout 2019, other than at the end of the first quarter when it is 3.25x.

At the end of the period, drawings against the total facility were GBP125.5m (2017: GBP154.5m).

Future outlook

In the short term, mitigating cost pressures will continue to be a priority. In addition to a further c.5% increase in the National Living Wage, we will need to manage significant energy cost inflation and additional rental costs following the sale and leaseback programme. To improve efficiency we are continuing to invest in systems and processes; alongside pursuing further estate optimisation. We have already taken some further action in the new financial year, including a head office and overheads efficiency review.

Alongside a strengthened balance sheet, rebuilding gross margin momentum will be our key focus.

I am very much looking forward to working with Jonathan and the team to further our strategic plans in 2019 and beyond.

Robbie Bell

Chief Financial Officer

Notes:

(3) To better reflect the core operations of the Group, Post Office revenue, previously included in other operating income, is now recognised in statutory sales. In order to ensure comparability 2017 full year revenue, gross margin, gross profit and other operating income have been restated. Details of the restatements can be found in note 2.

(4) In December 2017, we received a fine of GBP0.6m relating to a historic health and safety incident following the installation of a ramp at one of our stores by a third party. Alongside the contractor involved, we take responsibility for this regretful incident and have taken a number of actions relating to contractor works, monitoring risk assessment, issue escalation and local training to ensure that the risk of such an event in the future is materially reduced.

(5) The HMRC ruling relates to missed payment in relation to a number of colleagues opening and closing stores outside of scheduled working hours. We have recently introduced biometric scanners in-store that monitor colleague time and attendance to ensure we can accurately manage our payroll.

Responsibility statement

The responsibility statement has been prepared in connection with the Company's full Annual Report for the period ended 25 November 2018. Certain parts of the annual report are not included in this announcement, as described in note 1.

We confirm that to the best of our knowledge:

-- the Financial Statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

-- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

-- the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

By order of the board

Robbie Bell

18 February 2019

McColl's Retail Group

Consolidated Income Statement for the 52 week Period from 27 November 2017 to 25 November 2018

 
                                                Adjusting              Adjusted  Adjusting      Total 
                                      Adjusted      items      Total   restated      items   restated 
                                                     2018                             2017 
                                          2018     Note 3       2018       2017     Note 3       2017 
                               Note    GBP 000    GBP 000    GBP 000    GBP 000    GBP 000    GBP 000 
Revenue                         2    1,241,539             1,241,539  1,148,747          -  1,148,747 
Cost of sales                        (919,003)    (1,428)  (920,431)  (841,370)             (841,370) 
                                     ---------  ---------  ---------  ---------  ---------  --------- 
Gross profit                           322,536    (1,428)    321,108    307,377          -    307,377 
Administrative 
 expenses                            (311,442)    (7,118)  (318,560)  (286,889)    (3,730)  (290,619) 
Other operating 
 income                         2        6,811          -      6,811      7,787          -      7,787 
Profits arising 
 on property-related 
 items                                     416      6,109      6,525      3,110    (2,621)        489 
                                     ---------  ---------  ---------  ---------  ---------  --------- 
Operating profit                4       18,321    (2,437)     15,884     31,385    (6,351)     25,034 
                                     ---------  ---------  ---------  ---------  ---------  --------- 
Finance income                  2            -          -          -         93          -         93 
Finance costs                          (7,859)      (158)    (8,017)    (5,200)    (1,521)    (6,721) 
                                     ---------  ---------  ---------  ---------  ---------  --------- 
Net finance cost                       (7,859)      (158)    (8,017)    (5,107)    (1,521)    (6,628) 
                                     ---------  ---------  ---------  ---------  ---------  --------- 
Profit before 
 tax                                    10,462    (2,595)      7,867     26,278    (7,872)     18,406 
Income tax (expense)/receipt    5      (2,778)      1,762    (1,016)    (5,228)      1,014    (4,214) 
                                     ---------  ---------  ---------  ---------  ---------  --------- 
Profit for the 
 period                                  7,684      (833)      6,851     21,050    (6,858)     14,192 
                                     =========  =========  =========  =========  =========  ========= 
Earnings per 
 share (pence)                  7        6.67p                 5.95p     18.28p                12.32p 
Diluted Earnings 
 per share (pence)              7        6.66p                 5.94p     18.19p                12.26p 
 

The above results were derived from continuing operations.

McColl's Retail Group

Consolidated Statement of Comprehensive Income for the 52 week Period from 27 November 2017 to 25 November 2018

 
                                               2018      2017 
                                            GBP 000   GBP 000 
Profit for the period                         6,851    14,192 
Items that will not be reclassified 
 subsequently to profit or loss 
Remeasurement of defined benefit pension 
 scheme                                         859     3,039 
Tax on defined benefit pension scheme         (150)     (517) 
                                           --------  -------- 
Total comprehensive income for the 
 period                                       7,560    16,714 
                                           ========  ======== 
 

McColl's Retail Group

Consolidated Statement of Financial Position for the 52 week Period from 27 November 2017 to 25 November 2018

 
                                                  2018       2017 
                                       Note    GBP 000    GBP 000 
Assets 
Non-current assets 
Property, plant and equipment          8        92,314    103,565 
Intangible assets                      9       252,747    248,899 
Deferred tax assets                                 97        172 
Retirement benefit asset                        14,122     13,609 
Investments                                         36         36 
                                             ---------  --------- 
Total non-current assets                       359,316    366,281 
                                             ---------  --------- 
Current assets 
Inventories                                     77,146     75,965 
Trade and other receivables                     41,984     39,810 
Cash and cash equivalents                       28,547     14,273 
Assets in disposal groups classified 
 as held for sale                                    -        581 
                                             ---------  --------- 
Total current assets                           147,677    130,629 
                                             ---------  --------- 
Total assets                                   506,993    496,910 
                                             =========  ========= 
Equity and liabilities 
Current liabilities 
Trade and other payables                     (213,337)  (163,670) 
Loans and borrowings                   10      (2,148)    (1,799) 
Income tax liability                             (673)    (2,633) 
Provisions                                     (4,627)    (4,508) 
Liabilities directly associated with 
 assets classified as held for sale                  -      (830) 
                                             ---------  --------- 
Total current liabilities                    (220,785)  (173,440) 
                                             =========  ========= 
Net current liabilities                       (73,108)   (42,811) 
                                             =========  ========= 
Non-current liabilities 
Loans and borrowings                   10    (124,989)  (154,722) 
Other payables                                 (9,552)   (10,367) 
Provisions                                     (1,042)      (593) 
Deferred tax liabilities                       (6,895)    (8,528) 
Retirement benefit obligations                 (2,250)    (3,352) 
                                             ---------  --------- 
Total non-current liabilities                (144,728)  (177,562) 
                                             =========  ========= 
Total liabilities                            (365,513)  (351,002) 
                                             =========  ========= 
Net assets                                     141,480    145,908 
                                             =========  ========= 
 

McColl's Retail Group

Consolidated Statement of Financial Position for the 52 week Period from 27 November 2017 to 25 November 2018

 
                               2018       2017 
                    Note    GBP 000    GBP 000 
Equity 
Share capital       12        (115)      (115) 
Share premium       12     (12,580)   (12,579) 
Retained earnings         (128,785)  (133,214) 
                          ---------  --------- 
Total Equity              (141,480)  (145,908) 
                          =========  ========= 
 

McColl's Retail Group

Consolidated Statement of Changes in Equity for the 52 week Period from 27 November 2017 to 25 November 2018

