ProCook Group plc (PROC) Earnings Call Transcript

Good morning, everybody. Welcome. Thank you for being here, those of you in person. I know everyone in the room, but for those of you online that may not know me, I'm Lee Tappenden, I Lead ProCook. I'm joined by Dan Walden, our CFO. So with that, we'll kick off today, I'll give you a quick overview of the agenda. I'm going to cover with brief highlights of our FY '25 performance. Dan is going to go into a lot more detail about our financial update with a real deep dive on our cash position. I'll look back on 12 months ago, we set out a clear strategy, give some updates on how we progressed there. And then finally, Dan will finish with current trading in the last quarter and outlook for FY '26. We're probably going to talk for about 25 minutes, plenty of time for Q&A at the end. So if you remember a year ago, we set out a very clear medium-term strategy for 100 U.K. stores, GBP 100 million in revenue and 10% operating profit margin. So highlights of our performance against that backdrop. Really pleased to share with you record sales last year, GBP 69.5 million, which was up 11% year-on-year, also up 4.9% like-for-like. So record sales for the year that drove an improved market share position, so continued to outperform the market. A very clear objective for us was to grow our customer base, both from a record new customer and active customers up 7% and 8%, respectively, so very healthy. I won't cover the profit performance. Dan will cover that in detail, just to say really good gross margin performance and continued cost discipline. Many of you would have seen this before, but I think it's worth taking just 1 minute to reinforce our model. It is very unique. The unique model involves basically 100% ProCook owned brand products, all direct source, taking out any middlemen and ultimately driving a clear agenda around quality, a really good value price gap to the competition and enabling us to deliver margins north of 65%, and Dan will cover that in more detail as well. We operate all our own stores and our websites. So again, everything end-to-end is controlled by ourselves. Trustpilot reviews continue to be very high. We're currently at 4.8 to maintain that ranking with over 135,000 5-plus star reviews. We'll talk a lot in the next few minutes around our store expansion plans and how that's coupling together with improved marketing as well. And finally, we have been recertified to BCorp, which I think is resonating clearly much more with consumers across the U.K. over the last 12 months. So with that, I'll just hand over to Dan to talk a bit more about our financials.

