SCS Group Plc Annual Report 2018

FY2018 Annual Report · SCS Group Plc

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Profitable growth

Annual Report 2018

ScS is one of the
UK’s leading furniture
and flooring retailers,
operating from 101 ScS
stores and 27 House of
Fraser concessions

In this report
Strategic Report

Corporate Governance

Financial Statements

Chairman’s statement

A year in review
1
At a glance
2
4 Our history
6
8 Our markets
10 Chief Executive Officer’s review
14 Our business model
16 Our strategy
22 Our strategy in action
Financial review
26
28 Risk and risk management
30 Principal risks and uncertainties
34 Viability statement
35

Sustainability, people and community

See our website for more
information www.scsplc.co.uk

42 Board of Directors
44 Corporate governance statement
48 Audit Committee report
52 Directors’ remuneration report
59 Remuneration policy report
65 Directors’ report
68

Statement of Directors’ responsibilities

Independent auditors’ report
to the members of ScS Group plc
Consolidated statement
of comprehensive income
Consolidated statement
of changes in equity
Consolidated statement
of financial position
Consolidated statement
of cash flows
Notes to the consolidated
financial statements

91 Company statement of financial position
92 Company statement of changes in equity
93 Company statement of cash flows
94 Notes to the Company
financial statements

IBC Company information

A YEAR IN REVIEW

Financial highlights

Gross sales

£352.3m

+£2.8m

Earnings per share

26.8p

+14.0%

Operational highlights

Gross margin

44.7%

+67bps

Dividend

16.2p

+10.2%

EBITDA

£18.8m

+8.1%

Cash in bank

£48.2m

+£8.1m

Strategy reviewed
Providing focus and priorities for the business
for the next three years.

Customer service
Became the first UK furniture retailer to achieve
100,000 Trustpilot reviews.

Building resilience
Increased the balance sheet strength, whilst
increasing margins and cost flexibility.

Improving our store network
New ScS store opened in Chelmsford –
now trading from 101 stores.

Improved online sales
Increased investment in team and website grew
online sales by 22.6% to £13.8m.

Read more on page 16

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsAT A GLANCE

What we do

ScS, the ‘Sofa Carpet Specialist’, are one of the UK’s
leading furniture and flooring retailers. Principally
located in modern retail park locations throughout
the UK, we also run a furniture and flooring concession
in House of Fraser.

We have over 100 years’ furniture and retailing
experience and our dedicated team of specialists
are highly-trained in their fields, which means
we can offer our customers the best combination
of value-for-money, product choice, quality and
customer service.

Our people and our customers are paramount
to us and they are placed at the very heart of
the Group through our mission, culture and
values. Having been established since the 1890s
as a family-owned business in Sunderland,
we know our customers and how important
customer experience and value are to them.
Our business and reputation is built on
offering outstanding value-for-money in the
marketplace along with a 5-star rated customer
experience. We combine this with a relentless
focus on great quality and choice, from our
bespoke and extensive sofa ranges to our
specialist flooring collections.

During the year we have refreshed our mission
statement, values and company strategy,
which we reference throughout the remainder
of the Annual Report. However, our aim
remains simple – to provide ‘An excellent
customer experience with outstanding value,
quality & choice.’

Employees

1,932

(FY17: 1,970)

Trustpilot rating

5-star

ScS Group plc Annual Report 2018

Upholstered furniture market share

9.6%

(FY17: 9.4%)

Trustpilot reviews

113,000

Where we are

We trade from 101 ScS stores and operate
27 concessions within House of Fraser department
stores across the country – from Aberdeen
to Plymouth.

Managing our store footprint is critical to our
success. The right store in the right location
works hand-in-hand with having great people,
great product, service and value. We review
our store network on an ongoing basis in order
to optimise the store estate and ensure we
are retailing in the best available locations.
This review covers both the existing network
and any opportunities we have identified for
new locations. These reviews have identified
a further 10-15 potential locations where
we would consider opening a new ScS store.
We have also identified opportunities to
improve our existing network by either
relocating to better retail parks in the same
area or to rationalise our network to improve
our profitability, flexibility and resilience.

Our view is the reach offered by our existing
and targeted network is optimum to meet
customer demand, whilst ensuring we make
an appropriate return. All new locations and
existing store lease extensions are subject
to a judicious review and Board sign off.

In 2014 ScS began operating a furniture and
flooring range for House of Fraser and we
offer a collection of sofas, flooring, dining and
occasional products. Throughout the year the
concession operated from 27 House of Fraser
stores across the UK.

Our online sales grew to £13.8m, up from just
£0.5m in 2009. We offer our full in-store ranges
on our ScS website.

The retail network is supported by nine
strategically placed regional distribution
centres. We believe this regional footprint
is ideal for optimising customer deliveries,
whilst maximising business efficiency.

www.scs.co.uk
www.houseoffrasermadetoordersofas.co.uk

Our stores and
distribution centres

ScS stores

Distribution centres
House of Fraser
concessions

Stores across the UK

Distribution centres

101

Average store retail space

14,536 sq ft

House of Fraser concessions

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements

OUR HISTORY

From a family-owned
local business to a plc
with a national footprint

2009

Transactional online
website launched

La-Z-Boy, the first third
party brand, is added to
the ScS product range

2010

2011

2013

Occasional tables, lamps
and dining furniture added

Interest-free credit offered
on all products in every store

Endurance, the second own brand,
is added to the range

2012

Flooring added to ScS range

ScS re-branded as the Sofa
Carpet Specialist

G Plan, the second third
party brand, is added

SiSi Italia, the first own brand,
is added to the ScS range

Three House of Fraser
concession pilots

2014

Parker Knoll, a further third party
brand, is added to the ScS range

New website launched to
provide enhanced online
shopping experience

House of Fraser
concessions launched

ScS Group plc Annual Report 2018

2015

2016

2017

Listed on the London Stock
Exchange in January

Three new ScS store openings in
Abbotsinch, Slough and Croydon

5-star ‘Excellent’ rating achieved
on independent customer review
site Trustpilot

One new store opening
in Bromborough

Four new store openings:
Aberdeen, Thanet, Edinburgh
(Straiton) and Plymouth

5-star Trustpilot rating maintained
and overall score improved

2018

One new store opening
in Chelmsford

First furniture retailer to reach
100,000 Trustpilot reviews –
with a 5-star ‘Excellent’ rating

First UK Company to be accredited
with FIRA certified compliance

Tetrad became the latest brand
to be added to the range

Interiors Monthly, Flooring Retailer
of the Year

Duresta and A&J become
the latest third party brands
to be added to the range

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements

CHAIRMAN’S STATEMENT

A strong year of
profitable growth and
increased resilience

I am pleased to report a third consecutive
year of progress, with growth in sales and
margins, coupled with increased resilience
in the business. These results are particularly
encouraging given the ongoing uncertainty
in the UK retail sector.

In light of this challenging environment, a review
of the Group’s strategy was completed during
the year. This has provided increased focus on
the areas we feel will continue to deliver value
to our customers, colleagues and shareholders.

ScS Group plc Annual Report 2018

Financial and strategic objectives
The strategy continues to pursue the same
key objectives:

• Deliver profitable and sustainable growth;
•
•

Improve the quality of earnings;
Improve business resilience through the
economic cycle, and
Increase shareholder returns.

•

The business has continued to deliver
against these objectives, further increasing
revenue, gross profit, EBITDA and margins,
whilst diligently controlling overheads. The
continued strong cash flow generation has also
strengthened our balance sheet and further
enhanced the resilience of the Group.

Our relentless focus on the customer
experience and our value offering is a key part
of the current and future strategy. Reaching
the milestone of 100,000 customer reviews on
Trustpilot was a considerable achievement for
the Group; maintaining our 5-star ‘Excellent’
rating provides further evidence that customers
enjoy shopping with us.

Results and dividend
I am once again pleased to report that the
Group has delivered results ahead of market
expectations. This is particularly pleasing
given the continued challenging trading
environment, and demonstrates the resilience
of the business and the success of our focus
on offering an excellent customer experience
with outstanding value, quality and choice.

The first half of the financial year saw the
Group trade strongly, with overall like-for-like
performance growth of 2.2%. However,
the second half of the year brought more
challenging conditions across the market.
Extreme bad weather at the end of February
and exceptionally warm weather through
June and July, coupled with the World Cup,
resulted in like-for-like orders in the second
half declining by 2.6%. Given these headwinds,
it is encouraging that we have delivered a
full-year like-for-like order increase of 0.2%.

As part of our continued aim to improve
profitability, we have continued to identify
and implement various business efficiencies,
both within gross margin and overhead costs,
and these initiatives have helped to increase our
EBITDA margin, resulting in a 14.0% increase in
earnings per share (EPS) from 23.5p to 26.8p.

During the year we successfully opened one
new ScS store in Chelmsford and this, along
with the full year impact of new stores opened
during the previous financial year, has helped to
drive the increase in revenue in the year. As part
of our ongoing reviews to ensure we have the
best stores in the best locations we also took
the decision to not renew the lease on one of
our Edinburgh stores, which was not achieving
the level of return the Group desires for the
capital invested.

I am once again pleased to report that
the Group has delivered results ahead
of market expectations.

Gross sales

£352.3m

+£2.8m

Earnings per share

26.8p

+14.0%

Our concession within House of Fraser,
which represented 7.1% of gross sales, has had
a particularly challenging year. The ongoing
uncertainty throughout the year as to the
viability of the House of Fraser business
culminated in the business going into
administration shortly after our year end.
The business and assets were subsequently
bought by Sports Direct International plc
and, whilst we continue to trade from all 27
concessions, order performance has continued
to be disappointing. We are currently in
discussions with the new owners with a view
to agreeing a mutually beneficial arrangement,
which will allow us to continue trading in a
profitable manner in as many of the current
concessions as possible.

The Group continues to hold no debt,
had cash reserves of £48.2m at 28 July 2018
(2017: £40.1m) and, after paying out a further
£6.0m (2017: £5.9m) in dividends in the year,
generated net cash flows in the year of £8.0m
(2017: £17.7m). The Group continues to
maintain a £12.0m committed revolving credit
facility, which was extended during the year
to November 2021. This provides further
resilience, whilst also allowing the Group to
take advantage of opportunities as they arise.

Whilst the continued uncertain economic
environment means that we expect trading
to continue to be challenging, the improved
results year-on-year, coupled with the strength
of the Group’s balance sheet, has resulted in
the Board proposing a final dividend of 10.90p.
If approved, this would give a full year dividend
of 16.2p, an increase of 10.2% on the full-year
dividend for 2017.

Conclusion
The continued strength and resilience of the
Group is built on the hard work, dedication
and expertise of all of the people who work for
the business. On behalf of the Board, I would
like to thank all of our 1,932 team members
throughout the business, in particular for their
determination and commitment in helping
us to continue to grow despite the continued
challenging trading conditions. This is a
particularly difficult time for our 124 employees
working across our House of Fraser concessions,
and I would especially like to thank them for
their professionalism and patience whilst we
do our very best to agree a way forward with
the new owners.

The Group has a clear strategy, underpinned by
strong cash flows and the increasing resilience
of the Group’s balance sheet. The Group
is positioned to take advantage of future
opportunities and whilst there remains a level
of uncertainty in the wider economy and within
our House of Fraser concessions, the Board
remains positive about the long-term prospects
for the business.

Alan Smith
Chairman
1 October 2018

Our culture – listening
and improving

As a Board we are committed to listening to
our employees. We received 1,571 responses
to the Group’s Culture Survey and having
considered all feedback we have committed to:

• Greater openness to change and a

•

willingness to challenge the status quo;
Improved clarity on our key strategic
objectives and prioritisation;

• Enhanced communication to all levels

of the business, and

• Making ScS a great place to work.

Our values

We live by our RIGHT values:

Responsive
To our customers, colleagues, markets
and new ways of working.

Inclusive
Working and communicating with each
other to achieve common goals.

Get it right
Doing things right first time.

Hard working
Passionate, committed and driven with
a winning attitude.

Trusted
Operating with fairness, respect, honesty
and integrity.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsOUR MARKETS

Growing market share
despite suppressed
consumer confidence

Current UK market trends

Implications on ScS

Recent research from GlobalData indicates
the following key drivers of activity in our
core markets:

Challenging economic conditions are likely
to continue to suppress consumer confidence.

