The Works PLC
H1 FY25 Results and Strategic Outlook – Slow and Steady on the Path to Profitability
By Alex Langton | 26 January 2025
The Works delivered its interim results for H1 FY25 with the gusto of a family-friendly retailer valiantly navigating turbulent high streets. While the results show clear signs of progress, the journey remains a cautious uphill climb, with promising developments offset by persistent challenges. They have a plan!
Financials
Revenue edged up 1.3% to £124.2 million (H1 FY24: £122.6m), reflecting modest growth despite the broader malaise in non-food retail. A store LFL sales increase of 0.9% balanced a concerning 14.7% plunge in online sales, which were hindered by fulfilment bottlenecks at their third-party facility. Isn’t there a pattern with online sales disappointment?
However, profitability is where The Works has made reasonable strides. Pre-IFRS 16 adjusted EBITDA losses narrowed significantly to £2.8 million, compared to a much heftier £8.5 million loss in H1 FY24. Similarly, the adjusted loss before tax improved to £6.5 million from £10.4 million. The improved product margins (up 220bps) and cost-saving measures have clearly borne fruit, demonstrating management’s ability to execute on short-term profitability goals.
But the rise in net debt to £8.5 million (from £2.5m) is a niggling concern, driven by higher inventory levels and timing quirks related to the period-end date. While the company expects to close the year with £4 million net cash, this will require disciplined execution amidst ongoing cost pressures.
Key Ratio Analysis
Gross Margin Improvement: The 220bps margin expansion in H1 FY25 and the 190bps uplift during the 11-week Christmas trading period underscore effective cost management and pricing discipline.
Debt Levels: Net debt of £8.5 million is concerning, but the company expects to end FY25 in a net cash position of £4 million. This hinges on solid H2 performance.
Profitability Trajectory: Pre-IFRS 16 Adjusted EBITDA is forecasted at £8.5 million for FY25, implying significant H2 profitability. The long-term goal of a 6% EBITDA margin is ambitious but achievable if strategic initiatives gain traction.
Overview
The Works continues to stand out in its niche as a value retailer offering "screen-free" entertainment. While it isn’t immune to broader sector woes, the company appears to be outperforming its peers in the struggling non-food retail market.
Store performance remains a bright spot, accounting for over 90% of total sales and maintaining a robust LFL growth of 1% in the recent 11-week trading period. This resilience was bolstered by an improved Christmas trading season, where categories like adult fiction books, stationery, and Christmas accessories showed strong demand.
However, the decline in online sales raises critical questions about the future of The Works' digital strategy. Fulfilment issues have not only eroded customer trust but also incurred exceptional costs of £1 million. The company is "considering its options" for its online offering, but the pressure is on to transform digital operations into a reliable growth engine.
New Strategy
The new five-year plan aims to reposition The Works as the go-to destination for affordable, screen-free activities, targeting sales north of £375 million and an EBITDA margin of 6%. This strategy rests on three pillars:
Growing Brand Fame – Strengthening brand awareness with marketing campaigns, like the new #TimeWellSpent strapline, and improved customer engagement.
Improving Customer Convenience – Streamlining operations, store portfolio optimisation, and addressing online fulfilment challenges.
Being a Lean and Efficient Operator – Continued focus on cost savings, supplier negotiations, and targeted investments to support efficiency gains.
Execution remains key. The Works has already demonstrated a commitment to leaner operations through initiatives like new store labour models, rent renegotiations, and restructuring at the Operating Board level.
Outlook and Challenges
The Works expects to meet FY25 guidance with modest sales growth and improved profitability. However, the challenges ahead are formidable:
Cost Pressures: Rising wages and National Insurance changes will create £6.5 million in headwinds for FY26. Management’s reliance on targeted price increases and further efficiencies will need to be delicately balanced against customer sensitivity to price hikes.
Digital Transformation: Online sales account for less than 10% of total revenue, and the fulfilment issues cast a shadow over the company’s e-commerce ambitions. A reimagined online strategy will be critical for unlocking future growth.
Fragile Consumer Confidence: The broader retail market remains volatile, and TheWorks will need to weather an uncertain economic environment without overreliance on deep discounting.
Conclusion: The Works is undeniably moving in the right direction, but it’s far from a smooth ride. The significant reduction in losses and margin expansion signal tangible progress, yet the company’s debt position, online struggles, and exposure to cost headwinds temper my optimism.
The market may appreciate the transparency in acknowledging challenges and outlining a detailed five-year strategy. But in a market increasingly demanding short-term resilience alongside long-term vision, the onus is on The Works to prove that "elevation" is more than just a clever tagline.
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