Thank you, Lee. So we've delivered strong results this year, and we've improved trading momentum over the first year of executing our refreshed strategic plan. Together with our continued focus on cost discipline and improving operational efficiency, we've improved profitability and strengthened our balance sheet while self-funding significant capital investments in our store estate. Across our key financial metrics, we're in a stronger place with revenue growth -- with stronger revenue growth, improved gross margin, stronger EBITDA and robust cash management throughout the year, we delivered a second year of positive free cash flow, leading to a net cash position at the year-end. Our revenue grew by 11% year-on-year to a new record level as Lee set out of GBP 69.5 million, with growth positive in both channels and total like-for-like up 4.9%. Our like-for-like retail stores grew by 1.5%, reflecting 7 quarters of consecutive growth, driven by improved conversion, which was up 390 basis points, as well as growth in ATV, which was up 40 bps, partly offset by a small decline in like-for-like footfall year-on-year. The addition of new stores during the year added a further 8.8 percentage points of Retail channel growth, taking our total revenue growth in Retail up to 10.3% year-on-year, with further full year annualization benefits anticipated in the year ahead and new store maturity benefits to follow over the next couple of years. Online, our website sales grew by 10.3%, recovering and returning to positive growth on a 2-year basis from the disruption last year as we migrated to a new web platform. Growth was driven by recovery in traffic of 6.5%, including the benefit of the new social media acquisition channel, which we've developed in the year, whilst conversion improved year-on-year by 160 basis points. We began trading on Amazon U.K. again at the end of Q1 last year, and our smaller curated range on this channel has been successful in adding incremental and profitable sales this year, contributing a further 2 percentage points of sales growth to the Ecommerce channel. We're pleased with the trading momentum that we've now established with both channels performing well, it's particularly encouraging as we look ahead. We've accelerated top line revenue performance throughout the FY '25 year, having delivered 6 consecutive quarters of total Retail -- total revenue growth. Importantly, we've also improved gross margins throughout the year. We held lower prices in the early part of the year and absorbed the impact of higher shipping costs due to the Red Sea closure, which peaked at around $8,000 per container. The impact on margins was most pronounced during our peak trading period in Q3. As these cost pressures subsided later in the year and foreign exchange gains provided some year-on-year support, we also optimized our pricing across core ranges. We've, therefore, improved margins back towards our target range with GM% reaching 67.6% in Q4. We continue to act with a high degree of discipline around costs, managing our operational activities carefully and prudently while we identify areas where we can improve efficiency in our business to help offset inflationary pressures and improve operating margins. This has supported improved margins with EBITDA increasing from 10.9% of revenue to 12.8% last year. We remain committed to paying all colleagues at least the real living wage. And last year, our average colleague pay inflation was 8.3%. We also returned to paying colleagues a more meaningful bonus this year-end to provide added motivation and inspiration and to incentivize the high-performance culture that we're embedding after a number of years of lower awards. As planned, we didn't repeat the top-of-funnel brand campaigns this year instead focusing on developing our paid media strategy -- paid social media strategy, where we've made really strong progress in the year. This is not only helping us attract more customers as Lee set out to shop with us and to build our brand awareness, it's also benefiting marketing efficiency, reducing our total marketing spend by GBP 1.4 million year-on-year as we improve our paid media mix and reduce reliance on bottom of funnel Google ads despite attracting record new customers this year. We continue to work on reducing central overheads wherever possible. And this year, we've identified and delivered a further GBP 0.3 million year-on-year of cost savings on top of the cost savings that we delivered over the previous 2 years, primarily in technology costs. As we'll look at later in this presentation, as we scale the top line, we're already starting to see some benefit in central cost overhead coming through to support improved operating and EBITDA margins. Our underlying operating profit and PBT both increased by 51% year-on-year. We delivered GBP 4.6 million more gross profit this year, primarily driven by sales growth and our operating cost base increased by GBP 3.5 million year-on-year, which was driven by new store costs increasing, including the new store openings, pay inflation and reward, Ecommerce volume-related growth, partly offset by the marketing efficiencies that I just mentioned. Looking at our costs on a like-for-like basis, our operating expenses were up 1.4% compared to like-for-like growth of 4.9% on the top line. As the year came to a close, we experienced a rise in FX volatility on the back of U.S. tariff policy, resulting in a sharp downward adjustment in late Q4 in mark-to-market valuations of our foreign exchange trades as the dollar weakened, resulting in a noncash foreign exchange loss of GBP 0.3 million across the year as a whole and a GBP 0.4 million swing year-on-year. Opening new stores is a key component of our strategy, and we're really confident that we have a compelling route to drive profitable sales growth. In the year, we've successfully accelerated our plans, and we opened 12 new stores with a cautiously estimated average mature sales of GBP 0.9 million each. We project a 24% EBITDA margin at maturity, which typically takes 2 to 3 years to achieve. With CapEx of GBP 300,000 investment per store, our average payback net of lease incentives is just 2 years. We measure the halo effect of stores on our website sales. For the stores that we opened last year, for every GBP 100 spent by a customer in store, we see an incremental GBP 7 being spent on our website by customers who live within a 10-mile radius of the new store. This strengthens and reinforces the investment case further. The nature of the accounting and rent-free periods mean that opening new stores have different impacts on operating profit and EBITDA. EBITDA increases dramatically as the new store opens, benefiting from lease incentives typically in the form of rent-free periods and then begins to grow at a slower rate as the store matures. Operating profit, on the other hand, grows more steadily with the lease incentives smooth over the lease length and fit-out costs, depreciation straight line over a typical 5-year period. This means that in year 1, there was a dilutive effect of the new stores on operating profit margins in year 1, where we see an average operating profit of just 8%, increasing to 18% in year 2 and 20% plus in year 3 onwards as the store matures. This effect will benefit growth in operating profit and operating profit margins over time as our estate matures. We've again delivered a healthy and positive free cash flow in the year of GBP 1.7 million, improving our net debt position at the end of FY '24 to GBP 1 million net cash position this year-end. And with that, our improved profitability has enabled the self-funding of capital expenditure, GBP 4 million -- GBP 4.1 million total CapEx, of which GBP 3.8 million relates to new stores. We've improved our payable terms with key suppliers, and this has more than offset our investment in inventory to support sales growth. At this point, Lee, I'll hand back to you.