Current uncertainty around the Brexit
outcome has dampened big ticket sales and
the subsequent transitional period to follow
will continue to weigh on the market.

Housing transactions, a key purchase
motivation in furniture, have slowed in 2018.

Footfall in retail parks continues to shrink,
although customers often arrive better
researched and more committed to purchasing.

Interest rates have been at historic lows, which
has helped partly fund big ticket purchases.
Interest rate rises in November 2017 and
August 2018 will increase the cost of credit
and encourage savings.

Looking ahead

GlobalData forecasts state that ScS core
markets will grow over the longer term –
with circa 9.8% growth anticipated between
2018 and 2023 in furniture and circa 10.3%
in floorcoverings over the same period.

A growing prominence of ‘digital’ in the big
ticket market – with increased acceptance for
customers to make their purchase online, and
the vast majority of customers entering the
store having carried out research beforehand.

We continue to strive to offer the best value,
choice, quality and service to our customers
in light of pressures on consumer spend and
potential cost inflation following Brexit.

Our digital presence will continue to be
a significant driver in the success of the
business, both in regards to researching
and transacting online.

With nearly half of our customers choosing
to utilise our finance options to pay for
their products, we will work closely with
our providers to minimise the impact of
interest rate changes.

Our advantages in the market

Our continued aim to provide a value
proposition at a range of price points allows
us to offer best-in-class prices to customers
searching for the best deal.

Our product offering has continued to evolve
in line with our strategy to broaden our appeal
by offering a wider range of brands – including
third party brands – as well as flooring, dining
and occasional ranges. Flooring in our ScS
stores now represents 12.1% of total gross sales.

Our partnerships with multiple finance houses
will ensure competitive tension and drive the
best cost prices for our finance offerings.

Our refreshed strategy targets the key areas we
believe will improve our position in the industry
in the coming years. There is still considerable
room to grow our market share in both
upholstery and floor coverings.

Upholstery market size*

£3,205m

2019e

2018e

2017

2016

£3,246m

£3,205m

£3,241m

£3,293m

Floor coverings market size*

£1,975m

2019e

2018e

2017

2016

£2,000m

£1,975m

£2,037m

£2,065m

* Updated per latest GlobalData data at time

of publication.

2018 upholstery market share

9.6%

FY17 market share: 9.4%

2018 floor coverings market share

2.7%

FY17 market share: 2.5%

ScS Group plc Annual Report 2018

Recognising our place in the market

Increasing market share
We continue to grow, with GlobalData
estimating that our furniture market share
has increased from 7.9% in 2013 to 9.6%,
and our flooring market share increasing
from 1.6% to 2.7%, over the same time frame.

Value retailer
We recognise what we do best, and believe our
customers recognise this too. Our continued
focus on our key strengths ensures we have
a strong and growing reputation for delivering
consistently great value, and the continued
growth in our market share in upholstery
and floor coverings demonstrates this. Our
refreshed strategy will continue to support this.

Opportunities for further growth
Our focus is to provide choice, value and
quality for our customers and we appeal
strongly to a broad demographic with
our ScS stores appealing to aspiring
homemakers, families and retired couples.
Our House of Fraser concessions attract
a more affluent demographic.

Target upholstered furniture market share

13%

Target flooring market share

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsCHIEF EXECUTIVE OFFICER’S REVIEW

Improved profitability
through providing outstanding
value, quality and choice

Overview
2018 has been another strong year. Despite
a prolonged period of economic uncertainty
and challenging trading conditions, we have
continued to grow the business. I believe this is
due to our continued focus on what we do best
– ensuring that we offer an excellent customer
experience with outstanding value, quality and
choice. The downturn in sales in our House of
Fraser concessions has been more than offset
by growth in our core ScS business. This has
been aided by record results from our online
channel, which has seen a 22.6% increase in
gross sales.

Results
The Group saw a £4.3m (1.3%) increase in
revenue in the year to £337.3m (2017: £333.0m).
Gross profit increased to £157.3m (2017:
£153.7m), with the gross margin percentage
increasing 67bps to 44.7% (2017: 44.0%).
EBITDA increased 8.1% to £18.8m (2017: £17.4m)
and profit before tax rose 10.5% to £13.2m
(2017: £12.0m).

Strategic priorities
In light of the challenging and changing retail
environment, the Group reviewed its strategy
during the year. This has allowed the business
to reflect on its current focus, identify where
opportunities exist and led to a refinement in
priorities, mission statement and core values.
Eight priority areas were identified:

• Building and inspiring an outstanding team;
• Delivering an exceptional customer

experience;

• Optimising our product strategy;
• Driving sales densities in our ScS network;
• Creating a market-leading website and

digital awareness;

• Maximising the opportunity with House

of Fraser customers;

• Accelerating our flooring growth, and
•

Improving our profitability.

ScS Group plc Annual Report 2018

In light of the challenging and changing retail
environment, the Group reviewed its strategy
during the year. This has allowed the business
to reflect on its current focus, identify where
opportunities exist and led to a refinement in
priorities, mission statement and core values.

EBITDA

£18.8m

+8.1%

Gross profit

£157.3m

+2.3%

Building and inspiring
an outstanding team
The Group is fortunate to have very
experienced and dedicated employees.
However, if we are to continue to move the
business forward, it is critical that we continue
to improve our ability to attract, retain and
recruit the right people. Core to this was a
review of the Group’s culture and the launch
of its new core values. Progress in this area
has already occurred, with an increase in staff
retention rates, coupled with increased staff
engagement, alignment and communication
as evidenced by the recently completed
staff survey, which had a 81% response rate.
Further progress is targeted in 2019, with the
implementation of new recruitment strategies
and technology and additional strengthening
of the senior management team.

Delivering an exceptional
customer experience
The Group has held a 5-star ‘Excellent’
Trustpilot rating for three years and this
continues to be a key priority for us. The Group
is one of a handful of businesses in the UK to
have achieved over 100,000 reviews since we
started using the independent review site,
and whilst we are delighted to have achieved
the maximum star rating, there are still areas
we believe we can improve. This priority will
include a review of the customer journey,
from when customers start researching online
or visiting a store, to the point of delivery and
aftercare. The aim is to identify where we
an further enhance the experience. This will
include the use of mobile technology and the
continued incentivisation of our teams to
provide an excellent customer experience.

Optimising our product strategy
Key to the Group’s mission is providing product
that gives the customer outstanding value,
quality and choice. We feel our wide range
of price points, together with market leading
brands, core ranges and credit options delivers
a market leading offer. The Group’s long term
relationships with its supplier base means
we can react quickly to emerging trends and
can focus on product quality and service.
The ongoing development and management
of this supply chain will be a key competitive
advantage in the future.

Driving sales densities
in our ScS network
In-store sales remain the most significant
element of the Group’s business, making up
89.0% (2017: 88.9%) of the Group’s turnover.
Despite the significant pressure on consumer
spending in the year, and the consequential
impact on ‘big-ticket’ purchases, gross furniture
sales were inline with prior year, at £270.9m,
and flooring sales in-store grew 7.1%, to £42.8m.

This increase was mainly driven by the increase
in the store estate size, following the opening
of four stores in the previous year, and a further
store in Chelmsford in 2018. With regards to
future plans, we continue to pursue a number
of new locations across the UK, where we feel
there are opportunities for expansion with the
right level of return on investment. Conversely,
there are a small number of our current stores
where we would consider an exit should the
opportunity arise. We review our store network
on an ongoing basis in order to optimise the
estate. As part of this ongoing process we may
also look to take advantage of relocations
within a town from one park to another.

The Group has continued to optimise our
branded range of products, and this has
helped maximise our average order value, with
furniture order values rising 0.4% in the year
to £1,582, and flooring order values rising 7.9%
to £679. We continue to do this through our
use of brand-focused advertising campaigns
and the ongoing improvements we are making
in store to showcase brand areas.

We continue to invest in our online capability,
resulting in both the benefit of direct sales
through the website noted separately below,
but also the indirect benefit of improving
the quality of footfall, with the majority of
customers now entering our stores having
already researched their choices. This has
ensured that, despite continued decreases
in footfall noted industry-wide, customers
are more engaged and more likely to place
an order. The Group continues to operate
in an increasingly competitive and challenging
marketplace. Driving customers to both our
website and, ultimately, our stores via TV,
press, radio and digital marketing remains
a key strategic priority. In-store customer
conversion remains a key measure for the
Group, and in the current year this conversion
rate increased by 4.8%.

Following the exercise to refresh aged display
stock in FY17, stock sales were £2.2m lower in
FY18, which is the main reason the sales density
per square foot at our ScS stores for the year
ended 28 July 2018 decreased £2 or 0.9% per
square foot to £224 (2017: £226). Excluding
stock sales, the underlying sales per square
foot has remained the same and, whilst we are
disappointed to see this, industry data indicates
that we have outperformed the overall market.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsCHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED

The Group has held a 5-star ‘Excellent’
Trustpilot rating for three years now and
this continues to be a key priority for us.

Gross margin

44.7%

+67bps

Online gross sales

£13.8m

+22.6%

Creating a market leading website
and digital awareness
An ever increasing proportion of our customers
visit our website to research our products prior
to visiting a store to make their final purchase.
Additionally, whilst, as a big ticket retailer, we
believe that having a store network where
customers can come in and see the products is
essential, we also appreciate that an increasing
number of customers are choosing to transact
online. Continued website investment has
therefore been a key part of the Group’s strategy.
To this end, we have strengthened our
E-commerce team and have continued our
investment in website development and
maintenance and increased digital marketing
spend, which has successfully driven improvements
in our website visitor count and conversion.

Online was a significant success for the business
in the year, with gross sales increasing 22.6%
to £13.8m (2017: £11.3m). We continue to see
further potential and online growth will remain
a key strategic priority. We also took the decision
in the year to commit to a re-platforming of
our website in 2019, with the expectation this
will greatly improve our customer’s experience
through increased speed and functionality,
and dramatically improve the look and feel,
in particular on mobile devices.

Maximising the opportunity
with House of Fraser customers
The Group operates 27 House of Fraser
concessions, targeting those customers who
prefer to shop in department stores and town
centres, and enabling the Group to access a
wider demographic. On 10 August 2018, shortly
after our year end, House of Fraser was placed
into administration. Uncertainty as to the
viability of House of Fraser’s own business
throughout the year meant that trading
conditions were very difficult, and this resulted
in gross sales decreasing by 9.4% to £24.8m
(2017: £27.4m). This decline in gross sales has
resulted in a reduction in the contribution of
the concessions to the overall Group EBITDA.

As noted in the Chairman’s statement, the
House of Fraser business and assets were
bought out of administration by Sports Direct
International plc and we are currently still
trading from all 27 concessions. We remain in
discussions with the new owners in an attempt
to agree new terms of trade, mindful of the
124 employees who work in these concessions,
but also of the need to protect and enhance
shareholder value.

Accelerating our flooring growth
Since adding flooring as a sales channel
in 2012, it has continually helped drive
increased turnover and profitability.
We are very proud to have recently been
awarded the coveted ‘Best Flooring Retailer
2018’ from Interiors Monthly, a leading industry
magazine. Customers increasingly see ScS
as a destination for their flooring needs, with
flooring sales in-store increasing 7.1% to £42.8m
(2017: £39.9m). Flooring still remains a key
growth area and the Group is committed
to continuing to invest in its success. During
the year ended 28 July 2018, we also ran our
first flooring-specific advertising campaign,
as we continue to look to increase customer
awareness and highlight the product offering.
We also continue to improve and invest in the
space allocated to our flooring offer across our
network of stores, and look forward to this
helping to further grow our market share.

Improving our profitability
Delivering profitable growth and increasing
our quality of earnings are two of our four
financial objectives. With the Group’s high
level of operational gearing, modest changes
in revenue and gross profit margins can have
a significant impact on earnings. The Group
saw its gross profit margin increase to 44.7%
(2017: 44.0%) and the EBITDA margin increased
to 5.3% (2017: 5.0%). This is covered in more
detail in the Financial Review.

