Liquidity & Capital Resources Overview
It is the objective of the Group to maintain a strong balance sheet, after implementing its 8% – 10% new store space growth strategy in the US, the continuing programme of store refurbishments and relocations on both sides of the Atlantic, payment of dividends, and any repurchase of shares. Factors which could affect this objective would be the acquisition of a business or a change in the Group’s distribution policy to shareholders or if there was a variation in the operating performance of the Group.
The cash flow performance of the Group depends on a number of factors, such as the:
- operating performance of the business;
- rate of space expansion, which influences both fixed and working capital investment;
- level of store refurbishment and relocations;
- level of inventory investment; and
- proportion of US sales made on the in-house credit card and the average monthly collection rate of the credit balances.
Investment in new space requires significant investment in working capital, as well as fixed capital investment, due to the slow inventory turn, and the additional investment required to fund sales in the US utilising the in-house credit card.
In years when the rate of new store space expansion in the US is towards the lower end of the planned 8% – 10% range, or the level of store refurbishment and relocation is below normal, the Group will have reduced levels of investment in fixed and working capital. In 2006/07 a faster rate of new store space growth in the US, and increased dividend payments, more than offset a lower level of refurbishment in the UK and meant that there was a cash outflow of £16.3 million (2005/06: £6.7 million) before the repurchase of shares amounting to £33.7 million (2005/06: £2.0 million) and proceeds from the issue of shares of £4.1 million (2005/06: £3.9 million).
The Group’s working capital requirements fluctuate during the year as a result of the seasonal nature of its business. As inventory is purchased for the Christmas season there is a working capital outflow which reaches its highest levels in late autumn. This position then reverses over the key selling period of November and December. The working capital needs of the business are then relatively stable from January to August. The rough diamond sourcing initiative will require the Group to hold an element of its inventory for approximately an additional 60 days. The timing of the payment of the final dividend, normally in July, is also material to working capital requirements during the year.
The Board considers that the capital resources currently available are sufficient for both its present and near term requirements. A description of the main credit facilities of the Group are given in the next section, “Net debt”.
In 2006/07 cash generated from operating activities amounted to £182.2 million (2005/06: £188.1 million) after funding a working capital increase of £92.3 million (2005/06: £71.2 million), principally as a result of the growth of the US division. It is anticipated that in 2007/08 there will be a further increase in the level of working capital due to planned US store openings. Interest of £16.7 million (2005/06: £11.4 million) and tax of £69.2 million (2005/06: £64.7 million) were paid. Net cash from operating activities was £96.3 million (2005/06: £112.0 million).
Group capital expenditure was £66.2 million (2005/06: £75.9 million). The level of capital expenditure was some 1.3 times the depreciation and amortisation charge. Capital expenditure in 2007/08 is expected to be between £85 million and £95 million, most of which will be store related. There were disposal proceeds of £2.4 million (2005/06: £7.5 million). Equity dividends of £57.8 million (2005/06: £52.7 million) were paid, and £33.7 million (2005/06: £2.0 million) was utilised to repurchase shares. £4.1 million (2005/06: £3.9 million) was received from the proceeds of issuing shares. The increase in net debt before exchange adjustment was £45.9 million (2005/06: £4.8 million). In 2007/08 the increase in net debt is expected to be between £35 million and £45 million before exchange adjustments and movements in equity, reflecting a planned higher level of capital expenditure and an anticipated rise in tax and dividend payments. Up until 17 April 2007 share repurchases of £13.8 million have already been made in 2007/08.