 
                                    Share capital  Share premium  Retained earnings  Total equity 
                                          GBP 000        GBP 000            GBP 000       GBP 000 
As at 27 November 2017                        115         12,579            133,214       145,908 
                                    -------------  -------------  -----------------  ------------ 
Profit for the period                           -              -              6,851         6,851 
Remeasurement of defined 
 benefit pension scheme                         -              -                709           709 
                                    -------------  -------------  -----------------  ------------ 
Total comprehensive income                      -              -              7,560         7,560 
Dividends                                       -              -           (11,862)      (11,862) 
New share capital subscribed                    -              1                  -             1 
Deferred tax                                    -              -              (127)         (127) 
                                    -------------  -------------  -----------------  ------------ 
As at 25 November 2018                        115         12,580            128,785       141,480 
                                    =============  =============  =================  ============ 
                                    Share capital  Share premium  Retained earnings  Total equity 
                                          GBP 000        GBP 000            GBP 000       GBP 000 
As at 28 November 2016                        115         12,579            127,812       140,506 
                                    -------------  -------------  -----------------  ------------ 
Profit for the period                           -              -             14,192        14,192 
Remeasurement of defined 
 benefit pension scheme                         -              -              2,522         2,522 
                                    -------------  -------------  -----------------  ------------ 
Total comprehensive income                      -              -             16,714        16,714 
Dividends                                       -              -           (11,748)      (11,748) 
Share-based payment transactions                -              -                436           436 
                                    -------------  -------------  -----------------  ------------ 
As at 26 November 2017                        115         12,579            133,214       145,908 
                                    =============  =============  =================  ============ 
 

McColl's Retail Group

Consolidated Statement of Cash Flows for the 52 week Period from 27 November 2017 to 25 November 2018

 
                                                       2018       2017 
                                             Note   GBP 000    GBP 000 
Cash flows from operating activities 
Profit for the period                                 6,851     14,192 
Adjustments to cash flows from non-cash 
 items 
Depreciation and amortisation                 4      17,054     15,636 
Profit on disposal of property plant 
 and equipment                                     (14,994)      (489) 
Finance income                                            -       (93) 
Finance costs                                         8,017      6,721 
Share-based payment transactions                          -        436 
Income tax expense                            5       1,016      4,214 
Impairment losses                                     3,297        746 
                                                   --------  --------- 
                                                     21,241     41,363 
Increase in inventories                               (737)   (20,924) 
Increase in trade and other receivables             (1,593)    (3,969) 
Increase in trade and other payables                 48,082     40,561 
Decrease in retirement benefit obligation 
 net of actuarial changes                             (906)    (1,633) 
Increase in provisions                                  568      3,089 
                                                   --------  --------- 
Cash generated from operations                       66,655     58,487 
Income taxes paid                                   (4,811)    (4,267) 
                                                   --------  --------- 
Net cash flow from operating activities              61,844     54,220 
                                                   --------  --------- 
Cash flows from investing activities 
Interest received                                         -         93 
Acquisitions of property, plant and 
 equipment                                         (21,295)   (25,655) 
Proceeds from sale of property, plant 
 and equipment                                       27,410      7,622 
Acquisition of businesses, net of cash 
 acquired                                           (4,513)  (122,409) 
                                                   --------  --------- 
Net cash flows from investing activities              1,602  (140,349) 
                                                   --------  --------- 
Cash flows from financing activities 
Interest paid                                       (7,928)    (6,327) 
Proceeds from issue of ordinary shares, 
 net of issue costs                                       1          - 
Repayment of bank borrowing                   11   (29,000)   (37,000) 
New bank borrowing                            11          -    154,500 
Payment of finance lease creditors                    (235)    (2,506) 
Interest payment to finance lease creditor            (148)      (274) 
Dividends paid                                6    (11,862)   (11,748) 
                                                   --------  --------- 
Net cash flows from financing activities           (49,172)     96,645 
                                                   --------  --------- 
Net increase in cash and cash equivalents            14,274     10,516 
Cash and cash equivalents at beginning 
 of period                                           14,273      3,757 
                                                   --------  --------- 
Cash and cash equivalents at end of 
 period                                              28,547     14,273 
                                                   ========  ========= 
 

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
1  Accounting policies 
 

Basis of preparation

The Group financial statements for 2018 consolidate the financial statements of McColl's Retail Group plc (the "Company") and all its subsidiary undertakings (together, "the Group") drawn up to 25 November 2018. Acquisitions are accounted for under the acquisition method of accounting.

The Group financial statements have been prepared on the going concern basis and in accordance with IFRS and IFRS Interpretations Committee (IFRIC) interpretations, as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reported under IFRS.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 25 November 2018 or 26 November 2017, but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498 (2) or (3) Companies Act 2006.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in March 2019.

Management have assessed the impact of the following newly issued standards. IFRS9 will have no material impact on accounting policies or classification of financial instruments. IFRS15 will have no material impact to the financial statements. IFRS16 is expected to have a material impact on the financial statements, this continues to be assessed and currently it is not practicable to quantify.

The consolidated financial information is presented in sterling, the Group's functional currency, and has been

rounded to the nearest thousand (GBP'000).    The prior period was also a 52 week period. 

The preparation of financial information in compliance with adopted IFRS requires the use of certain critical judgements, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial information and the reported amounts of revenues and expenses during the reporting period. It also requires Group management to exercise judgement in applying the Group's accounting policies.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Going concern

The Directors have made appropriate enquiries and consider that the Group has adequate resources to continue in operational existence for the foreseeable future, which comprises the period of at least 12 months from the date of approval of the financial statements. The Directors continue to adopt the going concern basis in preparing the financial statements.

In November 2018, the Company signed an amended credit facility agreement, which provides improved headroom against the covenants. The updated facility consists of a GBP100m Revolving Credit Facility and an amortising GBP87.5m term loan (originally GBP100m initially being repaid at GBP2.5m per quarter). In addition, there is a GBP50m unsecured accordion facility available at the Company's option. At the end of the period, the Group had drawn down GBP125.5m (2017: GBP154.5m) of its facilities.

Following a disruptive year, the Directors reviewed the long-term forecasts covering all elements of income, balance sheet and cash flow. The Directors, taking into account these forecasts and the revised facilities available to the Group, continue to adopt the going concern basis in preparing the financial statements.

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
1  Accounting policies (continued) 
 

In considering going concern, the Directors have assessed the possible impacts of Brexit on the business and specifically its financial covenants. These potential impacts could include a short-term reduction in sales, due to product shortages, pressures on gross margin and a higher level of cost inflation. The overall going concern scenarios the Company has modelled include assessing a 1% LFL worsening compared to plan, nil year on year gross margin growth despite anticipated product mix improvements and delays to the intended sale & leaseback programme. This review has been completed alongside a general consideration of the potential medium term impacts of an unfavourable Brexit.

As well as this, other scenarios have been modelled to consider potential shorter term effects, including looking at a more material sales reduction of approximately 11% in April and May and then 2% thereafter, as customers migrate to new products and/or supply chains stabilise. In both the short and medium term considerations it is expected that the majority of product cost inflation would be passed on to customers and therefore could be mitigated overall. Whilst in the short term the covenant headroom is tighter, having modelled these scenarios and the mitigating actions, the directors remain confident that the business is a going concern.

In the event of a far more challenging Brexit than the scenarios modelled or the business currently anticipates, there remain a number of further mitigating actions that could be taken, including significantly reducing capex and dividends and, for the most severe outcomes, reviewing our current arrangements with our supportive banking syndicate.

The Directors have made this assessment after consideration of various scenarios covering the sensitivity of assumptions and management actions to mitigate, and in accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting published by the UK Financial Reporting Council in September 2014.

Alternative Performance Measures

In reporting financial information, the Directors have presented various Alternative Performance Measures (APMs) of financial performance, position or cash flows, which are not defined or specified under the requirements of International Financial Reporting Standards IFRS. On the basis that these measures are not defined by IFRS, they may not be directly comparable with other companies' APMs, including those in the Group's industry.

The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional useful information on the performance of the business. These APMs are consistent with how the business performance is planned, reported and analysed between reporting periods within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets and covenant calculations.

The key APMs that the Group uses include: adjusted EBITDA, adjusted profit before tax, like-for-like sales (LFL), net debt and adjusted earnings per share. Each of the APMs, and others used by the Group, are set out in the Glossary including explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant. These measures have remained consistent with the prior year.

The Group makes certain adjustments to the statutory profit measures in order to derive many of these APMs. The Group's policy is to exclude items that are considered to be significant in nature and/or quantum. Treatment as an adjusting items provides stakeholders with additional useful information to assess the annual trading performance of the Group.