ScS Group plc Annual Report 2018

Current trading and outlook
Since the start of the current financial year,
the overall trading performance of the Group
has been in line with our expectations. Due
to the ongoing changes at House of Fraser,
trading within our concessions, which
represented 7.1% of FY18 gross sales, remains
challenging and we are working with the
new owners to address this as a priority.
Performance in our core ScS business has
been encouraging.

We will continue to focus on our value offering
and we believe the Group’s increasing resilience
and strong cash flow dynamics will enable us to
manage the continued economic uncertainty
and take advantage of opportunities as they
arise, allowing us to continue to deliver value
for our shareholders.

David Knight
Chief Executive Officer
1 October 2018

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsOUR BUSINESS MODEL

The ScS business model offers a high quality, competitively priced range of furniture,
flooring and related products to our customers with great service – supported by
experienced expert staff, modern comfortable stores, an efficient supply chain and flexible
cost base – resulting in outstanding value, quality and choice for our customers.

Our competitive strengths

How we leverage our strengths
to deliver the best experience
for our customers

Expert staff
Experienced and knowledgeable staff who are passionate about helping
our customers operate throughout the business. This starts with our
product sourcing team, who ensure our customers have the right choice,
value and quality available to them in-store and online. Great product
is supported by our knowledgeable in-store teams who help customers
make the right choices. Our in-house delivery teams and dedicated
service and support teams ensure the whole customer journey is as
smooth as possible.

Customer service, awareness
and nationwide coverage
Customers can shop with confidence with our maximum 5-star Trustpilot
rating. With over 100 years of trading experience and many years of
marketing investment we are a known destination for customers looking
for their next sofa or flooring. With 101 stores and 27 House of Fraser
concessions we offer nationwide coverage from Aberdeen to Plymouth.

Modern and comfortable stores
Our stores offer a wide range of fabric and leather sofas, flooring and
furniture that help make a house a home.

An omnichannel shopping experience
Our continued investment in our trading websites ensures the customer
has a first class experience, whether looking to buy online or simply using
the site to research and view our great products and offers.

Efficient, reliable supply chain
We source from a small group of specialist, mainly UK-based suppliers,
most of whom we have worked with for many years and we are their
key customer.

Flexible cost base
Our make to order business model ensures over 75% of our costs are
proportioned to sales, or are discretionary.

ScS Group plc Annual Report 2018

Choice & value
We are sofa and flooring specialists
and this is the core of our
customer proposition – offering
a wide range of styles, fabrics,
brands and value.

Quality
Working with leading
furniture and flooring brands
and a small group of trusted
suppliers, we aim to provide
a quality and durable product
for our customers.

Convenience
Our customers can find many of
their home furnishing needs under
one roof, with 128 locations to
choose from around the UK, in
addition to our online offering.

Revenue generating activities

ScS furniture – in-store

£270.9m

ScS flooring – in-store

£42.8m

Value creation

For customers
Providing an excellent customer experience with outstanding value, quality
and choice.

We have now received feedback from over 100,000 of our customers via
Trustpilot and we are proud to have retained our 5-star ‘Excellent’ rating.

See Our Strategy in Action on page 24

For colleagues
Building a great place to work, where growth continues in a challenging economy.

A workplace where hard work is recognised and opportunities exist for progression.

Improving communication and clarity with the launch of the refreshed company
strategy and values.

See our Sustainability, People and Community section on page 35

For our stakeholders
Through our continued growth of revenue, margins, profits and dividends
underpinned by our strong cash flows we continue to deliver value for our
shareholders, whilst building resilience.

See the Financial Review in ScS on page 26

Credit
Offering choices for our
customers with affordable
monthly payments.

Service
Customer deliveries are
principally carried out
by our own experienced
workforce, which is central
to our strategy of providing
the best customer experience.

Online
Our digital channels are key
to our customer experience
and are designed to support
and compliment our stores.

ScS online

£13.8m

House of Fraser

£24.8m

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsOUR STRATEGY

During the year the Group
has reviewed its strategy

2018 strategic priority

Building and inspiring
an outstanding team

By putting people at the heart
of our business, we aim to ensure
they help us deliver an exceptional
customer experience.

To continue to achieve growth in today’s economy
we are focused on creating a great place to work.
Recognising the contribution individuals make and
creating opportunities for progression is important
to us.

Core values
We’ve refreshed our core values and have helped
our teams focus on getting it RIGHT:
• Responsive
•
Inclusive
• Get it right
• Hard working
• Trusted

Leading edge recruitment technology
Our new mobile-first recruitment website takes
candidates straight to the available positions local
to them; applying online is easy and quick and if
candidates don’t see a role that suits them they
can register with us and join our candidate bank
for when a future opportunity arises.

Creating opportunities
During FY18 12% of our staff were promoted
within our business. Every member of the team
was given an opportunity to participate in training
activities. Our most recent staff survey showed
improvements in all the areas measured compared
to previous surveys.

Delivering an exceptional
customer experience

Consumers today are better informed,
more demanding and have greater
freedom to choose who they buy from.
Giving our customers an excellent buying
experience is central to our values.

Trustpilot
For such an important purchase, customers want
confidence that their retailer of choice can deliver
on their promises. To aid this, we encourage our
customers to leave feedback on the independent
Trustpilot platform. Nothing gives customers more
insight than other customers’ feedback.

Technology
We are currently investing in technology that
will enhance our customer journey, covering web
research, in-store experience, delivery and aftercare.

The advancements will offer customers more choice
and flexibility throughout their buying journey.

Every review is taken seriously, especially where
they identify areas for improvement. Part of our
management’s remuneration is driven by the
quality of customer experience they deliver.

In addition we will be reviewing our internal
processes and procedures to ensure that we
adopt a customer-first focused approach across
all of our teams.

See page 24

Optimising our
product strategy

We want to ensure that our customers
are able to choose from a range of
products that offer value for money
at a range of price points.

Supplier performance
We are able to utilise feedback from customers
provided via Trustpilot and our Aftercare team to
provide our suppliers with detailed information
on the performance of their product.

The feedback is utilised by our suppliers to improve
product quality and durability with targets set for
levels of improvement.

Product performance
We monitor the performance of each of the products
in our range. This helps identify changing customer
preferences and allows the business to act appropriately
to ensure we maximise our retail space.

Range
A full review of the range (furniture and flooring)
offered in store and online was carried out in the
current year, ensuring we continue to provide
great value, quality and choice. During the year,
we refreshed a number of our products, including
the re-launch of our dining and occasional
furniture offering.

Brands
Being home to some of the UK’s best-loved
furniture and flooring brands gives customer’s
further confidence in our authority and the
quality we can offer. The majority of our branded
products are exclusive to the Group, making
ScS the destination for buying the biggest and
best brands.

ScS Group plc Annual Report 2018

Key performance indicators

Staff retention

three years.

Culture survey

last three years.

Key risks

Our people and culture

Changes to our staff retention over the last

Trend in our employee culture survey over the

Ensuring that we are able to attract and retain high quality and

2018

2017

2016

9.2

2018

2017

8.9

2016

experienced people right across our business, is key to ensuring

the growth and development of the Group.

The UK is currently experiencing high levels of employment. This,

+25%

along with increases to the minimum and living wage, is placing

upward pressure on salaries and demands for skilled labour.

+19%

Brand and reputation

Our people are key to all aspects of our business operation. It is

essential that we ensure that each of our team members have the

skills necessary to be able to do their job and sufficient knowledge

to ensure that our strong brand and reputation continue to grow.

damaged in any way, customers may choose to shop elsewhere

rather than visit us to consider a purchase.

Our people and culture

Failure to attract, develop and retain good people working with

our customers can impact on the customers buying experience.

Business systems

Customers are increasingly demanding of retailers and want

a service that suits their needs and requirements. Without

investment in business systems that facilitate this, customers may

become unhappy with a lack of flexibility to meet their needs.

Trustpilot

Customer satisfaction score

Brand and reputation

We have continued to focus on our

Customer satisfaction score is a methodology to

Customers have a great deal of choice and flexibility when it

TrustScore to ensure that we can maintain

determine customer satisfaction with a purchase

comes to where they shop. If our brand or reputation becomes

our Excellent rating.

or interaction.

Furniture Industry Research

Association (FIRA)

We became the first UK Company to be

accredited with FIRA Certified Compliance.

Supply chain, infrastructure and product

Failure to deliver a safe, quality product in line with customer

expectations risks the reputation of the Group, resulting in

a loss of customer confidence and declining sales volumes.

Regulation and compliance

If we are supplied with a product that does not meet the

required safety and quality standards this could result in

financial or reputational damage.

Economic environment

A challenging consumer market can lead to a drop in revenue

for suppliers with an impact on their long-term viability.

2018

2017

2016

2018

2017

2016

Sedex membership

Sedex is a not-for profit organisation that

is one of the world’s largest collaborative

platforms for sharing responsible sourcing

data on supply chains. We are working

towards ensuring that all of our suppliers

members and are focusing on their

performance around labour rights, health

and safety, environment and business ethics.

90%

73%

51%

2018 strategic priority

Building and inspiring

an outstanding team

By putting people at the heart

of our business, we aim to ensure

they help us deliver an exceptional

customer experience.

Our strategy covers eight main areas:
• Building and inspiring an outstanding team
• Delivering an exceptional customer experience
• Optimising our product strategy
• Driving sales densities in our ScS network

• Creating a market leading website and increasing digital awareness
• Maximising the opportunity with House of Fraser customers
• Accelerating our flooring growth
•

Improving our profitability

Key performance indicators

Key risks

To continue to achieve growth in today’s economy

we are focused on creating a great place to work.

Recognising the contribution individuals make and

creating opportunities for progression is important

We’ve refreshed our core values and have helped

our teams focus on getting it RIGHT:

to us.

Core values

• Responsive

•

Inclusive

• Get it right

• Hard working

• Trusted

Leading edge recruitment technology

Our new mobile-first recruitment website takes

candidates straight to the available positions local

to them; applying online is easy and quick and if

candidates don’t see a role that suits them they

can register with us and join our candidate bank

for when a future opportunity arises.

Creating opportunities

During FY18 12% of our staff were promoted

within our business. Every member of the team

was given an opportunity to participate in training

activities. Our most recent staff survey showed

improvements in all the areas measured compared

to previous surveys.

Staff retention
Changes to our staff retention over the last
three years.

Culture survey
Trend in our employee culture survey over the
last three years.

2018

2017

2016

+8.0%

2018

+25%

+0.8%

2017

+19%

2016

Delivering an exceptional

customer experience

Consumers today are better informed,

more demanding and have greater

freedom to choose who they buy from.

Giving our customers an excellent buying

experience is central to our values.

Trustpilot

Technology

For such an important purchase, customers want

We are currently investing in technology that

confidence that their retailer of choice can deliver

will enhance our customer journey, covering web

on their promises. To aid this, we encourage our

research, in-store experience, delivery and aftercare.

customers to leave feedback on the independent

Trustpilot platform. Nothing gives customers more

The advancements will offer customers more choice

insight than other customers’ feedback.

and flexibility throughout their buying journey.

Every review is taken seriously, especially where

In addition we will be reviewing our internal

they identify areas for improvement. Part of our

processes and procedures to ensure that we

management’s remuneration is driven by the

quality of customer experience they deliver.

adopt a customer-first focused approach across

all of our teams.

See page 24

Trustpilot
We have continued to focus on our
TrustScore to ensure that we can maintain
our Excellent rating.

Customer satisfaction score
Customer satisfaction score is a methodology to
determine customer satisfaction with a purchase
or interaction.

2018

2017

2016

9.2

2018

2017

8.9

2016

Our people and culture
Ensuring that we are able to attract and retain high quality and
experienced people right across our business, is key to ensuring
the growth and development of the Group.

The UK is currently experiencing high levels of employment. This,
along with increases to the minimum and living wage, is placing
upward pressure on salaries and demands for skilled labour.

Brand and reputation
Our people are key to all aspects of our business operation. It is
essential that we ensure that each of our team members have the
skills necessary to be able to do their job and sufficient knowledge
to ensure that our strong brand and reputation continue to grow.

Brand and reputation
Customers have a great deal of choice and flexibility when it
comes to where they shop. If our brand or reputation becomes
damaged in any way, customers may choose to shop elsewhere
rather than visit us to consider a purchase.

