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Material Issues, risks and opportunities

MANAGING THE RISK OF FASHION

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Refer to Managing the risk of fashion for more detail.

2020 Performance against objectives and targets

OBJECTIVES AND PLANS

PERFORMANCE AGAINST OBJECTIVES

Ongoing focus on managing the risk of fashion by entrenching refined buying philosophy focused on differentiation and aligning made-to-order (MTO) offering to consumer demand (reduce styles/options and increase inventory turn).

  • Product strategy refined to provide further clarity to buying and design teams on product direction.

  • Reduction in number of MTO styles to ensure a more focused range.

  • Benefits of refined product strategy and range reduction not yet evident as the majority of MTO orders from March 2020 were cancelled due to COVID-19.

  • Retail sales were significantly impacted by the COVID-19 lockdown and declined by 16.4% (2019: decline of 0.9%).

  • Gross margin declined to 38.7% (2019: 42.3%).

Undertake market research to better define and understand the needs of the Offspring customer.

  • Market research undertaken and the customer insights have been incorporated into the development of the new Offspring website to be launched during October 2020.

Challenges encountered

  • Continued aggressive discounting and promotions across the UK high street.
  • Weak trading resulted in markdown sales substituting full-price sales, having an impact on both sales and margin.
  • Branded footwear market continues to be highly influenced by social media and successful trading can be dependent on the sales performance of a single style.
  • Under-performance of MTO footwear impacting negatively on Office gross margin.

2021 Objectives and plans

  • Grow MTO offering and benefit from the refined product strategy using Truworths’ ‘own-brand’ expertise.
  • Ensure effective planning and stock management to manage markdowns and increase margins.
  • Continue to develop brand relationships and mutually agreeable payment terms.
  • Ensure relevance with consumer by reacting quickly to test and trial new product.

MEDIUM-TERM Opportunities

  • Increase MTO as a percentage of Office sales to increase gross margin and reinforce Office’s unique proposition.
  • Focus on sustainability by improving sourcing network, introducing sustainable products as well as reducing the usage of plastic and paper in packaging.

Gross margin 41% – 45%

PERFORMANCE AGAINST TARGET

Gross margin 38.7% (2019: 42.3%)

Medium-term target

Gross margin 38% – 42%

Key risks and mitigation strategies

DESCRIPTION OF RISK

RISK MITIGATION

Suitability and sustainability of Office’s ageing merchandise management system, having become acutely dependent on highly skilled scarce internal and external resources.

  • Implement plans to replace current merchandise system.

  • Moved current merchandise management system to a new server.

  • Reduce reliance on current merchandise management system by decoupling new systems and through use of business intelligence.

Reliance on third-party brands.

  • Continued engagement with partner brands to maintain brand relationships.

  • Increase MTO as a percentage of the total sales mix.

  • Identify and introduce new and emerging brands.

Impact on gross margin of changing product mix within sports and MTO ranges.

  • Continued focus on MTO product.

  • Reduce product options to improve inventory turn.

  • Improve systems and processes to increase inventory turn.

Ineffective management of merchandise and buying decisions over stock ranges and volumes.

  • Apply proven merchandise processes and key executive interventions throughout the merchandise life cycle aimed at managing and mitigating the risk of fashion.

  • Utilise the merchandise management system to control stock levels and ensure the ideal level of stockholding.

  • Continue to work with Truworths’ management to implement effective processes and controls.

Office is exposed to exchange rate volatility on imported merchandise.

  • Continue to apply foreign exchange hedging policy to reduce the adverse impact of currency fluctuations.

  • Net exposure to US dollar is 5% (as a proportion of total expenditure).

  • Use natural hedge through Euro income generated from sales from stores in Germany and Ireland, the German website and the multi-currency payment option on the UK website.

Optimising supply chain efficiency

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Refer to OPTIMISING SUPPLY CHAIN EFFICIENCY for more detail.

2020 Performance against objectives and targets

OBJECTIVES AND PLANS

PERFORMANCE AGAINST OBJECTIVES

Reduce stockholdings to ideal levels, with a continued focus on aged stock.

  • Successful reduction in stock through third-party clearance partners has created warehouse capacity.

  • Branded product clearance through markdown at an acceptable rate and an improvement on 2019 level.

  • COVID-19 cash flow constraints and cancelled orders reduced stock intake; closing inventory was 26.0% lower than 2019.

Focus on improving delivery options across same day and express ‘click & collect’.

  • Express ‘click & collect’ service successfully trialled pre-COVID-19 and planned to be implemented after September 2020.

  • Same-day delivery service trialled with limited success.

Finalise the appointment of a new warehouse management system (WMS) supplier with the aim of implementing a new WMS in the next two years.

  • Project to re-engineer distribution centres was put on hold due to COVID-19.

Challenges encountered

  • Managing the impact of Brexit and ensuring that the business can continue to trade across Europe.
  • COVID-19 impacted delivery of stock as suppliers experienced challenges in their warehouse due to social distancing protocols.
  • COVID-19 impacted progress on implementation of express ‘click & collect’ service and retrial of same-day delivery service.

2021 Objectives and plans

  • Continue relationships with third-party stock clearance partners.
  • Improve fulfilment options by completing the implementation of the same-day delivery and express ‘click & collect’ services.
  • Investigate named day and time delivery to improve fulfilment options.
  • Mitigate the risk of disruption to the business supply chain posed by Brexit.
  • Continue to strengthen key supplier relationships through ongoing constructive engagement on significant matters.

MEDIUM-TERM Opportunities

  • Continue with warehouse and distribution redesign project to realise efficiencies.
  • Continue to integrate new international payment channels as the market expands.
  • Investigate and integrate new courier management software to ensure deliveries are undertaken at the lowest cost to the business while meeting the timeline expectation of customers.