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
1  Accounting policies (continued) 
 

Adjusting items

Adjusting items relate to costs or incomes that derive from events or transactions that fall within the normal activities of the Group, but are excluded from the Group's adjusted profit before tax measure, individually or, if of a similar type in aggregate, due to their size and nature in order to better reflect management's view of the performance of the Group. The adjusted profit before tax measure (profit before adjusting items) is not a recognised profit measure under IFRS and may not be directly comparable with adjusted profit measures used by other companies. Details of adjusting items are set out in note 3.

 
2  Revenue and other income 
 

In accordance with IFRS 8 'Operating segments' an operating segment is defined as a business activity whose operating results are reviewed by the chief operating decision-maker and for which discrete information is available. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors. The principal activities of the Group are currently managed as one segment. Consequently all activities relate to this segment, being the operation of convenience and newsagent stores in the UK.

The analysis of the Group's revenue for the period from continuing operations is as follows:

 
                                              2017 
                                   2018    GBP 000 
                                GBP 000   restated 
Revenue 
Sale of goods                 1,241,539  1,148,747 
                              ---------  --------- 
Other operating income (1) 
Property rental income            3,249      3,224 
Other income                      3,562      4,563 
                              ---------  --------- 
                                  6,811      7,787 
                              ---------  --------- 
Finance income 
Finance income                                  93 
                              ---------  --------- 
                              1,248,350  1,156,627 
                              =========  ========= 
 

(1) During the year management performed a review of all revenue streams. As a result of the review all income from Post Office will now be classified as revenue. The reclassification of GBP16.7m from other income to revenue is the net income received as an agent in the transaction with the Post Office. This has increased gross profit by 1% from 25% to 26%. The prior year's revenue has also been restated on the same basis and the value of this restatement is GBP16.9m.

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
3  Adjusting items 
 

Due to their significance or one-off nature, certain items have been classified as adjusting, as follows:

 
                                                   2018      2017 
                                                GBP 000   GBP 000 
Cost of Sales 
Supplier administration(a)                          807         - 
Supply chain transition(b)                          621         - 
                                               --------  -------- 
Gross Loss                                        1,428         - 
                                               ========  ======== 
Administrative expenses 
                                               --------  -------- 
Fines & National Minimum Wage(c)                  1,236         - 
Supplier administration(a)                          935         - 
Supply chain transition(b)                        4,306         - 
 Defined benefit pension scheme - past 
  service cost(d)                                   641         - 
Unprofitable store closure programme(f)               -       283 
Co-op acquisition and integration costs(h)            -     3,447 
                                               --------  -------- 
                                                  7,118     3,730 
                                               ========  ======== 
(Profits)/losses arising on property-related 
 items 
Sale and leaseback(e)                          (11,941) 
Unprofitable store closure programme(f)           2,535     2,621 
Impairment(g)                                     3,297 
                                               --------  -------- 
                                                (6,109)     2,621 
                                               ========  ======== 
Finance Costs 
Co-op acquisition and integration costs(h)                  1,521 
Unprofitable store closure programme(f)             158 
                                               --------  -------- 
                                                    158     1,521 
                                               ========  ======== 
Tax effect on adjusting items                   (1,762)   (1,014) 
                                               ========  ======== 
                                                    833     6,858 
                                               ========  ======== 
 

a. Supplier administration

The administration of P&H, our primary supplier to c.700 newsagents and small convenience stores, on 28 November 2017 created stock availability issues in store. To address this stock availability and to minimise disruption we entered into a short-term contract with Nisa, a short-term contract with Fresh to Store, brought forward the commencement of the Morrisons contract, and introduced a new supply chain solution for tobacco, via Clipper Logistics. As such, the Group incurred additional one-off costs, which are not reflective of ongoing costs and therefore management have classified these as adjusting items. This Resulted in a net cash outflow of GBP1.7m

b. Supply chain transition

As a result of the integration of a new supply partner, Morrisons, material one-off costs of transitioning were incurred. These costs included GBP1.3m of additional payroll cost, GBP1.8m of marketing, GBP1.5m of store preparation, including costs associated with stock replacement and GBP0.3m of other costs. In line with the accounting policy for adjusting items, the additional costs incurred as a result of the transition are classified as adjusting items. This Resulted in a net cash outflow of GBP4.9m

c. Fines & National Minimum Wage

On 22 December 2017 the Group was found guilty of a health and safety breach relating to contractor works at a store and subsequently a fine of GBP612k was issued to the Group. This was disclosed as a contingent liability in the Annual Report 2017. Following the completion of a HMRC National Minimum Wage investigation the Group was fined GBP227k and paid arrears due to colleagues of GBP397k. Each of these fines are fully paid. Management classify these fines as adjusting items due to the non-recurring nature. This Resulted in a net cash outflow of GBP612k.

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
3  Adjusting items (continued) 
 

d. Past service cost

Management have classified the amount for Guaranteed Minimum Pension (GMP) equalisation as an adjusting item due to its non-recurring nature. In October 2018, the High Court ruled that Lloyds Banking Group will need to equalise pension benefits for the effect of unequal GMP between men and women, which dates back to 1990. The impact of the GMP calculation on our pensions was prepared following the C2 model. There was no cash impact from this adjustment.

e. Sale and leaseback

During the year the Group undertook a number of sale and leaseback transactions on its freehold property. In line with the accounting policy for adjusting items, management concluded that the profits relating to the sale and leaseback of property were significantly higher than prior years (2017: GBP3m) and therefore not in line with ordinary business and should therefore be treated as adjusting. This Resulted in a net cash inflow of GBP26.7m.

f. Unprofitable store closure programme

Management have undertaken an ongoing review of poor performing stores and have made the decision to close a material number of stores which are not economically viable to continue trading. The majority of these stores are either near lease expiry or lease break date. The closure programme consists of stores which have either closed in 2018 or will close in 2019. Management have adjusted onerous lease provisions, impairment, and other costs in relation to the closures. Provisions are discounted to their present value at the reporting date, giving rise to a finance cost as the discount is unwound. Any other closures costs which cannot be reliably estimated at present, may also be adjusting in 2019. Management have classified these as adjusting due to the one-off nature of the closure programme. This Resulted in a net cash outflow of GBP861k.

g. Impairment

Management have assessed the value in use cash flow of each branch against the carrying value of its assets, as a result of the impairment review an impairment charge was recognised in the year. Further information can be found in note 8. There was no cash impact from this adjustment.

h. Co-op acquisition and integration costs

On 13 July 2016 management entered into an agreement to purchase 298 convenience stores from the Co-op, for an aggregate consideration of GBP117m. The acquisition was approved by the Competition and Markets Authority on 20 December 2016. The acquisition was integrated during 2017 by Martin McColl Limited, a wholly-owned subsidiary of the Group. The adjusting costs relate to legal fees, sponsor fees, implementation costs and finance costs. All 298 stores were successfully transitioned by 13 July 2017. There was no cash impact from this adjustment in the current year.

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
4  Operating profit 
 

Arrived at after charging/(crediting)

 
                                                  2018      2017 
                                        Note   GBP 000   GBP 000 
Depreciation and amortisation expense           17,054    15,636 
Write-down of inventory recognised 
 as an expense                                  16,471    13,766 
Operating lease expense - property              35,868    33,810 
Profit on disposal of property, 
 plant and equipment                          (12,150)     (489) 
Impairment                               8       3,297       746 
Cost of inventories recognised 
 as an expense                                 951,073   876,599 
                                              ========  ======== 
 

Adjusted EBITDA and operating profit excluding property-related items

In order to provide shareholders with a measure of the underlying performance of the business which is more aligned with the way that management monitor and manage the business, the Group makes adjustments to profit before tax. Adjusting items relate to costs or incomes that derive from events or transactions that fall within the normal activities of the Group, but which are excluded from the Group's adjusted profit before tax measure due to their size and nature in order to better reflect management's view of the performance of the Group. The adjusted profit before tax measure (profit before adjusting items) is not a recognised profit measure under IFRS and may not be directly comparable with adjusted profit measures used by other companies. Details of adjusting items are set out in note 3.