Our people and culture
Failure to attract, develop and retain good people working with
our customers can impact on the customers buying experience.

Business systems
Customers are increasingly demanding of retailers and want
a service that suits their needs and requirements. Without
investment in business systems that facilitate this, customers may
become unhappy with a lack of flexibility to meet their needs.

Optimising our

product strategy

We want to ensure that our customers

are able to choose from a range of

products that offer value for money

at a range of price points.

Supplier performance

Range

We are able to utilise feedback from customers

A full review of the range (furniture and flooring)

provided via Trustpilot and our Aftercare team to

offered in store and online was carried out in the

provide our suppliers with detailed information

current year, ensuring we continue to provide

on the performance of their product.

great value, quality and choice. During the year,

we refreshed a number of our products, including

The feedback is utilised by our suppliers to improve

the re-launch of our dining and occasional

product quality and durability with targets set for

furniture offering.

levels of improvement.

Product performance

Brands

Being home to some of the UK’s best-loved

We monitor the performance of each of the products

furniture and flooring brands gives customer’s

in our range. This helps identify changing customer

further confidence in our authority and the

preferences and allows the business to act appropriately

quality we can offer. The majority of our branded

to ensure we maximise our retail space.

products are exclusive to the Group, making

ScS the destination for buying the biggest and

best brands.

Sedex membership
Sedex is a not-for profit organisation that
is one of the world’s largest collaborative
platforms for sharing responsible sourcing
data on supply chains. We are working
towards ensuring that all of our suppliers
members and are focusing on their
performance around labour rights, health
and safety, environment and business ethics.

2018

2017

2016

90%

73%

51%

Furniture Industry Research
Association (FIRA)
We became the first UK Company to be
accredited with FIRA Certified Compliance.

Supply chain, infrastructure and product
Failure to deliver a safe, quality product in line with customer
expectations risks the reputation of the Group, resulting in
a loss of customer confidence and declining sales volumes.

Regulation and compliance
If we are supplied with a product that does not meet the
required safety and quality standards this could result in
financial or reputational damage.

Economic environment
A challenging consumer market can lead to a drop in revenue
for suppliers with an impact on their long-term viability.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements
OUR STRATEGY CONTINUED

2018 strategic priority

Drive sales densities
in our ScS network

In a challenging marketplace where
competition between retailers is tougher
than ever, we have continued our success
at converting our footfall into customers
and increasing average order values.

Expert sales teams
With our heritage and authority in the sofa and
flooring marketplace, customers can feel confident
that our teams will help them make the right choice.
Building on this experience and quality is a key priority
for 2019.

Affordability
Our wide range of products at different price points
allow customers to choose furniture and flooring they
love. To compliment this we also offer a number of
credit options, including 48 month interest free credit.

Modern & comfortable stores
The year saw the Group open one ScS store
in Chelmsford. Following the successful opening
of a new store in Edinburgh in December 2016,
we have closed our existing Edinburgh store.

Marketing
Calling our customers to action is a key activity
in the Group. We advertise on all the traditional
media platforms (TV, radio and press) and also on
the emerging digital platforms. Making our spend
have the biggest impact is critical, often focusing
activity around key trading days and in line with
seasonal spending patterns.

Creating a market leading
website and increasing
digital awareness

Continued success online will increase
website new visitor count and improve
the quality of store footfall, with
consumers continuing to use our
website to research products prior
to making a purchase.

Optimising our existing website
The existing site is under review to see how we can
improve the user experience, including navigation,
speed and content. Recently deployed insight tools
have provided insight into the areas where we can
make quick wins.

Increasing our digital marketing
Over the past three years the Group has increased
its digital spend. With the improved insight and
improved website content and functionality this
is an area the Group will continue to grow its
investment in 2019.

Improving product presentation
and user experience
The Group is exploring how it best meets the ever
changing demands of the online customer and
optimises the research tools for our customers who
prefer to shop in store. This includes improved search
functionality product imagery, and video content.

Creating a market leading website
We have recently appointed a new provider
to help replatform the website, striving for
best-in-class functionality and performance.

Maximising the opportunity
with House of Fraser customers

Targeting a different demographic to
the core ScS business, our concessions
currently operate in 27 House of Fraser
stores across the UK.

A tailored offering
Promoted under the House of Fraser ‘Made to order,
Sofas, Furniture and Flooring’ brand, the product
offering is tailored to the target market.

Building customer confidence and awareness
With the well-publicised challenges and changes House
of Fraser has seen over the past few months, rebuilding
customer confidence in the brand is key. Awareness
that the department store also houses a furniture and
flooring offering that is one of the strongest on the high
street is also a key focus.

Optimising the store footprint
The Group currently operates from 27 House of
Fraser stores.

We remain in dialogue with House of Fraser
as they restructure and reinvest, with possible
opportunities in their remaining stores network,
and remain hopeful that the long-term outcome of
the restructuring will be a stronger House of Fraser
that can benefit both its customers and ourselves
as concession partners.

Key performance indicators

Key risks

Sales densities per square foot (£)

ScS furniture AOP (£)

Economic environment

Decline in sales densities per square foot

ScS furniture AOP increased 0.4% in the current

With the big-ticket nature of our sales, a reduction in consumer

of 0.9% in the current year, but an increase

year, and 2.0% over the last 3 years.

confidence may lead to a fall in discretionary spending.

of 15.2% over the last 3 years.

224

2018

1,582

226

2017

1,575

220

2016

1,558

Competition

With an increasingly competitive market, the ability to respond

to the changing customers’ needs and shopping habits is critical.

Consumer finance

The inability to offer interest free credit would have a material

impact on the Group’s proposition.

Seasonality/extreme weather

Prolonged extreme weather, either hot or cold, could impact on

store footfall. This is important due to the seasonal nature of big

ticket furniture retailing.

Online gross sales (£m)

Website hits

Competition

Growth in online gross sales of 22.6% in the

Website visitors increased 8% in the current year,

With the ongoing emergence of online businesses offering

current year, and 64.3% over the last 3 years.

and have increased 54% over the last 3 years.

furniture coupled with the increase of products researched/

purchased online the Group’s trading websites must be of

13.8

2018

+17%

11.3

10.0

2017

2016

+9%

+21%

good standard.

Our people

Failure to attract, develop and retain good people in this area

increases the reliance on third party providers.

Business systems

A loss of the websites or underlying business operating system

would cause a disruption to the customer-purchasing journey

and could lead to loss of business.

House of Fraser gross sales (£m)

House of Fraser AOP (£)

Brand and reputation

Decrease in gross sales of 9.4% in the current

HoF AOP increased 2.9% in the current year,

Recent news will have reduced consumer confidence in

year, but an increase of 17.0% over the last

although down 3.8% over the last 3 years.

House of Fraser. A failure to rebuild this confidence will lead

24.8

2018

27.4

2017

25.3

2016

to a deterioration of sales.

Our people

will prove challenging.

Competition

1,398

1,359

1,324

Given the uncertainty surrounding the high street and House of

Fraser in particular, attracting and retaining good quality people

Failure of the traditional department stores to adapt to changing

customer shopping habits may lead to reduced shopper footfall.

2018

2017

2016

2018

2017

2016

3 years.

2018

2017

2016

ScS Group plc Annual Report 2018

2018 strategic priority

Drive sales densities

in our ScS network

In a challenging marketplace where

competition between retailers is tougher

for 2019.

than ever, we have continued our success

at converting our footfall into customers

and increasing average order values.

Affordability

Expert sales teams

Modern & comfortable stores

With our heritage and authority in the sofa and

The year saw the Group open one ScS store

flooring marketplace, customers can feel confident

in Chelmsford. Following the successful opening

that our teams will help them make the right choice.

of a new store in Edinburgh in December 2016,

Building on this experience and quality is a key priority

we have closed our existing Edinburgh store.

Marketing

Calling our customers to action is a key activity

Our wide range of products at different price points

in the Group. We advertise on all the traditional

allow customers to choose furniture and flooring they

media platforms (TV, radio and press) and also on

love. To compliment this we also offer a number of

the emerging digital platforms. Making our spend

credit options, including 48 month interest free credit.

have the biggest impact is critical, often focusing

activity around key trading days and in line with

seasonal spending patterns.

Creating a market leading

website and increasing

digital awareness

Optimising our existing website

Increasing our digital marketing

The existing site is under review to see how we can

Over the past three years the Group has increased

improve the user experience, including navigation,

its digital spend. With the improved insight and

speed and content. Recently deployed insight tools

improved website content and functionality this

have provided insight into the areas where we can

is an area the Group will continue to grow its

Continued success online will increase

make quick wins.

investment in 2019.

website new visitor count and improve

the quality of store footfall, with

consumers continuing to use our

website to research products prior

to making a purchase.

Improving product presentation

and user experience

The Group is exploring how it best meets the ever

changing demands of the online customer and

optimises the research tools for our customers who

prefer to shop in store. This includes improved search

functionality product imagery, and video content.

Creating a market leading website

We have recently appointed a new provider

to help replatform the website, striving for

best-in-class functionality and performance.

Maximising the opportunity

with House of Fraser customers

A tailored offering

Optimising the store footprint

Promoted under the House of Fraser ‘Made to order,

The Group currently operates from 27 House of

Targeting a different demographic to

the core ScS business, our concessions

currently operate in 27 House of Fraser

stores across the UK.

Sofas, Furniture and Flooring’ brand, the product

Fraser stores.

offering is tailored to the target market.

Building customer confidence and awareness

With the well-publicised challenges and changes House

of Fraser has seen over the past few months, rebuilding

customer confidence in the brand is key. Awareness

that the department store also houses a furniture and

We remain in dialogue with House of Fraser

as they restructure and reinvest, with possible

opportunities in their remaining stores network,

and remain hopeful that the long-term outcome of

the restructuring will be a stronger House of Fraser

that can benefit both its customers and ourselves

flooring offering that is one of the strongest on the high

as concession partners.

street is also a key focus.

Key performance indicators

Key risks

Sales densities per square foot (£)
Decline in sales densities per square foot
of 0.9% in the current year, but an increase
of 15.2% over the last 3 years.

ScS furniture AOP (£)
ScS furniture AOP increased 0.4% in the current
year, and 2.0% over the last 3 years.

Economic environment
With the big-ticket nature of our sales, a reduction in consumer
confidence may lead to a fall in discretionary spending.

2018

2017

2016

224

2018

1,582

226

2017

1,575

220

2016

1,558

Online gross sales (£m)
Growth in online gross sales of 22.6% in the
current year, and 64.3% over the last 3 years.

Website hits
Website visitors increased 8% in the current year,
and have increased 54% over the last 3 years.

2018

2017

2016

13.8

2018

+17%

11.3

10.0

2017

2016

+9%

+21%

Competition
With an increasingly competitive market, the ability to respond
to the changing customers’ needs and shopping habits is critical.

Consumer finance
The inability to offer interest free credit would have a material
impact on the Group’s proposition.

Seasonality/extreme weather
Prolonged extreme weather, either hot or cold, could impact on
store footfall. This is important due to the seasonal nature of big
ticket furniture retailing.

Competition
With the ongoing emergence of online businesses offering
furniture coupled with the increase of products researched/
purchased online the Group’s trading websites must be of
good standard.

Our people
Failure to attract, develop and retain good people in this area
increases the reliance on third party providers.

Business systems
A loss of the websites or underlying business operating system
would cause a disruption to the customer-purchasing journey
and could lead to loss of business.

House of Fraser gross sales (£m)
Decrease in gross sales of 9.4% in the current
year, but an increase of 17.0% over the last
3 years.

House of Fraser AOP (£)
HoF AOP increased 2.9% in the current year,
although down 3.8% over the last 3 years.

Brand and reputation
Recent news will have reduced consumer confidence in
House of Fraser. A failure to rebuild this confidence will lead
to a deterioration of sales.

2018

2017

2016

24.8

2018

27.4

2017

25.3

2016

1,398

1,359

1,324

Our people
Given the uncertainty surrounding the high street and House of
Fraser in particular, attracting and retaining good quality people
will prove challenging.

Competition
Failure of the traditional department stores to adapt to changing
customer shopping habits may lead to reduced shopper footfall.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements
OUR STRATEGY CONTINUED

2018 strategic priority

Accelerating our
flooring growth

Sales and profits from flooring have
increased every year since we introduced
this offer in 2012. Flooring still remains
a key growth opportunity for the Group.