Thanks, Dan. So now I'll just give a quick update on the strategy that we set out last year, so 12 months in how we're performing. I'm going to talk around the wheel here, 4 key areas: accelerating profitable sales growth, improving our operating efficiency. And then finally, quickly touch on Great Place to Work in sort of internal engagement and then externally, how we've been recognized as A Force for Good. So in terms of driving the business, I think we're really excited about new stores. Dan talked about it. I mean we set out what we thought was an ambitious plan last year internally going after 10 new stores. We managed to deliver 12 new stores. So we're really, really pleased with the performance there. I think we've really seen the business step up. There's a muscle in the business to open new stores effectively on time and on budget. These 12 new stores on a full year basis, mature sales up to GBP 10 million. And as Dan said, we anticipate still getting a 2-year payback on this investment. These actual 12 stores represent about GBP 2 million extra store footfall. So in terms of the brand awareness, brand exposure, it's a really key part of our strategy to increase ProCook awareness. Going into this year, we're one quarter in. We've already opened 3 new stores in Hereford, Southampton and Reading, pleased with all 3 openings, and the pipeline is forming out quite nicely for the coming year. We expect to open between 5 to 10 net new stores in the coming year. Excitingly as well, we said a year ago that although we did not want to slow down the store expansion program and that our stores were not broken, we felt they weren't really very contemporary in terms of look, feel, warmth. So we've come up with a new format, a new design package. We've pretty much locked that down now, and we'll be opening 2 of the new stores at the end of Q2, we'll have this new look and feel. We will then test this in an existing couple of stores to get some customer feedback and obviously look at the metrics of the stores before we decide to roll that out further. But it's a real step change for us. I'm glad to say that we're not waiting a long period of time to bring that to life. Equally exciting, I think, is product. The model I framed up earlier, it's 100% our own product, and we've seen a lot of newness come through and a lot of success on that newness. I'll talk in more detail on the next slide around coffee, but Electricals, we talked about last year, currently represents about 5% of our sales. We're really pleased with that performance. And we will be, as you expect, curating the assortment as we go. Not every item has worked, but overall, we will replace those with new product development going forward. Also interestingly in a couple of our heritage categories of cookware and knives, where we're quite dominant, we've introduced a lot of new more premium ranges. And really interestingly, we're seeing the premium ranges sell very well. So in a marketplace where there's pressure on discretionary income, consumer spending, we're seeing that these new ranges of more premium products and higher price points are resonating well. We launched last year, Black Friday and Christmas, very different look and feel Black Friday promotional campaign, which worked extremely well. We will double down again on that this year. And the first sort of attempt seasonal offering for Christmas will be expanded further this coming Christmas. Our goal this year will be to have a very comprehensive look and feel of Christmas. Last year, we were a little bit fragmented. This year, that packaging look and feel has been really locked down quite tightly. And because we are a long lead time business, the teams are already looking at spring/summer next year and autumn 2026 calendar. So really getting ahead of pipeline of new products. And finally, as Dan alluded to, we've had improved terms from our suppliers. We identified we have a quite fragmented supply base. We reduced suppliers by 20% last year. There's a lot more opportunity here, and that comes through in terms of improved buying terms and payment terms as we become more important to our suppliers. Next, Coffee, which was a bit of a fanfare internally. We launched this range a few months ago. We bought what we thought was 5 to 6 months' worth of inventory that sold out in 8 weeks, which is a nice problem to have. It is a little bit frustrating. Fortunate timing, we actually got back in stock as of Friday night last week online and back in stores yesterday. So that's good timing. I think this is a really important story. And we're looking at a range, everything from GBP 149, as you can see on the product, a pretty sophisticated product at GBP 600. And the velocity at which they sold is very encouraging. And the price comp to other national brand products is a huge variation. And this is one example of some media coverage we received multiple out there. Customers standing in line at new store openings who've researched these products wanting to buy them, having those conversations directly myself, people are turning up to our stores wanting to buy the GBP 599 coffee machine, which I think says a lot. So super excited about product and new store openings. Another key part of our focus for us was differentiating ourselves from Big-box. We should be offering much more premium personalized service. We are moving on and really pleased to see Trustpilot rating still holding high. That Trustpilot score relates to both our in-store and online experience. In stores, we're making quite a lot of change. We appointed a new Retail Director 3 months ago. A gentleman called Joe Pennington, who's joined us from Charles Tyrwhitt. He's a very high-touch, high-service retailer. Joe has been a great addition to the team. We've introduced field-based regional trainers. They're training on product knowledge, which is critical, especially when you're talking about electricals. So training on product is important, but also customer service and more of a sell-in versus service mindset. There's a real opportunity to drive a basket value in stores going forward. In Ecomm, it's constant improvement around friction-free, improving the basket experience, navigation, building out build your own sets for cookware, recipes for inspiration. There's a lot of work happening online ongoing and then recently introduced tokenized basket. So again, take out the friction for customers. Trying to think about our business omnichannel more. I mean a good example will be gift cards, where we launched physical gift cards and then e-gift cards, where now the process between the 2 stores and Ecomm is much more seamless in returns and in buying gift cards. So just one example of how we're trying to join the dots between stores and Ecomm better. In terms of our brand awareness, clearly, opening the new stores is a big part of that improvement with the extra traffic that Dan talked about earlier, but also social media, we set out a year ago, this is an opportunity for us to move quickly and very efficiently to drive brand awareness. And our reach through social media website is up 130% year-on-year. Our number of followers is up 30% to 120,000. And we've seen a lot of our switch of spend between more Google-based into more Meta and very recently, TikTok, which I think is going to play very well to us in terms of inspiration of cooking in the home. So a lot of great work done on social. A good example of this would be local influencers where at recent store openings, we seeded product free gifts with local influencers. These are individuals with 80,000 to 100,000 followers. They come to our store openings, they video around the store, they post and we get 25,000 to 30,000 impact and reach from those local influencers are talking to customers in those local catchment areas. So I think it's a great example of us being a bit more nimble and trying to localize how people think about ProCook. Three areas of driving cost efficiency. I guess the headline here is in the bottom, which is on a like-for-like basis, our operating expenses only went up 1.4%, whilst driving a 4.9% sales increase. So really starting to leverage the business in a good way. Supply chain has been a big part of that. And as we said last year, we are truly looking at it end-to-end from goods into warehouse through the warehouse, out to stores to the end customer. So we've launched with a new delivery partner out to stores. 80% of our stores now receive deliveries on caged versus pallets, which is quite archaic in terms of damage, shrink and fundamentally how stores operate. So cages have been a big win for stores. They have taken out a lot of non-value-add tasks. And I think this will pay huge dividends going into peak trading because we've been able to increase the delivery frequency without increasing costs. Also enables us to do reverse logistics on products when we need to. In terms of tech, I'll call out a couple here, very good collaboration between our tech and Ecomm team, constantly testing new things. We launched retail handheld terminals in our stores to do delivery checks, but also take out laborious stock takes twice a year with a pen and paper and now move to perpetual inventory checks throughout the year to take out a huge amount of tasks, also improving inventory accuracy and availability, obviously. Final one I'll call out here, we adopted an AI-led facial age verification check for knife purchases online. It's a much better experience for customers. It's less clunky, involves -- does involve our customer service team getting involved. And it's just a very good example of us moving quite quickly and using tech. In terms of cost, the marketing efficiency that Dan mentioned is probably the call-out here. And our efficiency last year improved around 19% for the full year. And in Q1 this year, we've seen that uptick in terms of efficiency much, much greater in Q1 of FY '26. We have renegotiated some of our transport deals with third parties, the Everest and DPDs of this world to get some cost benefits, and that's going to flow through in the coming year as well. And finally, in terms of A Place to Work and the engagement with our colleagues. So we've been through quite an aggressive change agenda and to get a record colleague engagement score in that year, we're very pleased with 77%. So it's a record year, and we've gone through a lot of change, both in stores and SSC. We came out our highest ranking at 61 on U.K. Best Places to Work, and that's in the Large Company category as well. And finally, we've maintained our real living wage commitment, which each year we talk about it, and it's a good thing. But if you look back 5 years, it's a 40% increase in pay for our colleagues in stores, which is meaningful. And that's built into obviously the efficiency gains that we've had as well. In terms of being A Force for Good, I'll just call out again BCorp recertification. Customers understand more and more what BCorp is and how important it is and what it takes to be certified. So I think that is an opportunity for us to talk about that more externally as we continue to drive that agenda. And there's a lot of work going on around sustainability and challenge [indiscernible], as you can see. So with that, I'll hand back to Dan to talk about Q1 trading and a bit of an outlook for the full year.