 
                                                  2018      2017 
                                               GBP 000   GBP 000 
Adjusted EBITDA excluding property related items 
Operating profit before adjusting 
 items                                          18,321    31,385 
Depreciation and amortisation                   17,054    15,289 
Profits arising on property-related 
 items                                           (416)   (3,110) 
Share-based payments                                 -       436 
                                              --------  -------- 
                                                34,959    44,000 
                                              ========  ======== 
Adjusted operating profit excluding property related items 
Operating profit before adjusting 
 items                                          18,321    31,385 
Less: Profits arising on property-related 
 items                                           (416)   (3,110) 
                                              --------  -------- 
                                                17,905    28,275 
                                              ========  ======== 
 

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
5                                                   Income tax 
                                                         2018      2017 
                                                      GBP 000   GBP 000 
Income statement 
Current tax : 
Current tax on profit for the period                    2,858     4,780 
Adjustments in respect of prior periods                   (7)     (173) 
                                                     --------  -------- 
                                                        2,851     4,607 
                                                     ========  ======== 
Deferred tax : 
Origination and reversal of temporary differences     (2,123)      (81) 
Arising from change in tax rate                           234      (14) 
Adjustments in respect of prior periods                    54     (298) 
                                                     --------  -------- 
                                                      (1,835)     (393) 
                                                     ========  ======== 
Income tax expense for the period                       1,016     4,214 
                                                     ========  ======== 
Equity items 
                                                     ========  ======== 
Share-based payment                                        92         - 
Fixed assets                                               35         - 
                                                     --------  -------- 
                                                          127 
                                                     ========  ======== 
Other comprehensive income 
Deferred tax in respect of actuarial valuation 
 of retirement benefits                                   150       517 
                                                     ========  ======== 
 
 

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 017 to 25 November 2018

 
5  Income tax (continued) 
 

The differences are reconciled below:

 
                                                       (As restated) 
                                                 2018           2017 
                                              GBP 000        GBP 000 
Profit before tax                               7,867         18,406 
                                            =========  ============= 
Tax on profit calculated at standard rate 
 for 2018 of 19.00% (2017: 19.33%)              1,495          3,558 
Income not taxable                                  -            (8) 
Expenses not deductible                           817            650 
Deferred tax on share options                      55           (18) 
Adjustments in respect of prior years              47          (471) 
Arising from change in rate of tax                234           (14) 
Exempt amounts(1)                                 605            517 
Disposal of business combination assets       (2,237)              - 
                                            ---------  ------------- 
Total tax charge                                1,016          4,214 
                                            =========  ============= 
 

(1) Include finance leases, land and buildings in use and disposal rebates against assets.

Changes to the UK corporation tax rates were enacted as part of Finance Bill 2016 on 6 September 2016. This included reductions to the main rate to reduce the rate to 17% from 1 April 2020.

The tax charge for the 52 week period was GBP1,016,000 (2017: GBP4,214,000) representing a rate of 12.9% (2017: 22.9%). The comparable effective rate of tax in 2018 excluding the impact of non-deductible adjusting items was 26.6% (2017: 19.9%). The difference between the current and statutory rate of 19.0% in the period is due principally to the sale and leaseback and closure cost transactions, all of which are classified as adjusting items, see note 3 for further information.

Amounts recognised in other comprehensive income:

 
                                       2018                                  2017 
                                                              Before 
                         Before  Tax (expense)                   tax  Tax (expense) 
                            tax       /benefit    Net of tax     GBP       /benefit    Net of tax 
                        GBP 000        GBP 000       GBP 000     000        GBP 000       GBP 000 
Remeasurements 
 of post employment 
 benefit obligations        859          (150)           709   3,039          (517)         2,522 
                       ========  =============  ============  ======  =============  ============ 
 

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
6                                              Dividends 
                                                   2018     2017 
                                                GBP 000  GBP 000 
Interim 2018 dividend of 3.40p (2017: 3.40p) 
 per ordinary share                               3,916    3,916 
Final 2017 dividend of 6.90p (2016: 6.80p) 
 per ordinary share                               7,946    7,832 
                                                 11,862   11,748 
                                                =======  ======= 
 
 

The Directors are proposing a final 2018 dividend of 0.6 pence (2017: 6.90 pence) per share totalling GBP691,000 (2017: GBP7,946,000).

The proposed final dividend is subject to approval by shareholders passing a written resolution and accordingly has not been included as a liability in these financial statements.

 
7  Earnings per share 
 

Basic and diluted earnings per share are calculated by dividing the profit for the period attributable to shareholders by the weighted average number of shares.

 
                                                      2018         2017 
                                                   GBP 000      GBP 000 
Basic weighted average number of shares        115,173,145  115,172,774 
                                               ===========  =========== 
Diluted weighted average number of shares      115,331,969  115,724,645 
                                               ===========  =========== 
Profit attributable to ordinary shareholders 
 (GBP'000)                                           6,851       14,192 
                                               ===========  =========== 
Basic earnings per share                             5.95p       12.32p 
Diluted earnings per share                           5.94p       12.26p 
                                               ===========  =========== 
Adjusted earnings per share: 
Profit attributable to ordinary shareholders 
 (GBP'000)                                           6,851       14,192 
Adjusting items (note 3)                             2,595        7,872 
Tax effect of adjustments                          (1,762)      (1,014) 
Profit after tax and before adjusting items          7,684       21,050 
                                               ===========  =========== 
 
Basic adjusted earnings per share                    6.67p       18.28p 
                                               ===========  =========== 
Diluted adjusted earnings per share                  6.66p       18.19p 
                                               ===========  =========== 
 

The difference between the basic and diluted average number of shares represents the dilutive effect of share options in existence.

The diluted weighted average number of ordinary shares is calculated as follows:

 
                                                           2018         2017 
                                                        GBP 000      GBP 000 
Ordinary shares in issue at the start of 
 the period                                         115,172,774  108,505,494 
Effect of shares issued for the Co-op acquisition 
 (full year)                                                  -    6,667,280 
Effects of shares issued during the period                  741            - 
Total shares in issue at the end of the year        115,173,515  115,172,774 
                                                    -----------  ----------- 
Effect of shares to be issued for the long 
 term incentive plan (LTIP)                             158,825      551,871 
Weighted average number of ordinary shares 
 at the end of the period                           115,332,340  115,724,645 
                                                    ===========  =========== 
 

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
8  Property, plant and equipment 
 
 
                                                                Furniture, 
                                                              fittings and 
                                         Land and buildings      equipment     Total 
                                                    GBP 000        GBP 000   GBP 000 
Cost or valuation 
At 28 November 2016                                  34,679         90,406   125,085 
Additions                                             8,727         15,981    24,708 
Acquired through business combinations               29,839          4,410    34,249 
Classified as held for sale                               -          3,044     3,044 
Disposals                                           (5,242)        (3,690)   (8,932) 
                                         ------------------  -------------  -------- 
At 26 November 2017                                  68,003        110,151   178,154 
                                         ------------------  -------------  -------- 
At 27 November 2017                                  68,003        110,151   178,154 
Additions                                             5,849         13,968    19,817 
Acquired through business combinations                  726          1,314     2,040 
Disposals                                          (15,473)          1,429  (14,044) 
Transfers to software                               (1,133)              -   (1,133) 
                                         ------------------  -------------  -------- 
At 25 November 2018                                  57,972        126,862   184,834 
                                         ------------------  -------------  -------- 
Depreciation 
At 28 November 2016                                  13,116         45,186    58,302 
Charge for period                                     4,235         10,761    14,996 
Disposals                                             (274)        (1,525)   (1,799) 
Impairment                                                -            746       746 
Classified as held for sale                               -          2,344     2,344 
                                         ------------------  -------------  -------- 
At 26 November 2017                                  17,077         57,512    74,589 
                                         ------------------  -------------  -------- 
At 27 November 2017                                  17,077         57,512    74,589 
Charge for the period                                 4,678         11,678    16,356 
Disposals                                             (349)        (1,279)   (1,628) 
Impairment                                                -          3,297     3,297 
Transfers to software                                  (94)              -      (94) 
                                         ------------------  -------------  -------- 
At 25 November 2018                                  21,312         71,208    92,520 
                                         ------------------  -------------  -------- 
Carrying amount 
At 25 November 2018                                  36,660         55,654    92,314 
                                         ==================  =============  ======== 
At 26 November 2017                                  50,926         52,639   103,565 
                                         ==================  =============  ======== 
 

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
8  Property, plant and equipment (continued) 
 

During the year the Group disposed of property in sale and leaseback transactions, the net book value of these properties at disposal was GBP13,855,000.