Customer experience
Just as we do with our furniture services, we measure
the performance of our teams involved in the provision
of flooring. Trustpilot reviews specific to flooring are
fed back to our teams so we can learn and improve.

Optimising our footprint
A review of our flooring offer and positioning
in our stores in 2018 has led to a refurbishment
programme that will be completed in 2019. This
refit and re-location will enhance the flooring offer,
increase awareness and improve the customer
shopping experience.

Range and customer choice
Our non-stock operation allows the Group to carry
a range of flooring products that rivals the market
leaders, with over 120 ranges available and 5,000
SKUs. In the current year, the range has been
re-categorised to improve and simplify the
shopping experience.

Customer awareness
We are confident that further growth can be
achieved through increasing customer’s awareness
of the ScS flooring offering. We increasingly find
customers are interested in the proposition of
fitting new flooring and purchasing furniture at
the same time.

Improving our
profitability

Since floating in January 2015 the
business has focused on increasing the
Group’s profits, margins and resilience,
whilst maintaining the flexible cost base.
In the last three years EBITDA has
increased by 66%.

Procurement
A review of the Group’s procurement (both direct
and indirect) commenced in the current year and
continues. This review has helped with the increase
in gross margin noted in the current year. Services and
products purchased by the Group will be tendered
in line with procurement best practice.

Cost base flexibility
Whilst the Group is happy to invest in taking the
business forward, it continues to recognise the
importance of having a cost base that is appropriate to
a business with a high level of operational gearing. The
business estimates that 75% of its cost base is flexible.

Enhanced insight
The current year has seen the establishment
of regular margin reviews with the key operating
units of the business. This has been aided
by improved reporting and insight from
a strengthened reporting team.

Simplifying processes
Process reviews are ongoing in a number of the
areas of the business with the aim of finding a more
efficient way of operating. The use of technology
is also being considered where the business case
supports the required investment.

Key performance indicators

Key risks

Flooring gross sales (£m)

Flooring AOP (£)

Economic environment

Growth in flooring gross sales of 7.1% in the

ScS flooring AOP increased 7.9% in the current

A reduction in consumer confidence or activity levels in the

current year, and 34.6% over the last 3 years.

year, and 36.5% over the last 3 years.

housing market could reduce demand for new flooring.

42.8

2018

679

39.9

2017

38.1

2016

629

608

in the flooring market.

Competition

Our people and culture

Attracting and retaining high quality, experienced sales and

operating teams is key to continuing to offer the high levels

of service we currently deliver. The availability of these people

will be critical if the Group is to maximise the opportunity

Gross margin increased 67bps in the year to

EBITDA increase of 8.1% in the year.

EBITDA (£m)

Economic environment

Gross margin %

44.7% (2017: 44.0%).

44.7

2018

18.8

to cost pressure.

44.0

2017

44.6

2016

17.4

16.0

The market is in a period of change following the market leader’s

decision to reduce the number of operating locations. Whilst the

impact this will have on the market is not yet clear, this change

will create opportunities as well as risks.

A reduction in consumer confidence could lead to reduced

demand which, due to the level of operational gearing in the

business could have a significant impact on the Group’s profit

levels. Exchange and interest rate fluctuations could also lead

Seasonality/extreme weather

As seen in the current year, extreme weather conditions can lead

to reduced footfall and in turn reduced revenue.

Consumer finance

A reduction in the availability of reasonably priced finance may

reduce the ability of the Group to offer interest free credit, which

is a key part of the Group’s customer proposition.

2018

2017

2016

2018

2017

2016

ScS Group plc Annual Report 2018

2018 strategic priority

Accelerating our

flooring growth

Sales and profits from flooring have

increased every year since we introduced

this offer in 2012. Flooring still remains

a key growth opportunity for the Group.

Customer experience

Range and customer choice

Just as we do with our furniture services, we measure

Our non-stock operation allows the Group to carry

the performance of our teams involved in the provision

a range of flooring products that rivals the market

of flooring. Trustpilot reviews specific to flooring are

leaders, with over 120 ranges available and 5,000

fed back to our teams so we can learn and improve.

SKUs. In the current year, the range has been

Optimising our footprint

A review of our flooring offer and positioning

in our stores in 2018 has led to a refurbishment

re-categorised to improve and simplify the

shopping experience.

Customer awareness

programme that will be completed in 2019. This

We are confident that further growth can be

refit and re-location will enhance the flooring offer,

achieved through increasing customer’s awareness

increase awareness and improve the customer

of the ScS flooring offering. We increasingly find

shopping experience.

customers are interested in the proposition of

fitting new flooring and purchasing furniture at

the same time.

Improving our

profitability

Since floating in January 2015 the

business has focused on increasing the

Group’s profits, margins and resilience,

whilst maintaining the flexible cost base.

In the last three years EBITDA has

increased by 66%.

Procurement

Enhanced insight

A review of the Group’s procurement (both direct

The current year has seen the establishment

and indirect) commenced in the current year and

of regular margin reviews with the key operating

continues. This review has helped with the increase

units of the business. This has been aided

in gross margin noted in the current year. Services and

by improved reporting and insight from

products purchased by the Group will be tendered

a strengthened reporting team.

in line with procurement best practice.

Cost base flexibility

Simplifying processes

Process reviews are ongoing in a number of the

Whilst the Group is happy to invest in taking the

areas of the business with the aim of finding a more

business forward, it continues to recognise the

efficient way of operating. The use of technology

importance of having a cost base that is appropriate to

is also being considered where the business case

a business with a high level of operational gearing. The

supports the required investment.

business estimates that 75% of its cost base is flexible.

Key performance indicators

Key risks

Flooring gross sales (£m)
Growth in flooring gross sales of 7.1% in the
current year, and 34.6% over the last 3 years.

Flooring AOP (£)
ScS flooring AOP increased 7.9% in the current
year, and 36.5% over the last 3 years.

Economic environment
A reduction in consumer confidence or activity levels in the
housing market could reduce demand for new flooring.

2018

2017

2016

42.8

2018

679

39.9

2017

38.1

2016

629

608

Gross margin %
Gross margin increased 67bps in the year to
44.7% (2017: 44.0%).

EBITDA (£m)
EBITDA increase of 8.1% in the year.

2018

2017

2016

44.7

2018

44.0

2017

18.8

17.4

44.6

2016

16.0

Our people and culture
Attracting and retaining high quality, experienced sales and
operating teams is key to continuing to offer the high levels
of service we currently deliver. The availability of these people
will be critical if the Group is to maximise the opportunity
in the flooring market.

Competition
The market is in a period of change following the market leader’s
decision to reduce the number of operating locations. Whilst the
impact this will have on the market is not yet clear, this change
will create opportunities as well as risks.

Economic environment
A reduction in consumer confidence could lead to reduced
demand which, due to the level of operational gearing in the
business could have a significant impact on the Group’s profit
levels. Exchange and interest rate fluctuations could also lead
to cost pressure.

Seasonality/extreme weather
As seen in the current year, extreme weather conditions can lead
to reduced footfall and in turn reduced revenue.

Consumer finance
A reduction in the availability of reasonably priced finance may
reduce the ability of the Group to offer interest free credit, which
is a key part of the Group’s customer proposition.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements
OUR STRATEGY IN ACTION – CREATING A MARKET LEADING WEBSITE

Double digit online growth

Online continues to be the fastest growing area of the business, now contributing £13.8m of gross
sales, achieving 22.6% growth on the prior year.

The online sales channel continues to
be a crucial part of growth within retail and
ensuring we are maximising this opportunity
is a key part of the strategy for the Group.
Despite selling predominantly ‘big-ticket’ items,
customers are becoming increasingly confident
buying online and, whilst our average order
value is typically lower than that in store,
the increasing number of transactions shows
that our continued investment in this space
is achieving strong returns.

As well as the success of direct sales online,
we know our website also offers an excellent
catalogue and research tool for our customers.
For many online only retailers, a customer
leaving their website is the last time they’ll
see them. However, as we increasingly improve
our integrated ‘bricks and clicks’ model, we
are seeing more and more of our customers
selecting a shortlist of products before they

then come in to try them out, and ultimately
make the sale in the store. Despite the
continued industry-wide decrease in footfall,
our customers are more engaged and are more
likely to place an order with us, with a greater
proportion of people coming into the store
then placing an order than ever before, leading
to increased store conversion.

The Group is committed to further investment
in this area, and has therefore targeted achieving
a market-leading website and online presence.
Through 2019 we will be strengthening our
e-commerce and digital team with a number
of specialist roles, and have committed with
a new specialist partner to deliver a new, fully
re-platformed website.

Online sales

£13.8m

(FY17: £11.3m)

Store conversion

+4.8%

Link to 2018 Strategic Priorities

ScS Group plc Annual Report 2018

Online revenue growth

£13.8m

2018

2017

2016

13.8

11.3

10.0

Web traffic

+17%

2018

2017

2016

+17%

+9%

+21%

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsOUR STRATEGY IN ACTION – DELIVERING AN EXCEPTIONAL CUSTOMER EXPERIENCE

Over 100,000 Trustpilot Reviews – listening, engaging
and continually improving our customer experience

We love listening to and engaging with our customers and we use all the feedback we receive
to help inform and improve our business. The whole business gains an enormous sense of pride
when receiving positive customer feedback about their experiences of our stores or our delivery
and aftercare teams. However, receiving constructive feedback from our customers about what
to improve on is even more valuable to our business. Trustpilot is one of the world’s largest
independent consumer review platforms with almost 50 million reviews and more than 240,000
businesses reviewed worldwide. Free and open to all, it gives our existing customers a place to share
their opinions and for prospective customers to discover reviews about our business. Trustpilot
provides us with the tools to turn consumer feedback into valuable insights and business results.

Trustpilot is hugely important to our business,
and in June this year we were delighted to reach
100,000 reviews, becoming the first furniture
retailer, and one of only 10 UK companies, to
achieve the milestone. Even more impressively,
we have once again maintained our 5-star
‘Excellent’ rating, and are proud to think we’ve
now turned over 100,000 houses into homes.

Our TrustScore continues to be a key
metric that our business success is measured
against. Beyond listening and engaging with
our customers, Trustpilot’s Actionable
Insights solution allows us to pull rich, useful
information from all our customer reviews.
The reviews continue to show how much
customers enjoy their in-store experience
and how much they value the level of service
we provide when delivering orders to their
homes. Customers consistently comment
that we offer a friendly, helpful experience and
great service. We’ve also listened and acted
upon feedback from our customers regarding
delivery slots and timings, and we are currently
testing new software which will improve
timetabling, make routing more efficient, and
provide more useful notifications to customers
on delivery times, which we plan to implement
next financial year.

For prospective customers looking to purchase
their next piece of furniture, there is no better
research tool than reading reviews of previous
customers, and having over 100,000 reviews
for those potential customers to build their
opinion on is something nobody else can
offer! In fact, we are the furniture retailer on
Trustpilot who has received the most 5-star
ratings from customers.

Our TrustScore is available publicly and
viewed around 34,000 times per month.
Search engines also report our score on their
results pages, meaning it is seen a further
147,000 times per month, and local store
reviews even show on our “Store Locator” page,
allowing customers to see exactly what they
can expect if they visit their local ScS store.

Trustpilot remains the best way for us to
understand what our customers think about
us and the service we provide. 100,000 reviews
later, with a 9.2 out of ten TrustScore and
an average 5-star ‘Excellent” rating – we are
delighted with the results!

Link to 2018 Strategic Priorities

ScS Group plc Annual Report 2018

TrustScore

9.2 out of ten

Number of reviews

113,000

Overall customer experience rating – Excellent

More than just a rating, Trustpilot
stars signify to the world that
a company has nothing to hide,
loves its customers, and shares
our mission to create ever-
improving experiences for
everyone. Through Trustpilot,
ScS is striving to constantly put
its customers at the heart of what
it does, and that is great to see.

Peter Mühlmann,
Founder and CEO,
Trustpilot

Corporate Governance

Trustpilot is one of the world’s
largest review platforms with almost
50m reviews and 240,000 businesses
reviewed worldwide.