Thank you. So we're pleased to report another strong performance in Q1 and a good start to the new financial year. Total revenue grew by 13.7% year-on-year, building on the momentum that we have established. We delivered like-for-like sales growth of [ 2.2% ], marking the sixth consecutive quarter of total like-for-like growth. Retail up 0.3%, Ecommerce up 4.9% with footfall impacted in stores by the warmer weather. During the quarter, as Lee said, we opened 3 new stores. We also closed one in Central London, which wasn't economically attractive. Our Retail estate now stands at 68 stores, and our total revenue growth in Retail was 16.9% for Q1. Including the Amazon relaunch, Ecommerce revenue increased by 8.2% during Q1. Our margin also remains in positive territory year-on-year as we expected, and our cost base is in line with our internal expectations at this stage in the year. Looking ahead, as Lee said earlier, we expect to open 5 to 10 net new stores this year as we progress towards our 100 store target in the U.K. These stores, combined with the annualization of maturity effects that I've already mentioned, will continue to add incremental sales and support improved operating profit over time, as we discussed earlier. We expect to deliver low single-digit like-for-like growth, primarily driven by product, service and brand awareness improvements across both channels with a slightly higher weighting towards Ecommerce growth. From a gross margin perspective, we anticipate a step-up year-on-year, 50 to 100 bps helping us get closer to our target levels of approximately 67%. Whilst we still face inflationary pressures, including wage inflation and national insurance, obviously, we anticipate that these -- the cost efficiencies, which we'll continue to pursue will provide sufficient mitigation to fully offset these. It's worth noting again that our typical H1 weighting of sales represents about 40% of the full year, and we do expect the first half to be loss-making still. From a cash flow perspective, we expect to invest more in inventory to support sales growth. However, this will be partly offset by increased trade payables. And as we open more stores this year, we expect to continue to invest for growth with each new store opening costing approximately GBP 300,000. Finally, with respect to corporation tax, we hold a deferred tax asset on the balance sheet, and this will provide the ability to mitigate cash tax payments during FY '26. Looking out to the medium term, our targets of 100 stores in the U.K., GBP 100 million revenue and 10% operating margin and the route to get there from a sales perspective remain unchanged. I've set out here a guide of how we see operating profit margin improving with time, driven by the factors we've already discussed, including gross margin improvements, the Retail maturity and Ecommerce efficiency as a result of the improved marketing approach. Additionally, we anticipate being able to better leverage our central cost base, including the store support center, which we opened in 2023 as we prepared in advance to grow our business. Thank you. I hand back to Lee to summarize.