Included within fixture and fittings is GBP2,755,000 of finance lease assets.

For impairment testing the Group classes each branch as a CGU (cash generating unit). Each CGU was tested for impairment at the period end date. Management recognise an impairment where the recoverable amount of the CGU does not exceed its carrying value at the balance sheet date. Recoverable amounts for CGUs are the higher of fair value less costs of disposal, and value in use.

The key assumptions for the value in use calculation include the discount rate, long-term growth rates and forecast cash flows. The value in use calculations use forecast cash flows taking into account actual performance for the year and the Group's cash flow forecast for a three-year period, which has been approved by management. Cash flows beyond this period are extrapolated using a long-term growth rate of nil and discounted with a weighted average cost of capital (WACC) of 11.75% (2017: 8.9%). The change in WACC is driven by a decrease in share price and reduction in borrowings.

The discount rate is based on the Group's weighted average cost of capital, taking into account the cost of capital and borrowings, to which specific market-related premium adjustments are made.

Management extrapolated the cash flows to perpetuity with a growth rate of nil as this was considered to be a prudent basis. In assessing the EBITDA sensitivities, we have also considered the potential downside from Brexit and related mitigation, the impact of which would not affect the carrying values. Further detail of our considerations and sensitivities are included within going concern assessment in our accounting policies.

The annual impairment testing resulted in an impairment charge of GBP3,297,000 against branch assets.

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
9  Intangible assets 
 
 
                                                  Other intangible 
                                        Goodwill            assets     Total 
                                         GBP 000           GBP 000   GBP 000 
Cost or valuation 
At 28 November 2016                      157,292             5,872   163,164 
Additions                                 91,442               929    92,371 
Fair value adjustment for goodwill         (560)                 -     (560) 
Deferred tax on fair value adjustment 
 of land and buildings                     3,377                 -     3,377 
                                        --------  ----------------  -------- 
At 26 November 2017                      251,551             6,801   258,352 
                                        --------  ----------------  -------- 
At 27 November 2017                      251,551             6,801   258,352 
Additions                                  2,029             1,478     3,507 
Transfers from PPE                             -             1,133     1,133 
                                        --------  ----------------  -------- 
At 25 November 2018                      253,580             9,412   262,992 
                                        --------  ----------------  -------- 
Amortisation 
At 28 November 2016                        4,234             4,579     8,813 
Amortisation charge                            -               640       640 
                                        --------  ----------------  -------- 
At 26 November 2017                        4,234             5,219     9,453 
                                        --------  ----------------  -------- 
At 27 November 2017                        4,234             5,219     9,453 
Amortisation charge                            -               698       698 
Transfers from PPE                             -                94        94 
                                        --------  ----------------  -------- 
At 25 November 2018                        4,234             6,011    10,245 
                                        --------  ----------------  -------- 
Carrying amount 
At 25 November 2018                      249,346             3,401   252,747 
                                        ========  ================  ======== 
At 26 November 2017                      247,317             1,582   248,899 
                                        ========  ================  ======== 
 

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
9  Intangible assets (continued) 
 

Software includes GBP1,391,000 of internally generated development costs.

Transfers in the year relate to the reallocation of IT development costs, previously classified within tangible assets.

Amortisation expenses of GBP698,000 (2017: GBP640,000) are included in administrative expenses.

Goodwill acquired in a business combination is not amortised, but is reviewed for impairment on an annual basis, or more frequently if there are indications that goodwill may be impaired. Management recognise an impairment where the recoverable amount of the CGU does not exceed the carrying value of goodwill. For the purpose of Goodwill, in line with the accounting policy, the business manages and makes decisions as one group of CGUs and therefore impairment is assessed on that single group. The recoverable amount of the CGU is determined from value in use calculations with a discounted cash flow model used to calculate this amount. Management has determined the values assigned to each of the key assumptions.

The key assumptions for the value in use calculation include the discount rate, long-term growth rates and forecast cash flows. The value in use calculations use forecast cash flows taking into account actual performance for the year and the Group's cash flow forecast for a three-year period, which has been approved by management. Cash flows beyond this period are extrapolated using a long-term growth rate of nil and discounted with a weighted average cost of capital (WACC) of 11.75% (2017: 8.9%). The change in WACC is driven by a decrease in share price and reduction in borrowings.

The discount rate is based on the Group's weighted average cost of capital, taking into account the cost of capital and borrowings, to which specific market-related premium adjustments are made.

Management extrapolated the cash flows to perpetuity with a growth rate of nil as this was considered to be a prudent basis. In assessing the EBITDA sensitivities, we have also considered the potential downside from Brexit and related mitigation, the impact of which would not affect the carrying value. Further detail of our considerations and sensitivities are included within going concern assessment in our accounting policies.

Upon review of impairment, management have calculated the recoverable amount and it exceeds the carrying amount and therefore have not included an impairment charge.

Significant estimates

Change in discount rate

The Group has conducted sensitivity analysis on the impairment testing for goodwill. With reasonable possible changes in key assumptions including a 2 percentage point change in WACC, management have concluded that the carrying amount of goodwill would be likely to exceed the value in use.

Growth rate

Management have assumed a long term growth rate to perpetuity after three years of nil, which is considered a prudent basis. The growth rate in the next three years is based on managements expectation of sales growth.

Budgeted cash flows

Management have conducted sensitivity analysis on the CGUs VIU by reducing the anticipated future cash flows. A reduction of 2.2% in forecast cash flows would reduce the headroom to nil.

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
10                           Loans and borrowings 
                                    2018        2017 
                                 GBP 000     GBP 000 
Current 
Finance lease liabilities          2,148       1,799 
                                   2,148       1,799 
Non-current loans and borrowings 
Bank borrowings                  125,500     154,500 
Unamortised issue costs          (1,458)     (1,532) 
Finance lease liabilities            947       1,754 
                             -----------  ---------- 
                                 124,989     154,722 
                             ===========  ========== 
 
 

The long term loans are secured by a fixed charge over the Group's head office property together with a floating charge over the Group's assets.

In November 2018, the Group amended some of the terms of the existing facility. The Group has an amortising GBP87,500,000 term loan and a GBP100,000,000 revolving facility with a GBP50,000,000 accordion. The current facility drawn as at 25 November 2018 is GBP125,500,000 (2017: GBP154,500,000).