Very happy customers

We have used SCS in the past for a sofa and then carpet, the
whole customer experience has always been first class from the
sale right through to delivery/fitting and after care, for this reason
we did not hesitate to order bathroom flooring and as usual
received brilliant customer service!

Very welcoming shop

Very welcoming shop layout with a very good selection of furniture
on display.

Helpful but not pushy staff who had good product knowledge
and guided us through the different sofa beds that we were
considering.

I would say that SCS are a cut above the other furniture stores
and will not hesitate to both revisit in the future and recommend.

Very very satisfied

I have purchased my sofas from ScS for the past 10 years or more,
and would not think of going anywhere else. Marvellous customer
service/advice, friendly staff and no hard sales tactics.
I would recommend this company highly.

ScS Group plc Annual Report 2018

Strategic ReportFinancial StatementsFINANCIAL REVIEW

Strong results despite
an unsettled market

Gross sales and revenue
Gross sales increased by £2.8m (0.8%) to
£352.3m (2017: £349.5m) and is attributable to:

The increase in gross margin, coupled with
the higher volume year on year, resulted in
an increase in gross profit of £3.6m or 2.3%.

The year saw an increase in administrative
costs of £1.0m, with the increase being driven
by the following:

• Furniture sales in ScS stores in-line with

prior year at £270.9m;

• An increase in flooring sales in ScS stores

of 7.1% to £42.8m;

• An increase in online sales of 22.6% to

£13.8m, and

• A decrease in sales from the House of Fraser

concession of 9.4% to £24.8m.

The four new stores opened in the prior year,
plus the new store in Chelmsford in the current
year, contributed an additional £6.0m to gross
sales year on year. The decrease in gross sales
for existing ScS stores was due to a reduction
in the opening order book following the
downturn in trading experienced towards the
end of the prior year, and a reduction in the
number of lower margin stock sales of £2.2m
following the display refresh in the prior year.
Gross sales in the House of Fraser concessions
reduced due to the combination of a lower
opening order book and the trading difficulties
experienced by House of Fraser as a whole
during the financial year.

Revenue, which represents gross sales less
charges relating to interest-free credit sales
(see note 3 – Segment information) on page 82,
increased by 1.3% to £337.3m (2017: £333.0m).
This was driven mainly by increased volume,
but also benefitted from work undertaken to
reduce the cost of interest free credit provided
by the Group’s finance houses.

Gross profit
Gross margin (gross profit as a percentage of
gross sales) increased to 44.7% (2017: 44.0%).
The increase of 67bps is attributable to a
number of actions including reducing the cost
of interest free credit we pay to finance houses,
a reduction in the volume of lower margin
stock sales following the display refresh in the
prior year, and an increased focus and insight
on made to order sales.

ScS Group plc Annual Report 2018

Distribution costs
Distribution costs comprise the total cost of
the in-house distribution function and includes
employment costs, the cost of leasing vehicles
and related running costs and property costs
(principally rent, rates and utilities) for the nine
distribution centres, as well as costs of third
party delivery services contracted to support
peak delivery periods.

• £2.2m increase in payroll costs largely driven
by a £2.0m increase in performance related
bonuses following the Group’s improved
EBITDA;

• £0.8m decrease to marketing investment, and
• £0.4m decrease in website development and
maintenance costs following a strengthening
of the on-line team who have been able to
add in-house development.

Distribution costs expressed as a percentage
of revenue for the year were 5.3%, 0.3% higher
than the prior year. The higher costs in the
year reflect cost pressure experienced in
remuneration for drivers and increased
expenditure surrounding the opening of the
Group’s new distribution centre in Basildon.

Administrative expenses
Administrative expenses comprise:

• Store operating costs, principally

employment costs, property related costs
(rent and rates, utilities, store repairs and
depreciation) and costs associated with the
concession agreement with House of Fraser;

• Marketing expenditure, and
• General administrative expenditure, which
includes the employment costs for the
directors, senior management and all head
office-based support functions and other
central costs.

Administration costs for the year totalled
£126.2m, compared to £125.2m in the prior
year. Administrative costs as a percentage
of revenue were 37.4%, compared to 37.6%
in the prior year.

Marketing costs decreased to £23.9m in the
year (2017: £24.7m) as, following the decision
to re-phase some of our half-one spend into
half-two in order to enhance returns, we then
decided to reduce the overall level of spend
in light of the benign market conditions. The
control of costs remains a key focus area as does
increasing the level of flexibility in our cost base.

Flexible costs
The nature of the Group’s business model,
where almost all sales are made to order, results
in the majority of costs being proportional
to sales. This provides the Group with the
ability to flex its cost base as revenue changes,
protecting the business should there be wider
economic pressures. As shown below, the
proportion of cost variability remained
consistent year-on-year.

Total costs before interest, tax, depreciation
and amortisation across for the year were
£333.5m (2017: £332.1m).

Of this total, 75% (2017: 75%), or
£251.5m (2017: £249.7m), are variable
or discretionary, and are made up of:

• £195.0m cost of goods sold, including

finance and warranty costs (2017: £195.8m);

• £17.9m distribution costs (2017: £16.5m);
• £23.9m marketing costs (2017: £24.7m), and
• £14.7m performance related payroll costs

(2017: £12.7m).

Semi-variable costs total £45.5m, or 14%
of total costs, for the year (2017: £46.3m; 14%)
and are predominately other non-performance
related payroll costs and store costs. Rent,
rates, heating, and lighting then make up
the remaining £36.5m (11%) of total costs
(2017: £36.1m; 11%).

The Group has reduced the average remaining
lease tenure of our store portfolio. This has been
achieved by targeting lower tenures on existing
lease renewals and on new stores. This provides
the Group with increased flexibility to exit or
relocate stores where required. The majority of
recent leases entered into are ten years in length.
Average remaining tenure length for the Group
has dropped from 8.4 years at the end of FY16
to 6.8 years at the end of FY18 (FY17: 7.6 years).

Operating profit
Operating profit for the year increased by 10.5%
to £13.2m (2017: £12.0m).

EBITDA
An analysis of EBITDA is as follows:

Operating profit
Depreciation
Amortisation

EBITDA

Year ended
28 July 2018
£m

Year ended
29 July 2017
£m

13.2
5.1
0.5

18.8

12.0
4.8
0.6

17.4

Taxation
The tax charge for the financial year is higher
(2017: higher) than if the standard rate of
corporation tax had been applied, mainly due
to charges not deductible for tax purposes,
principally depreciation on capital expenditure
that does not qualify for capital allowances,
offset by a benefit on the exercise of share
options by management awarded upon listing.

Earnings per share (EPS)
EPS for the year ended 28 July 2018 was 26.8p
compared to earnings per share of 23.5p in the
previous year, an increase of 14.0%.

Cash and cash equivalents
A strong cash flow has been generated from
operations reflecting the negative working
capital business model whereby:

• For cash/card sales, customers pay deposits
at the point of order and settle outstanding
balances before delivery;

• For consumer credit sales, the loan provider
pays ScS within several days of delivery, and
• The majority of product suppliers are paid at
the end of the month following the month
of delivery into the distribution centres.

A summary of the Group’s cash flows
is shown below:

Cash generated from
operating activities

Net capital expenditure

Net taxation and interest

payments

Free cash flow

Dividends

Purchase of own shares

Net cash generated

Year ended
28 July 2018
£m

Year ended
29 July 2017
£m

21.0

(2.9)

15.2

(6.0)

(1.2)

8.0

30.1

(5.2)

(1.3)

23.6

(5.9)

–

17.7

Cash generated from operating activities in the
previous year benefited by £10.6m from the
timing of the July 2017 supplier payment run
when compared to the year ended 30 July 2016.

Gross sales

Revenue

Gross profit

Distribution costs
Administration expenses

Total operating expenses

Operating profit
Net finance costs

Profit before tax
Tax

Profit after tax

Earnings per share

EBITDA

Year ended
28 July 2018
£m

Year ended
29 July 2017
£m

352.3

337.3

157.3

(17.9)
(126.2)

(144.1)

13.2
–

13.2
(2.5)

10.7

26.8p

18.8

349.5

333.0

153.7

(16.5)
(125.2)

(141.7)

12.0
–

12.0
(2.6)

9.4

23.5p

17.4

Net capital expenditure in the year includes
£0.8m on the new Chelmsford store and new
Basildon distribution centre following the
consolidation of the Thetford and West
Thurrock distribution centres (2017: £3.1m
on four new stores).

Dividend
The Board recognise the importance of a
dividend to investors and has set a progressive
policy, with the intention to:

• Keep earnings cover in the range of 1.25x

to 2.00x;

• Ensure cash cover remains in the range of 1.75x
to 2.25x through the economic cycle, and

• Pay an interim dividend that will be

approximately one third of the total dividend.

The Board considers this policy appropriate
given the strength of the balance sheet, whilst
ensuring the Group has sufficient resources
to pursue potential future opportunities to
deliver growth.

An interim dividend of 5.30p per ordinary share
was paid in May 2018. The Group has continued
to strengthen and deliver positive results, with
very strong cash generation and a balance sheet
that is growing in resilience. Additionally, the
Group continues to maintain a £12.0m
committed revolving credit facility, which was
extended during the year to November 2021.

Therefore, despite the continued uncertain
economic environment, the Board is confident
in the outlook for the Group and proposes
a full-year dividend of 16.2p, a 10.2% increase
on the full-year dividend for 2017. If approved,
this would result in a final dividend of 10.90p.
The divided, if approved, will be paid on
26 November 2018 to shareholders on the
register on 2 November 2018. The ex-dividend
date in 1 November 2018.

The total dividend paid is in line with target
earnings per share cover, and cash cover
through the economic cycle.

Chris Muir
Chief Financial Officer
1 October 2018

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsRISK AND RISK MANAGEMENT

Risk governance
Like all businesses, we face risks and uncertainties
that could affect the achievement of our strategy.
These risks are accepted as part of doing
business. The Group recognises that the nature
and scope of these risks can change, therefore
regular reviews are undertaken of the risks and
the systems and processes to mitigate them.

The Board has ultimate responsibility for risk
management throughout the Group and
determines the nature and extent of the risks
the Group is willing to take to achieve its
strategic objectives.

management. The Board has carried out
a robust assessment of the principal risks and
uncertainties of the Group, including those
that threaten its business model, future
performance, solvency and risk.

The Group has a formal governance framework
in place underpinning our approach to risk

Top-down
Governance and oversight
identification, assessment
and mitigation of risk at
corporate level.

Bottom-up
Risk management reporting.

Board
Overall responsibility for the leadership of risk management, sets strategic objectives and the risk appetite and monitors performance.

The Executive Directors
Responsible for disseminating risk policies.
They support and help the Operating
Company Board assess risk. The Executive
Directors also oversee risk management
throughout the Group and encourage
open communication on risk matters. The
Executive Directors assess the materiality
of risks in the context of the whole group.

The Audit Committee
Delegated responsibility from the Board
to oversee risk management and internal
controls. The Committee reviews the Group’s
internal controls and sets objectives and
monitors the effectiveness of the Internal
Audit team. The Committee also monitors
the independence and expertise of the
external auditors.

Internal Audit
Responsible for the monitoring of the Group’s
risk management approach and provides
a link between the operational managers
and the Audit Committee. The Head of
Internal Audit reports formally to the Audit
Committee and has direct access to the Chair
of the Audit Committee. The Internal Audit
team takes a risk-based approach to planning
audit work.

Operating Company Board
Responsible for risk management roles at operational level. They are responsible for the continuous identification of risk assurance and self-assessment
of mitigating controls.

Risk management process & framework
The Board and Executive Management are collectively
responsible for managing risk across the Group. On a
departmental basis, risks are reviewed and reported
through risk registers.

The Audit Committee is presented with risk reports
at every committee meeting.

This process
is then reviewed/
monitored and reported
to the Board and Audit
Committee on an
ongoing basis

Key risks by area
(and any changes since
the last review)

Risk
management
process

Risk ratings –
by evaluating
each risk and
assigning
a score

Progress in executing
agreed process
improvement and
implementing agreed
risk mitigation

Identifying the
required actions
against each risk

ScS Group plc Annual Report 2018

Identification of risks
The Board and the Group’s management have a clearly defined
responsibility for identifying the major business risks facing the
Group and for developing systems to mitigate and manage
those risks. The control of key risks is reviewed by the Board
twice yearly and by the Group’s management at their monthly
meetings. The Board can therefore confirm that there is an
ongoing process for identifying, evaluating and managing the
significant risks faced by the Group, which has been in place for
the year under review and up to the date of approval of this
Annual Report. The Board has performed a robust assessment
of the principal risks facing the Group.