Thanks, Dan. So in summary, we talked about our medium-term plan, 100, 110. We're increasingly confident of delivering that. We're only 1 year into that plan, and I feel that we have made really good progress, both on the financials and strategically. So in summary, I'd say that, bear in mind what I talked about at the beginning, the business model is unique. Customer proposition is unique, and we're confident in that. The trading momentum carried on through last year and is continuing into Q1 of this year and the improved financial performance reflects that. We're driving a really clear performance agenda and performance culture in the business, and that starts with the leadership team. Joe joining us as Retail Director is the final change in that leadership team. And just to remind everybody, we have a new Ecommerce Director, Marketing Director, Commercial Director and our Retail Director in the last 12 months. And that is not -- that's really what we talk about here. But within that, in those teams, we've made major changes to the commercial team with external hires and marketing and Ecomm below that. So there's a lot of change of people that's happened in the last 12 months. So with that said, we're clear on our plan, and we actually believe that we can accelerate profitable growth in FY '26. So I'll wrap up there and take any questions you may have.

Can I just ask about store rollout. You had net 5 to 10 this year. You've already done renew and closed one. So what's the environment like? And does that imply there's a couple of stores to be closed as well?

You're referencing Tottenham Court Road, which we closed for specific reasons for that location. We believe there's probably one other store in the portfolio. But it's a constant evaluation, looking at lease updates, renewals and how they fit with the brand going forward. I think the pipeline of stores we have identified for the next year, we're confident of, but we never want to get ahead of ourselves until the deals are finally done. But there's a lot of opportunity, as we've talked about stores, in some big cities in the Midlands and the North where we're not currently out.

Just following on from that really. Just the types of location you're in. I mean that stat, I think 12 stores gets you access to 2 million people that suggests they're pretty impressive locations. So just a bit more on that and again, availability going forward. And then -- just a bit more granularity perhaps on like-for-like. You mentioned that the Retail side of it was impacted a little bit by the weather, which has sort of eased off a little bit. I know it's hot today, but was it a sort of tricky April and then a stronger May and a decent exit rate?

Yes, I'll take the first one and take the second one, Dan.

Yes.

So on the new -- new store perspective, I think we've opened some stores, a mix of regional high-traffic shopping malls and some affluent high street locations, the Gilfords of this world. They both work for us. That number around 2 million extra footfall in the 12, we would see that sort of ratio maintaining for the other stores we plan to open this year. I think it's probably the easiest way to answer it. There are a lot of -- again, it's the same mix of stores we're looking at, but some major cities with really big busy shopping malls that we're targeting. And I should have said that as part of the change of the new store look and feel, we're planning to deliver that at the same CapEx rate as well. There's been some great work on reducing the fit-out costs by making the store design package more modular. So a, it's more flexible when we want to change category spacing and productivity. The fixtures themselves are more premium and more expensive. There's more quality product in the fixtures, but the fit-out costs negate that. So net-net, we expect to open these stores at around the same GBP 300,000 CapEx. Dan, do you want to take the Q1 like-for-like split?