Details of loans and hire purchase obligations repayable within two to five years are as follows:

 
                                                     2018       2017 
                                                  GBP 000    GBP 000 
Term Loan and revolving facility available 
 until July 2021                                  125,500    154,500 
Finance lease liabilities                             947      1,754 
                                                ---------  --------- 
                                                  126,447    156,254 
                                                =========  ========= 
11                                             Net debt 
                                                     2018       2017 
                                                  GBP 000    GBP 000 
Cash at bank and in hand                           28,547     14,273 
                                                ---------  --------- 
                                                   28,547     14,273 
                                                =========  ========= 
Term loan and revolving facility available 
 until July 2021                                (125,500)  (154,500) 
Less: unamortised issue costs                       1,458      1,532 
                                                ---------  --------- 
                                                (124,042)  (152,968) 
                                                =========  ========= 
Amounts due under finance lease obligations       (3,095)    (3,552) 
Net debt                                         (98,590)  (142,247) 
                                                =========  ========= 
 
 

Analysis of net debt

 
                                                  Other non-cash 
                                 2017  Cash flow       movements       2018 
                              GBP 000    GBP 000         GBP 000    GBP 000 
Cash and short-term 
 deposits                      14,273     14,274               -     28,547 
                            ---------  ---------  --------------  --------- 
                               14,273     14,274               -     28,547 
                            ---------  ---------  --------------  --------- 
Bank borrowings             (152,968)     29,000            (74)  (124,042) 
Finance lease liabilities     (3,552)        457               -    (3,095) 
                            ---------  ---------  --------------  --------- 
                            (156,520)     29,457            (74)  (127,137) 
                            ---------  ---------  --------------  --------- 
                            (142,247)     43,731            (74)   (98,590) 
                            =========  =========  ==============  ========= 
 

McColl's Retail Group

Notes to the Financial Statements for the 52 week Period from 27 November 2017 to 25 November 2018

 
12                                 Authorised, issued and fully paid share capital 
                                        Number of 
                                     ordinary shares 
                                        0.1 pence        Share capital   Share premium 
                                           each             GBP 000          GBP 000 
At 28 November 2017                        115,172,774              115          12,579 
Shares issued during the period                    741                -               1 
At 25 November 2018                        115,173,515              115          12,580 
                                   ===================  ===============  ============== 
 
 

The Board has authorised the allotment of shares equal to the nominal value of GBP77,000.

The Company has one class of ordinary shares which carry no right to fixed income. All issued shares are fully paid.

The Group did not acquire any of its own shares for cancellation in the 52 weeks ending 25 November 2018 or 52 weeks ending 26 November 2017.

The shares rank equally for voting purposes. On a show of hands each shareholder has one vote and on a poll each shareholder has one vote per ordinary share held. Each ordinary share ranks equally for any dividend declared. Each ordinary share ranks equally for any distributions made on a winding up of the Group. Each ordinary share ranks equally in the right to receive a relative proportion of shares in the event of a capitalisation of reserves.

 
13   Related party transactions 
 

Only the Directors are deemed to be key management personnel. All transactions between Directors and the Group are on an arm's length basis and no period end balances have arisen as a result of these transactions.

 
                                             2018      2017 
                                          GBP 000   GBP 000 
Salaries and other short term employee 
 benefits                                   1,917     1,793 
Share-based payments                           29       228 
                                         --------  -------- 
                                            1,946     2,021 
                                         ========  ======== 
 

There were no material transactions or balances between the Group and its key management personnel or members of their close family.

Principal Risks and Uncertainties

We are committed to good corporate governance. To this end, we follow a sound risk management process closely aligned to our strategy.

At present, the Board, with the assistance of the Audit & Risk Committee, considers the following to be the principal risks facing the Group.

 
   Principal           Risk                         Mitigation/Strategic response                     Current changes 
      Risk 
   Strategy      If the Board                                                                        Key strategic 
  (maintained)   either adopts        *    Our strategic development is led by an experienced        challenges 
                 the wrong                 Board and Senior Management                               for 2019 include 
                 strategy                                                                            the continuing 
                 or does not                                                                         work to deliver 
                 implement            *    An annual strategic review takes place alongside our      the supply 
                 it effectively            budget-setting process                                    chain benefits 
                 the aims of the                                                                     from our 
                 business, its                                                                       partnership 
                 performance and      *    The McColl's strategy is widely communicated and          with Morrisons 
                 reputation may            understood across the business                            and further 
                 suffer.                                                                             developing 
                                                                                                     our convenience 
                                      *    Business plans are developed, monitored and reviewed      offer. Ongoing 
                                           against strategic KPIs                                    change and 
                                                                                                     consolidation 
                                                                                                     in the sector 
                                      *    Senior Management are incentivised with                   may also impact 
                                           performance-related rewards to deliver our strategic      our business 
                                           goals                                                     and require 
                                                                                                     us to adjust 
                                                                                                     our strategy 
                                                                                                     accordingly. 
  Competition    We operate in                                                                       We will work 
  (increased)    a highly                 *    We monitor competitor activity and customer trends    through 
                 competitive                                                                         individual 
                 environment,                                                                        category reviews 
                 which is                                                                            to ensure our 
                 continually              *    Regular meetings are held with key suppliers to       offer, range 
                 changing and                  optimise our offer                                    and price is 
                 has been subject                                                                    competitive. 
                 to ongoing                                                                          Our ongoing 
                 consolidation.                                                                      store refresh 
                 Failure to               *    We are increasing brand awareness through marketing   programme will 
                 maintain                                                                            enhance our 
                 market share                                                                        customers' 
                 could have an                                                                       shopping 
                 adverse effect           *    Improvement of our estate and stores is ongoing       experience. 
                 on our core 
                 business. 
 
                                          *    Local refit programmes are undertaken to counter 
                                               specific competitive threats 
 
 
 
                                          *    We have launched the Safeway brand in store to 
                                               differentiate our offer 
 
 
 
                                          *    We have increased our marketing ad campaigns and 
                                               seasons events, both in store and through local 
                                               advertising 
                -----------------  ---------------------------------------------------------------  ------------------ 
   Customer      Customer                                                                            Working with 
     Offer       shopping             *    Membership of third party organisations (such as the      our new supply 
  (maintained)   habits are                Association of Convenience Stores) gives us greater       partner we 
                 influenced                insight into the convenience channel trends and           will focus 
                 by a wide range           developments                                              on the breadth 
                 of factors. If                                                                      and depth of 
                 we do not                                                                           our offer, 
                 respond              *    Our Customer Director has enhanced the Retail Board's     particularly 
                 to their                  capability to address changing customer needs             in key categories 
                 changing                                                                            such as fresh 
                 needs they are                                                                      & chilled food. 
                 more likely to       *    Promotional programmes offer customers great value        We will also 
                 shop with a                                                                         look to broaden 
                 competitor,                                                                         our seasonal 
                 resulting            *    Our strong customer service standards are reflected       relevance e.g. 
                 in falling                in our evolving brand strategy                            in non-food 
                 revenues.                                                                           areas 
 
                                      *    We complete detailed customer research for key 
                                           projects, for example our store refurbishment 
                                           programme 
 
 
                                      *    We have launched our presence in social media to 
                                           better engage with customers 
                -----------------  ---------------------------------------------------------------  ------------------ 
 Supply chain    We rely on a                                                                        The collapse 
  (increased)    small number         *    We establish long-term relationships with trusted         of P&H in 
                 of key                    suppliers                                                 November 
                 distributors                                                                        2017 tested 
                 and may be                                                                          our contingency 
                 adversely            *    Our distribution partners maintain their own              arrangements 
                 affected by               contingency planning as do we                             as did the 
                 changes                                                                             accelerated 
                 in supplier                                                                         transition 
                 dynamics             *    We closely monitor supplier performance including         to Morrisons 
                 and                       service levels and hold regular discussions with them     supply in 2018. 
                 interruptions             to address any issues (with contractual protections       Going forwards 
                 in supply.                in place)                                                 into 2019 it 
                                                                                                     is important 
                                                                                                     to fully 
                                      *    We monitor the financial stability of key partners        stabilise 
                                                                                                     and then optimise 
                                                                                                     arrangements, 
                                      *    We regularly review our supply chain arrangements,        including 
                                           with full tenders completed in 2013 and 2017              responding 
                                                                                                     to the outcomes 
                                                                                                     of Brexit. 
                                      *    We have a flexible electronic ordering process, with 
                                           established links to the key UK wholesalers 
 
 
                                      *    Our supply chain partner, Morrisons, is undertaking 
                                           significant pre-Brexit planning (including becoming 
                                           an authorised economic operator) 
                -----------------  ---------------------------------------------------------------  ------------------ 
 Supply chain    During 2018,                                                                        Issues relating 
   transition    we transitioned      *    There is close oversight by the Retail Board and          to availability, 
  (increased)    the wholesale             Senior Management                                         product set 
                 arrangements                                                                        up and cost 
                 for the majority                                                                    prices are 
                 of our estate        *    We undertook a significant amount of planning and         being worked 
                 to a new                  testing work to identify and resolve potential issues     through with 
                 supplier.                 and have instigated close monitoring of performance       suppliers and 
                 The accelerated                                                                     our new wholesale 
                 timeline                                                                            partner. We 
                 introduced           *    We have a dedicated and skilled management team with      expect to exit 
                 additional                extensive experience of managing supply arrangements      2019 with an 
                 complexity                                                                          improved 
                 and risk.                                                                           trajectory. 
                                      *    We have established clear lines of communication and 
                                           a joint project management approach with our new 
                                           supplier 
 