Risk appetite
Risk is always high on the Board’s agenda and the focus on
effective risk management cascades all the way through the
organisation. The culture of the organisation ensures that
all activities, from day-to-day operations to high-level
strategic decisions, are performed in line with this approach.
Management’s assessment of our principal risks is based
on impact, likelihood and any change from the prior year.
The governance of risk is undertaken in the context of the
Group’s overall risk appetite. The Group considers risk appetite
to ensure adequate resources are allocated to the risks.
The Board reviewed and approved a formal risk appetite
statement as follows:

Group principal risks map

t
c
a
p
m

h
g
H

w
o
L

Credit Risk
and Liquidity

Regulation,
Compliance &
Consumer
Finance

Competition

Business
Systems
& Information
Infrastructure

Brand & Reputation

Supply Chain,
Infrastructure
& Product

People & Culture

Economic
Environment

Seasonality/
Extreme Weather

Remote

Highly probable

Likelihood

Category of risk

Risk parameters

Strategic

Medium to high tolerance

During development of new propositions, and assessing new opportunities, we are
prepared to accept medium to high risks that support our pursuit of growth.

Operational

Low to medium tolerance

Financial

Low tolerance

Compliance

Extremely low tolerance

When operating within our business, including the management of our suppliers,
controlling stock and assets, and managing our people, we have a low to medium
tolerance for risk. We will take a cautious approach to risk within our operations but
consider that certain risks will be taken in order to achieve our strategic objectives
and maintain our competitive position.

We consider that robust financial controls are necessary to manage our business
effectively. All our operating processes are based around policies and procedures
that minimise the risk of a loss of financial control.

We have an extremely low tolerance when complying with laws and regulations that
relate to bribery and corruption, product safety, employee safety, customer safety and
consumer credit. We have controls in place that are designed to mitigate these types
of risks. We have detailed and tested procedures in place for dealing with these types
of scenarios when they arise.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsPRINCIPAL RISKS AND UNCERTAINTIES

The following principal risks and uncertainties are those that the Board has identified as having
a potential detrimental impact on our corporate reputation, the operation of our business or on
our ability to execute our strategy. The business takes a variety of steps to mitigate these risks and
these are reviewed regularly as part of the oversight by the Audit Committee of the system of
internal controls and reported on to the Board and the executive directors, who are collectively
responsible for overall risk management.

For reporting purposes we have combined the following risks into one heading:

• Combined ‘regulation & compliance’ plus ‘consumer finance’ into ‘regulation, compliance & consumer finance’.
• Combined ‘supply chain/infrastructure’ plus ‘product’ into ‘supply chain/infrastructure & product’.

We have removed the risk of ‘property – availability/lease costs’ as this risk has been reported as low impact and remote likelihood
for a number of years, and although the risk will continue to be monitored internally, we no longer class it as a principal risk.

Key to change in risk level since the previous year: Risk higher (worsened)

Risk stayed level

Risk lower (improved)

ECONOMIC ENVIRONMENT

Link to strategic priorities
7

Performance indicator
Sales performance

Executive responsibility
Board

Change in risk level

Description

Mitigation

Progress in 2017/18

A reduction in consumer confidence
or activity levels in the housing market,
resulting in a fall in consumer spending
on discretionary high value items,
such as furniture, could be damaging
to the performance of and prospects
for the Group.

The Group faces economic uncertainty
following the decision for the UK to leave
the EU along with other factors such as
income levels and the availability of credit.

Further exchange or interest rate
fluctuations could lead to cost pressure.

• We maintain a lean business model allowing
us to remain competitive in our markets and
adapt to change quickly.

• We offer a range of products and price points
in our categories to ensure that customers can
trade up or down.

In light of economic conditions this risk was
increased in the prior year.

Ongoing review of business structure
as part of strategic plan.

• A key strand of our strategy has been to broaden
and thereby diversify our product offering into
categories such as flooring and third party brands.

We have improved our occasional range
and introduced new ranges into our House
of Fraser concessions.

• We will continue to offer a quality product at a
competitive price that remains attractive to our
consumer base. Our entrance into the flooring
market, concessions and brands, along with
an improved dining and occasional range,
has diversified our offering into a wider
demographic consumer base.

• We offer a range of interest-free options to
our customers to enable more affordable,
monthly payments.
We work closely with our suppliers and will attempt
to minimise any impact on our cost base and our
retail pricing strategy.

•

Our flooring range has been improved.
Flooring departments in stores are being
fully re-merchandised with a fresh new look.

Our furniture product range has undergone
an internal and external review, resulting
in a refreshed range.

We have introduced further resilience
to our finance offer by introducing an
additional finance house.

We have worked with our existing suppliers to
manage costs over the year to ensure that we
can continue to offer value to our customers.

ScS Group plc Annual Report 2018

COMPETITION

Link to strategic priorities
6

Performance indicator
Sales performance

Executive responsibility
Buying Director
Sales Director

Change in risk level

Description

Mitigation

Progress in 2017/18

The Group operates in competitive and
fragmented markets and against a wide
variety of retailers and may face increased
competition in its target markets. Failure
to be aware of or respond to key changes
in the competitive environment is a risk
to our future success.

• We continue diversifying and developing our

proposition for customers as part of our Group
strategy. We continually respond to changing
patterns in demand in our core market that
broadens our appeal and sales base.
• We actively monitor sales performance,

product and advertising performance and
competitor activity.

• We have carried out a comprehensive review of our
advertising strategy to ensure that we are reaching
our target audience effectively.

We have continued to review our business
model and our ability to adapt to changes in
the market and challenges from competitors.

We have reviewed our digital strategy and
plan to invest significantly in customers
digital experience which will support our
growth expectations.

REGULATION, COMPLIANCE & CONSUMER FINANCE

Link to strategic priorities
8

Performance indicator
Prosecution and regulatory action

Executive responsibility
CFO
Corporate Services Director

Change in risk level

Description

Mitigation

Progress in 2017/18

Many of the Group’s activities are facing
increasing legislation and standards
including trading, advertising, product
quality, health & safety, the environment,
data protection (GDPR) and the Bribery
Act. Failure to comply with these may risk
incurring financial or reputational damage.
Changes to the regulation of product
warranties could affect future sales.

• Regular training is provided to retail staff and any

complaints regarding regulated activity are reported
to the Board.

• We actively monitor compliance with our existing
obligations and we maintain internal policies and
procedures. Colleagues are kept informed of these
requirements via regular briefings and internal
communications.

• All suppliers are subject to regular checks

The Group’s ability to offer interest-free
credit to customers may be impaired
as a result of high default levels, higher
interest rates or the withdrawal or
uncompetitive nature of consumer
credit facilities provided by external
finance companies – thereby reducing
the competitiveness of a key part of the
Group’s customer proposition.

and independent product testing is regularly
undertaken.

• We ensure that we comply with current guidelines
on pricing and promotions through regular review
and monitoring.

• Annually, all employees are issued with a code

of conduct.

• A confidential hotline is established for colleagues

to raise any concerns in confidence.

• We maintain relationships with a number of

credit providers to reduce the risk of the facility
being withdrawn.

• We regularly review default levels with the providers.
• The Group has obtained the relevant permissions
from the FCA to continue to provide interest-free
credit to customers and continually monitors
relevant compliance to obligations.

During 2017/18 we have improved and
strengthened our assurance framework.

We have improved our training programme
and developed monitoring and reporting
processes.

We work closely with our finance providers
to ensure that we adhere to relevant
legislation and guidance. The Group also
engaged a third finance provider during the
year, increasing resilience.

We conducted a full review of all business
processes ahead of the implementation of
the changes to data protection regulation
improvements were made to ensure that we
were fully compliant with the new regulations.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements

PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED

Key to change in risk level since the previous year: Risk higher (worsened)

Risk stayed level

Risk lower (improved)

BUSINESS SYSTEMS AND INFORMATION INFRASTRUCTURE

Link to strategic priorities

Description

Performance indicator
Number of major incidents

Executive responsibility
CFO

Change in risk level

Mitigation

Progress in 2017/18

The Group’s business involves a high
number of operational and financial
transactions across numerous sites that
rely on the continuous operation of our
IT systems.

• 24-hour system monitoring is in place for business

We have continued to invest in our IT systems.

critical systems.

• A disaster recovery site is available and a full disaster

recovery plan is in place and is reviewed and
updated annually.

• The resilience against cyber-attack is regularly tested

and monitored by the Group.

The IT investment program aligns and supports
our growth strategy.

We have implemented our plan to ensure our
compliance with GDPR.

SEASONALITY/EXTREME WEATHER

Performance indicator
Number of major incidents

Executive responsibility
Board

Change in risk level

Mitigation

Progress in 2017/18

• The Group constantly monitors national, divisional,

regional and branch results.

• This close monitoring and our ability to flex the

marketing and advertising spend enables the Board
to react quickly to changes in the marketplace.

We have reviewed our marketing strategy, and
undertaken significant work on improving our
presence on digital channels. Improvements
have been made to our website to improve the
customer journey and experience.

Performance indicator
Cash headroom
Banking covenants

Executive responsibility
CFO

Change in risk level

Mitigation

Progress in 2017/18

• We have developed strong relationships and credibility
with credit insurers though regular communication
and information sharing.

The committed bank revolving credit
facility has been agreed and is in place
until November 2021.

• Robust forecasting facilities enable early discussion
of possible issues increasing the chances of positive
solutions.

• £12.0m revolving credit facility in place.
• Suppliers provide regular updates on their credit

insurance arrangements.

• See the viability statement on page 34 for further

information.

We have continued to maintain a strong
financial position through careful monitoring
and management.

Closing cash has increased £8.1m to £48.2m
(2017: £40.1m).

Link to strategic priorities

Description

Furniture retailing is highly seasonal in
nature. Prolonged extreme cold, warm or
unseasonal weather conditions may reduce
footfall in our stores, resulting in weak sales,
leading to potentially adverse effects on
profitability.

CREDIT RISK AND LIQUIDITY

Link to strategic priorities

Description

The availability of supplier credit and the
ability of suppliers to obtain credit risk
insurance could have material adverse
effects on the Group’s cash position and
overall financial condition.

ScS Group plc Annual Report 2018

SUPPLY CHAIN/INFRASTRUCTURE AND PRODUCT

Link to strategic priorities

Performance indicator
Customer feedback/independent
testing/delivery optimisation

Executive responsibility
Logistics Director
Buying Directors

Change in risk level

Description

Mitigation

Progress in 2017/18

A large proportion of the Group’s products
are supplied by a small number of key
manufacturers. A supplier that ceases to
trade could cause disruption to the supply
of products to customers.

• The Group has long-established and good working

relationships with its key suppliers.

• When sourcing products we ensure that at

least two factories can produce each product
providing resilience.

• We independently monitor supplier financial stability

Around one-third of the total products
sold by the Group are manufactured
in the Far East, which could present
difficulties in ensuring supplier compliance
and an ethical supply chain.

to identify any early signs of failure.

• Suppliers are expected to be members of Sedex
that entails agreeing to independent audits of
manufacturing facilities (including compliance
to the Modern Slavery Act).

Failure to deliver a safe, quality product in
line with customer expectations risks the
reputation of the Group, resulting in loss
of customer confidence and declining
sales volumes.

• The Group carries out regular independent testing

on products supplied to ensure ongoing compliance
to current regulations.

• Product performance is monitored via the customer
service team and regular meetings are held with
suppliers to help eliminate and reduce product issues.

We have updated our Service Level Agreements
with all our suppliers to ensure that they meet
our business requirements.

We have continued as members of Sedex to
monitor risks of modern slavery within our
supply chain.

We have been accredited by the FIRA certified
compliance scheme during the past year, with
ScS being the first UK company to achieve this.