Inventory turn of 3.0 – 4.0 times

PERFORMANCE AGAINST TARGET

Inventory turn 4.0 times in Sterling (2019: 3.2 times in Sterling)

Medium-term target

Inventory turn 3.0 – 4.0 times

Key risks and mitigation strategies

DESCRIPTION OF RISK

RISK MITIGATION

Reliance on third-party brands to secure reliable product.

  • Diversify the range and styles across and within the different brands.

  • Increase Office MTO contribution.

  • Office considered a strategic partner by all major international brands due to its national coverage and access to certain target markets.

Unethical behaviour within the supply chain.

  • Apply and monitor adherence with anti-corruption and bribery policy.

  • MTO suppliers required to provide written confirmation that they accept the working practices in Office’s supplier manual.

  • Ensure adherence to Modern Slavery Act statement available on Office website.

  • Communicate the Office code of ethics to new suppliers, and obtain acknowledgement and signature.

  • Implemented documentation controls to safeguard against tax avoidance in the supply chain in line with legislation.

Managing retail presence

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Refer to MANAGING RETAIL PRESENCE for more detail.

2020 Performance against objectives and targets

OBJECTIVES AND PLANS

PERFORMANCE AGAINST OBJECTIVES

Undertake a critical review of the real estate portfolio and close or renegotiate leases of loss-making stores.

  • Ongoing review of portfolio to exit unprofitable stores.

  • Three loss-making stores and eight concessions closed in the period.

  • One new store opened in 2020.

  • Trading space reduced by 4.8%.

Negotiate rental reductions where possible and conclude new leases for a maximum of five years.

  • Negotiations with landlords accelerated during COVID-19 lockdown and rent-free periods and rent reductions achieved.

  • Renewed eight store leases at maximum tenure of five years, including three on a short-term, flexible basis.

Office and Offspring websites will be enhanced to ensure a best-in-class omni-channel experience.

  • New Office website launched in October 2019.

  • Planning for new Offspring website completed, with launch scheduled for October 2020.

Continue to evolve the ‘store of the future’ concept and implement key learnings in other stores.

  • Planning commenced on evolving the ‘store of the future’ concept for a refit of the Westfield London store.

  • All store refits were halted due to the impact of the COVID-19 lockdown.

Expand product offering in existing and adjacent categories (including children’s footwear and accessories).

  • Introduced branded backpacks and back-to-school products.

  • Expanded shoe care range.

  • Buying team in a test and learn phase on accessories.

Grow wholesale business and MTO extensively and explore new markets in Europe and Asia.

  • Wholesale performance impacted by loss of major customer and MTO range suffered from poor range choices.

  • All wholesale orders with factories and customers cancelled from March 2020 due to COVID-19.

Challenges encountered

  • In the current weak trading conditions, renegotiating long-term leases which only make allowance for upward rental reviews and the restrictions on exiting these leases or sub-letting.
  • Continuing decline in high street footfall with customer preference to online shopping, and this trend has been accelerated through COVID-19.
  • Continued lower sales growth in physical stores.
  • Low stock availability.
  • Challenging retail environment as a result of COVID-19 and the uncertainties around Brexit.

2021 Objectives and plans

  • Plan to close up to 28 under-performing stores through lease expiries and break clauses.
  • Improve efficiency in staff scheduling in stores.
  • Planned launch of Offspring website in October 2020.
  • Expand online payment options.
  • Enhance e-commerce and digital retail by elevating personalisation, optimising merchandising strategies and marketing optimisation.

MEDIUM-TERM Opportunities

  • Right-size property portfolio with the closure of up to a further 30 stores from 2022 to 2024.
  • Develop a single view of the customer by integrating customer information from online and store purchases.
  • Create one digital platform for all omni-channel customers.
  • Target new wholesale customers in Asia, the USA and the Middle East.
  • Expand wholesale product offering in line with expansion of MTO range.
  • Improve speed to market through use of carrier hubs in Europe and Asia.
  • Continue to roll out the ‘store of the future’ concept.

Reduce trading space by 3%

PERFORMANCE AGAINST TARGET

Trading space decreased by 4.8% (2019: decrease of 5.2%)

TARGET FOR 2021

Reduce trading space by 20%

Key risks and mitigation strategies

DESCRIPTION OF RISK

RISK MITIGATION

Risk of online sales substituting store sales in a fast-changing UK retail landscape.

  • Store portfolio under review and opportunity to exit poor-performing stores.

  • ‘Store of the future’ concept implemented in the Oxford Street flagship store can be rolled out to further select locations.

  • Drive customer footfall into stores through improvements in the omni-channel offering including ‘click & collect’ and online returns in store.

  • New Office website launched and new Offspring website planned for launch in October 2020.

Footfall in London substantially reduced from previous years due to the COVID-19 pandemic.

  • Management focus and monitoring of the London stores with new initiatives to encourage footfall.

  • Reassessment of the contributions from London stores based on lower footfall.

  • Compensate for reduction in sales through higher e-commerce sales in London.

Non-compliance with the General Data Protection Regulation (GDPR) introduced in May 2018, which has changed laws relating to the collection, storage and usage of customer data.

  • GDPR training provided to all employees.

  • Adherence to GDPR in line with legislation.

  • All store-based documentation to be paperless by end of 2021 financial period.

Payment Card Industry Data Security Standard (PCIDSS) non-compliance.

  • Implementation of PCI-compliant omni-channel payment processor.

  • PCIDSS training provided to all key employees.

  • Adherence to PCIDSS in line with legislation.