 
                                      *    The final phase of the transition will, in due course, 
                                           incorporate all of the learnings from 2018 
 
 
                                      *    Transitional support has been provided by our new 
                                           wholesale partner 
                -----------------  ---------------------------------------------------------------  ------------------ 
    Economy      All our revenue                                                                     As the impacts 
  (maintained)   is generated         *    We sell food and household essentials which are not       of Brexit on 
                 in the UK.                considered to be highly discretionary                     the UK economy 
                 Any                                                                                 become clearer 
                 deterioration                                                                       we will continue 
                 in the UK            *    We offer a wide range of products at different price      to evolve our 
                 economy,                  points, e.g. value and premium brands                     strategy to 
                 for example as                                                                      mitigate any 
                 a consequence                                                                       impacts. We 
                 of Brexit, could     *    Our flexible business model allows us to respond to       have modelled 
                 affect consumer           changes in customer behaviour, for example, by            various scenarios 
                 spending and              adapting our ranges                                       to ensure we 
                 cost of goods,                                                                      have sufficient 
                 which in turn                                                                       mitigation 
                 would impact         *    We are growing our range of own brand products            options. 
                 our sales and             through the rollout of Safeway 
                 profitability. 
 
                                      *    We are working with supply partners and manufacturers 
                                           to build our Brexit contingency plans 
                -----------------  ---------------------------------------------------------------  ------------------ 
   Financial     The main                                                                            We will continue 
  and treasury   financial            *    Committed loan facilities are in place to deliver our     to work with 
  (increased)    risks are the             strategy, with amendments in the year delivering          our banking 
                 availability              additional covenant headroom (see notes 10 and 11)        syndicate to 
                 of short- and                                                                       optimally manage 
                 long-term                                                                           our funding 
                 funding              *    Funding requirements are managed through regular          position and 
                 to meet business          forecasting and treasury management                       further 
                 needs,                                                                              deleverage. 
                 fluctuations                                                                        We plan to 
                 in interest          *    The Board approves budgets and business plans             conclude our 
                 rates,                                                                              2017 acquisition 
                 movements in                                                                        sale & leaseback 
                 energy prices        *    Relationships with lenders are managed through            programme in 
                 and other                 regular meetings                                          H1 2019 
                 post-Brexit 
                 impacts. 
                                      *    Our risks associated with financial instruments are 
                                           disclosed in the annual report 
                -----------------  ---------------------------------------------------------------  ------------------ 
  Information    We depend on                                                                        We have a future 
   Technology    the reliability      *    All business-critical systems are well established        IT roadmap 
  (maintained)   and capability            and are supported by an appropriate disaster recovery     and have plans 
                 of key                    strategy designed to ensure continuity of the             to upgrade 
                 information               business                                                  our EPOS systems 
                 systems and                                                                         in the next 
                 technology.                                                                         24 months. 
                 A major failure,     *    Business continuity plans are tested on an annual         We will also 
                 a breach, or              basis                                                     continue to 
                 prolonged                                                                           evolve our 
                 performance                                                                         store back 
                 issues with          *    Regular reviews assess our vulnerability and our          office systems 
                 store                     ability to re-establish operations in the event of a      to improve 
                 or head office            failure                                                   efficiency 
                 systems could                                                                       and effectiveness 
                 have an adverse 
                 impact on the        *    Testing is performed to ensure data is controlled and 
                 business and              protected 
                 its reputation. 
 
                                      *    We are currently investing in a new ERP system 
                                           (Oracle Fusion) to improve head office efficiency 
 
 
                                      *    We have processes in place to ensure GDPR compliance 
                -----------------  ---------------------------------------------------------------  ------------------ 
  Operational    We have a                                                                           National Living 
   cost base     relatively           *    We continually seek to remove unnecessary complexity      Wage and National 
  (increased)    high cost base,           from our operational procedures to optimise               Minimum Wage 
                 consisting                performance                                               will again 
                 primarily                                                                           increase above 
                 of salary,                                                                          the rate of 
                 property             *    We operate a flexible staffing model aligned to           inflation in 
                 rental and                revenue levels                                            2019. We have 
                 energy                                                                              set up a group 
                 costs. Increases                                                                    to focus on 
                 in these costs       *    We monitor legislation and developments related to        delivering 
                 without a                 our costs, e.g. minimum wage, rents and energy            efficiencies 
                 corresponding             tariffs, to allow us to plan and mitigate increases       and process 
                 increase in                                                                         improvements 
                 revenues                                                                            in our 
                 could adversely      *    Property management is a key function with regular        operations. 
                 impact our                review processes in place 
                 profitability. 
 
                                      *    We minimise energy costs by combining energy 
                                           efficiency initiatives and forward purchasing 
 
 
                                      *    We regularly retender external contracts to ensure 
                                           they remain market-competitive 
 
 
                                      *    We have an ongoing programme of estate optimisation 
                                           to remove unprofitable stores 
 
 
                                      *    We manage exposure to fluctuating energy prices by 
                                           forward buying electricity. We acknowledge that the 
                                           forward contracts in place are derivatives, they are 
                                           treated as a pre-agreed price for electricity 
                -----------------  ---------------------------------------------------------------  ------------------ 
  Regulation     We operate in                                                                       Regulations 
  (maintained)   an environment       *    We have clear accountability for compliance with all      impacting our 
                 governed                  laws and regulations                                      business continue 
                 by strict                                                                           to change but 
                 regulations                                                                         we have processes 
                 to ensure the        *    Our policies and procedures are designed to meet all      in place to 
                 safety                    relevant requirements                                     make sure we 
                 and protection                                                                      take proper 
                 of customers,                                                                       account 
                 colleagues,          *    We train colleagues to comply with all relevant           of regulatory 
                 shareholders              legislation                                               developments 
                 and other                                                                           in the way 
                 stakeholders.                                                                       we conduct 
                 Regulations          *    We have established governance groups, such as our        our business. 
                 include                   Health and Safety Strategy Committee to review and 
                 alcohol                   manage our compliance 
                 licensing, 
                 employment, 
                 health               *    Through third party memberships and expert advice, we 
                 and safety, data          keep up to date with evolving statute 
                 protection and 
                 the rules of 
                 the Stock 
                 Exchange. 
                 Failure to 
                 comply 
                 with relevant 
                 laws and 
                 regulations 
                 could result 
                 in sanctions 
                 and reputational 
                 damage. 
                -----------------  ---------------------------------------------------------------  ------------------ 
 

Brexit

We recognise that the UK's planned exit from the European Union (EU) creates some risks and uncertainties. We do not expect it to have a material impact on the business except in the event that the UK leaves the EU with no deal in place and this results in the most severe economic scenario.

Customers

Except in the event of a severe economic shock to the UK economy, we do not expect Brexit to have any significant impact on the behaviour of customers in McColl's. The grocery sector as a whole has a proven record of withstanding economic downturn. In recent periods of economic uncertainty consumers have tended to manage their budgets by shopping little and often, locally. Therefore the convenience sector in particular is largely protected from, and can even benefit from, broader negative economic trends.

Supply chain

It is estimated that around 35% of all the food we eat in the UK is sourced from the EU. Due to the nature of our product mix, we estimate that the proportion of products we source from the EU is considerably lower than average.

The most significant risk to food supplies is in the event of a no-deal Brexit where import delays could mean short shelf life products expire before they can reach their destination. We sell a relatively low proportion of chilled and fresh food with a short shelf life and as such are less exposed to this risk than other grocery retailers.

The majority of our products are sourced via UK wholesale partners. Morrisons is our largest wholesale partner, directly supplying c.1,300 of our stores. As the UKs second largest food manufacturer, they source and manufacture a high proportion of products in the UK. To mitigate the risk of a no-deal Brexit Morrisons have applied for and been granted "approved economic operator status", which means that goods will be fast tracked through customs, hence reducing the risk with their non UK suppliers.

