The Works says trading conditions are becoming more challenging as it moves into a new financial year. Online sales were down by more than a quarter in the opening months of the year following a cyber security incident in March and as customers returned to buy in-store.
The discount multichannel retailer, which sells books, arts and crafts materials and children’s toys and is ranked Top100 in RXUK Top500 research, says in a first quarter trading update today that total sales fell by 1.3% on last year, with like-for-like (LFL) sales – that strips out the effect of store openings and closures – 2.5% lower. While store LFL sales grew by 1.4% year-on-year in the 13 weeks to July 31, online sales fell by 28.6% over the same period. Nonetheless, ecommerce sales remained 40% higher than before the pandemic.
That follows a year in which underlying EBITDA (earnings before interest, tax and assets write downs) is expected to come in at £16.5m, higher than the £15m previously predicted following a lower than expected level of provisions relating to stock.
Impact of cyber security incident
A cyber security incident at the end of March had a limited initial effect on trading, but The Works says that the action taken to secure the business had a longer-lasting effect both on in-store and online sales. It says that its cyber security protection is greatly improved following a decision to bring forward planned investment to strengthen IT security, and that the business has recovered well. The main impact on like-for-like sales was felt for the first two months of the quarter before improving.
In July, in-store LFL sales were up by 7.6% on last time. The Works says this was driven by expanded and improved adults and children’s book ranges and investment in its biggest back-to-school offer yet. However, online sales continued to be affected both by a post-pandemic shift back to store, and by a challenging trading environment that, says The Works, is only set to be more challenging in the short term. The retailer says that since online currently accounts for about 10% of its total sales, there is a “significant opportunity for growth in the medium term”.
The retailer says that the market outlook is now marked by low consumer confidence and rising inflation, and that it is not clear how long that will last – making it more uncertain how shoppers will behave, especially during the key peak trading season. Citing BRC data showing falling online non-food sales, it suggests this challenging consumer environment appears to be affecting online sales more than physical stores.
The Works still expects sales to grow in the rest of its financial year, but is not sure whether it will meet its original expectations, or whether sales will offset costs such as “historically high freight costs, which are showing little sign of abating in the short term, as well as increases to the National Living Wage”.
The Works has now increased its lending limit to £30m until the end of November 2025, which it says gives it “significant additional liquidity headroom”.
Gavin Peck, chief executive of The Works, says: “We delivered a strong performance in FY22 and will report a better than expected profit, as well as reinstating the payment of a dividend. Since the start of the financial year we have faced the residual effects of the cyber security incident and increasingly challenging trading conditions. The progressive recovery of store trading throughout the period is reassuring and we are pleased with the resilient performance delivered considering the lower consumer confidence. Our recent online sales performance reflects the challenges facing the broader sector but remains significantly higher than pre-Covid levels and we remain confident that the long term investment we have made in our customer proposition will see further growth.
“The Works is a remarkably resilient business and the group’s financial position remains robust. Although the near term market conditions are very uncertain, we are confident that our ‘better, not just bigger’ strategy still has a lot more upside to deliver in the medium term. As a value retailer we are working hard to ensure that customers can continue to rely on The Works as a destination for good value products, as well as focusing on protecting our profitability as the cost of doing business continues to rise.”