Labour

It is likely that in leaving the European Union there will be a restriction on free movement that could lead to a shortage of low skilled workers. We do not believe this presents a significant risk to the business because we have a low number of transient workers. The majority of our store colleagues work on a part-time basis and live locally to their store. However, we recognise that there is some risk that we could be impacted by the UK experiencing a greater demand for low skilled workers that could create recruitment challenges and lead to wage inflation.

Glossary of Terms

Introduction

In the reporting of financial information, the Directors have adopted various Alternative Performance Measures (APMs) of financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS).

These measures are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry.

APMs should be considered in addition to IFRS measures and are not intended to be a substitute for IFRS measurements.

Purpose

The Directors believe that these APMs provide additional useful information on the underlying performance and position of McColl's.

APMs are also used to enhance the comparability of information between reporting periods by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding McColl's performance.

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive-setting purposes and have remained consistent with prior year.

The key APMs that the Group has focused on this year are as follows:

Like-for-like sales (LFL): This is a widely used indicator of a retailer's current trading performance and is a measure of growth in sales from stores that have been open for at least a year. It includes sales from stores that have traded throughout the whole of the current and prior periods, and including VAT but excluding sales of fuel, lottery, mobile top-up, gift cards and travel tickets.

Adjusted EBITDA: This profit measure shows the Group's Earnings Before Interest, Tax, Depreciation and Amortisation adjusted for both property gains and losses and other adjusting items.

Property gains and losses; are incomes and costs that arise from events and transactions in relation to the Group's property and not from the principal activity of the Group, i.e. that of an operator of convenience stores and newsagents.

Adjusting items; relate to costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of a similar type, in aggregate, are excluded from the Group's adjusted profit measures due to their size and nature in order to reflect management's view of the performance of the Group.

Adjusted operating profit: Operating profit before the impact of adjusting items as explained above.

Adjusted earnings per share: Earnings per share before the impact of adjusting items.

 
 APM                  Closest equivalent   Note reference        Definition and purpose 
                       IFRS measure         for reconciliation 
                     -------------------  -------------------- 
 Income statement 
  Revenue measures 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Sales growth         No direct            Not applicable        Growth in sales is a ratio 
                       equivalent                                 that measures year-on-year 
                                                                  movement in Group sales 
                                                                  for continuing operations 
                                                                  for 52 weeks. It shows the 
                                                                  annual rate of increase 
                                                                  in the Group's sales and 
                                                                  is considered a good indicator 
                                                                  of how rapidly the Group's 
                                                                  core business is growing. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Sales mix            No direct            Not applicable        The relative proportion 
                       equivalent                                 or ratio of products sold 
                                                                  compared to the same period 
                                                                  in the prior year. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Like-for-like        No direct            Not applicable        Like-for-like is a measure 
  (LFL)                equivalent                                 of growth in Group sales 
                                                                  from stores that have been 
                                                                  open for at least a year 
                                                                  (but excludes prior year 
                                                                  sales of stores closed during 
                                                                  the year). It is a widely 
                                                                  used indicator of a retailer's 
                                                                  current trading performance 
                                                                  and is important when comparing 
                                                                  growth between retailers 
                                                                  that have different profiles 
                                                                  of expansion, disposals 
                                                                  and closures. It's reported 
                                                                  on an 'including VAT' basis, 
                                                                  which aligns with the sales 
                                                                  measurement by the field 
                                                                  and stores teams, whose 
                                                                  focus is on the retail performance. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Profit measures 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Adjusted operating   Operating            Note 4                Operating profit before 
  profit               profit                                     adjusting items is the headline 
                                                                  measure of the Group's performance. 
                                                                  It is based on operating 
                                                                  profit before the impact 
                                                                  of certain costs or incomes 
                                                                  that derive from events 
                                                                  or transactions that fall 
                                                                  within the normal activities 
                                                                  of the Group, but which 
                                                                  are excluded by virtue of 
                                                                  their size and nature in 
                                                                  order to reflect management's 
                                                                  view of the performance 
                                                                  of the Group. This is a 
                                                                  key management incentive 
                                                                  metric. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Gross margin         No direct            Not applicable        Gross margin is calculated 
                       equivalent                                 as Gross profit before adjusting 
                                                                  items divided by revenue. 
                                                                  Progression in gross margin 
                                                                  is an important indicator 
                                                                  of the Group's operating 
                                                                  efficiency. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Profits/(losses)     No direct            Not applicable        Profits/(losses) arising 
  arising on           equivalent                                 on property-related items 
  property-related                                                relates to the Group's property 
  items                                                           activities including; gains 
                                                                  and losses on disposal of 
                                                                  property assets, sale and 
                                                                  lease back of freehold interests; 
                                                                  costs resulting from changes 
                                                                  in the Group's store portfolio, 
                                                                  including pre-opening and 
                                                                  post-closure costs; and 
                                                                  income/(charges) associated 
                                                                  with impairment of non-trading 
                                                                  property and related onerous 
                                                                  contracts. These items are 
                                                                  disclosed separately to 
                                                                  clearly identify the impact 
                                                                  of these items versus the 
                                                                  other operating expenses 
                                                                  related to the core retail 
                                                                  operations of the business. 
                                                                  They can be one-time in 
                                                                  nature and can have a disproportionate 
                                                                  impact on profit between 
                                                                  reporting periods. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Adjusted net         Finance costs        Not applicable        Total finance costs before 
  finance costs                                                   adjusting items is the net 
                                                                  finance costs adjusted for 
                                                                  non-recurring one off items 
                                                                  due to their size and nature. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Adjusted EBITDA      No direct            Note 4                This profit measure shows 
                       equivalent                                 the Group's Earnings Before 
                                                                  Interest, Tax, Depreciation 
                                                                  and Amortisation adjusted 
                                                                  for both Property gains 
                                                                  and losses and other adjusting 
                                                                  items, in order to provide 
                                                                  shareholders with a measure 
                                                                  of true underlying performance 
                                                                  of the business. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Basic adjusted       No direct            Note 7                This relates to profit after 
  earnings per         equivalent                                 tax before adjusting items 
  share (EPS)                                                     divided by the basic weighted 
                                                                  average number of shares, 
                                                                  in order to provide shareholders 
                                                                  with a measure of true underlying 
                                                                  performance of the business. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Diluted adjusted     Diluted earnings     Note 7                The difference between basic 
  earnings per         per share                                  and diluted metric is the 
  share                                                           impact of the dilutive effect 
                                                                  of share options and warrants 
                                                                  in existence. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 Balance sheet measures 
----------------------------------------  --------------------  ---------------------------------------- 
 Net debt             Borrowings           Note 11               Net debt comprises bank 
                       less cash                                  and other borrowings, finance 
                       and related                                lease payables, and net 
                       hedges                                     interest receivables/ payables, 
                                                                  offset by cash and cash 
                                                                  equivalents and short-term 
                                                                  investments. It is a useful 
                                                                  measure of the progress 
                                                                  in generating cash and strengthening 
                                                                  of the Group's balance sheet 
                                                                  position and is a measure 
                                                                  widely used by credit rating 
                                                                  agencies. 
-------------------  -------------------  --------------------  ---------------------------------------- 
 

Other

Capital expenditure (Capex): The additions to property, plant and equipment and intangible assets.

FTE: Full-time equivalents.

RPI: Retail Price Index.

CPI: Consumer Price Index.

LPI: Limited Price Inflation

Total Shareholder Return (TSR): The notional annualised return from a share, measured as the percentage change in the share price, plus the dividends paid with the gross dividends, reinvested in McColl's shares. This is measured over both a one and three year period.

Grocery sales: This includes ambient, fresh, frozen and household groceries, and food-to-go, but excludes impulse categories (including confectionery, crisps and snacks, soft drinks and ice cream), general merchandise, news and magazines, and services.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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February 18, 2019 02:00 ET (07:00 GMT)

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