BRAND AND REPUTATION

Link to strategic priorities

Performance indicator
Customer feedback (Trustpilot)

Executive responsibility
Board

Change in risk level

Description

Mitigation

Progress in 2017/18

The Group recognises the need to
protect its brand and reputation –
failure to do so effectively could result
in a loss of confidence by customers
and or colleagues.

• Key aspects of our business activities that

have the potential to impact reputation are
monitored closely.

• We regularly survey customer service levels (for

example, through Trustpilot) and product quality,
colleague engagement (through staff surveys).
The integrity of our product sourcing is regularly
monitored and reviewed.

We have maintained our five-star rating
on Trustpilot.

We have reviewed and refreshed our values,
to align and focus on our revised business
strategy.

OUR PEOPLE AND CULTURE

Link to strategic priorities

Performance indicator
Colleague retention

Executive responsibility
Corporate Services Director
HR Director

Change in risk level

Description

Mitigation

Progress in 2017/18

The business is reliant on the high quality,
stability and experience in its senior
management team.

Retaining trained and engaged colleagues
is essential to the delivery of the high
standard of customer service, which is a
key part of our proposition. Our future
success is at risk if we do not recruit and
retain high-calibre people.

Recent changes to the minimum living
wage could affect the Group’s cost base
or affect ability to retain staff.

• The key senior Executives and management are

appropriately rewarded and incentivised through
bonus and long-term incentive arrangements
with a focus on retention as well as performance.
• The Board has adopted a succession plan which
includes strategy and contingency measures
should key individuals not be available.

• The Group ensures terms and conditions of

employment are fair and competitive in the sector.

• The Group works to maintain its brand presence
and retain its reputation as an ‘employer of choice’.
• The Group has achieved and maintained Investors

in People status.

We have launched a new recruitment website
and applicant tracking system.

We have refreshed our strategic approach
setting our Group mission, culture and values.

An HR Director has been appointed and
joined the Group in August 2018.

Further investment in training and
development has been in place to establish
and close training gaps.

• Retention rates are monitored and supported

by an exit interview process.

We continue to carry out and respond to staff
surveys on an annual basis.

Staff turnover has reduced by 8% during FY18.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements

VIABILITY STATEMENT

As explained in the Strategic Report, the
Group’s business model provides customers
with high quality, competitively priced
upholstered furniture, flooring and related
products. The Directors are confident that
consumer demand for these products will
continue to remain in the longer term, and
that our growth strategy (see pages 16 to 21)
will ensure our business model will continue
to bring long term sustainable success to
the Group.

Due to the inherent pace of change in the
retail environment and the wider economic
environment, the Group tends to ensure focus
is on delivery of short to medium term goals.
The strategy and associated principal risks
underpin the Group’s three-year strategic
planning process (‘the Strategic Plan’), which
is updated annually. This process takes into
account the current and prospective macro-
economic conditions in the UK and the
competitive tension that exists within the
markets that we trade. Changing economic
conditions which impact consumer confidence
could have an impact on demand for big ticket
items, and a three-year period enables the
Directors to plan with a reasonable confidence
over this time horizon. This also aligns with the
payback requirements of any significant capital
investment (new stores).

Assessment of viability
The Strategic Plan is stress tested for severe but
reasonable scenarios and the effectiveness of
any mitigating actions that would reasonably be
taken. The Strategic Plan was specifically stress
tested against the key risks identified within the
plan, with attention to the principal risks and
uncertainties highlighted on pages 30 to 33.
This included the modelling of:

• Various severities of downturn in revenue;
• Various severities of downturns in

gross margin;

• The withdrawal of supplier credit insurance
(inclusive of the above downturns), and

• A combination of all of the above.

Due primarily to the flexible nature of the
cost structure of the Group, and additionally
to the significant cash reserves held currently,
the outcome of this stress testing satisfied the
Directors with respect to the ongoing liquidity
and solvency of the Group over the three year
period under review. Approximately 76%
of total Group costs are either variable or
discretionary and as such, even in difficult
trading conditions, these costs would also
reduce, and in the most severe scenarios the
dividend could also be restricted. These
reductions, together with relevant mitigating
actions and significant cash reserves, would
ensure the Group could continue to meet its
liabilities. Further to the above examples, the

Directors are comfortable that the work done
to minimise the risk to the supply chain, chiefly
ensuring the use of a variety of suppliers and
ensuring multiple factories are able to produce
similar product ranges, would be sufficient
to limit the effect on the Group should that
risk occur.

The Strategic Plan also encompasses the
projected cash flows and headroom against
financial covenants under the Group’s existing
facility. The Strategic Plan makes certain
assumptions about the normal level of capital
recycling likely to occur and therefore considers
whether additional financing will be required.
The Group continues to hold a significant cash
balance and maintains an undrawn £12.0m
committed revolving credit facility. The facility,
which was extended in December 2017, has a
maturity date of November 2021, and therefore
covers the three-year period to 31 July 2021.

Conclusion
Based upon this assessment, the Directors have
a reasonable expectation that the Company
will be able to continue in operation and meet
its liabilities as they fall due over the period
to 31 July 2021. In making this statement, the
Directors have considered the resilience of the
Group, taking into account its current position
and the principal risks facing the business.

ScS Group plc Annual Report 2018

SUSTAINABILITY, PEOPLE AND COMMUNITY

At ScS we see our core purpose as helping customers
find perfect furniture and flooring for their home, suiting
both our customer’s budget and personal style. This year
we have refreshed our mission statement to ensure that
it reflects our core purpose. At the same time, of course,
we recognise that as a responsible business we have an
obligation to operate in a manner that is both ethical
and sustainable.

At ScS, sustainability, our people and the
communities in which we operate are a key
part of our business and is integrated into the
day-to-day management of our Company. It is
important to our reputation in the marketplace
and to our customers and colleagues, as well
as the wider stakeholders in society and the
communities we serve.

We focus on three key priority areas:
sustainability, where our emphasis is on
recycling waste, reducing electricity usage,
improving fuel efficiencies and sourcing with
integrity; people, to ensure that our staff
and customers can work and shop in a safe
environment, and a focus on ensuring that
ScS is a great place to work and develop; and
community, where we put great emphasis on
local charitable fundraising.

David Knight
Chief Executive Officer

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsSUSTAINABILITY, PEOPLE AND COMMUNITY CONTINUED

Sustainability
As a retailer we recognise our operations
will impact on the environment, and we
have a duty to ensure that both now and in
the future we seek to minimise this impact.
There are a number of important areas that we
place emphasis on, to reduce the environmental
impact of the business. Our focus is to maximise
the level of waste recycling, reduce our electricity
usage, improve our fuel efficiencies and source
products with integrity.

Waste recycling
ScS is committed to reducing waste. All of
our waste packaging, principally plastic and
cardboard, generated by our stores, head office,
distribution centres and used for protecting the
product we deliver directly to our customers,
is collected and recycled. We now recycle or
divert from landfill 97% of all waste collected
(2017: 95.7%).

Greenhouse gas emissions reporting
We aim to reduce our carbon footprint. All ScS
sites now have automatic meter readers (AMR)
fitted for recording electricity usage and meter
loggers for recording gas usage. This allows
greater control of costs by more accurate
recording of data but also the policing of
anomalies as these are highlighted within
24 hours.

We aim to place our contracts for electricity
supply with contractors providing energy
predominantly produced by renewable
sources such as solar and wind power.

Since 2014 ScS has installed new corporate
signage at all sites incorporating the latest
LED illumination technology and all new sites
opened since then include LED store lighting
and energy-efficient heating and cooling
systems. This, together with a progressive
change to energy efficient systems in our
existing stores, means that we are reducing our
electricity usage. Since 2013 we have reduced
our electrical energy consumption by 27.6%;
the electrical reduction is against a backdrop
of opening eleven all electric stores in that
period. Our gas usage has reduced 44.5%.
The gas reduction has been assisted by the
replacement of nine gas air-conditioning
systems with energy-efficient all electric
units, and a further five are targeted in 2019.

In 2018 we reduced our greenhouse gas emissions
from 7,395 t/CO2 to 6,132 t/CO2, a reduction of
1,264 t/CO2.

In 2015 we introduced the Paragon system of
computerised management of our logistics
operation. This allows the use of delivery
vehicles to be optimised in terms of load en
route, minimising the mileage required to
achieve our customer deliveries, thus reducing
fuel consumption. During 2018 we estimate
that we have reduced our fuel consumption
by a further 1.2% per delivery (2017: 1.6%).
We are currently introducing technology from
Kirona into our business, which will improve the
service given to our customers by improving
service technician appointment scheduling and
offering greater flexibility to our customers.

Sourcing with integrity
Modern slavery statement 2018
This statement is made pursuant to Section
54 of the Modern Slavery Act 2015.

The Group has clear policies and procedures
in line with best-industry practice which are
underpinned by our values and principles.
These demonstrate our continual commitment
to do what we can to eradicate this type of
human rights abuse. Our approach to modern
day slavery is overseen by our audit, risk and
compliance teams as part of governance
strategy. Throughout the year the Group
has continued to benefit from close, well
established and stable trading relationships
with a relatively small number of first tier
suppliers in both our furniture and flooring
product offering, with no material changes.
We also sell dining and occasional furniture
which we source from a small number of
well-established and highly regarded wholesalers.

Risk assessment
Goods are principally manufactured in the
UK, however around a third of goods are
manufactured in Europe and the Far-East.
The Group risk assesses its supply chain by:

• Assessing the risk profile of individual
countries based on the Global Slavery
Index together with the inherent profile
risk associated with the manufacturing
of the goods in that territory;

• Analysing the insights and expertise of

specialist third parties, and

• Reviewing the extent to which types

of employees may be more vulnerable
than others due to cultural, economic
or demographical reasons.

The Group maintains stable and long standing
working relationships with its key suppliers based
in the Far East. The manufacturing of all goods in
the Far East are completed in modern purpose-
built factories. Given the size and nature of the
goods, the level of risk is considerably lower
when compared to other types of manufacturing
activities in the region. In addition, the Group
operates a Whistleblowing Policy which allows
the reporting of any wrongdoing and extends
to human rights violations like Modern Slavery.
Any reporting will be fully investigated and
appropriate remedial actions taken.

Action completed
All our first tier suppliers have conducted
modern slavery risk assessments and have
commissioned or provided independent
ethical audits within their own manufacturing
processes to ensure alignment to local laws; and
standards set out by the International Labour
Organisation and our internal policies and
standards, which include:

• Clear obligations on suppliers to comply
and implement controls to prevent
Modern Slavery;

• Ensuring all employment shall be

voluntary, and

• Provision of an employment contract

confirming the employee’s right to leave work
and the ability to terminate employment
upon expiry of reasonable notice.

Next steps
Over the next 12 months we will increase the
scope of audits to key second tier suppliers
within the Group, to increase oversight
and detect risk of modern day slavery and
further strengthen our training, through the
development of e-learning modules for our
buying teams.

Assessment of effectiveness
The Group recognises that its commitment to
tackling modern slavery is a continual journey
and we will continue to assess the effectiveness
of our approach through an already established
Risk Committee. We will continue to improve
communication on this topic with our supply
chain as by working together, not only with our
suppliers but also with other companies, we will
be far more effective in meeting our common
goal of eradicating modern slavery.

ScS Group plc Annual Report 2018

Colleagues
Our people are core to our business, whether
they work in our stores, are part of our
distribution operation or are a member of our
support teams. During 2018 we refreshed our
strategy and put our people at the heart of this
refresh. We developed the RIGHT values that
we are encouraging all of our people to live by
and we have appointed an HR Director and
an Engagement and Internal Communication
Manager to support our ambitions people
objectives and gain buy in from our staff teams.

We are an equal opportunities employer
and we strive to ensure that no employee is
discriminated against on the grounds of gender,
race, religion, disability, sexual orientation or age.
We want ScS to be a great place to work and
everyone working in it has an equal opportunity
to progress within the business. As part of our
2018 staff survey we included specific questions
about the organisations approach to diversity
and inclusion 76% of survey respondents either
agreed or strongly agreed that as a business we
are pro-active and positive in our approach to
diversity and inclusion.

People
Health and safety
We take the welfare of our customers and
employees very seriously. We are therefore
committed to ensuring that our business has
appropriate health and safety standards across
our store portfolio as well as our distribution
centres and our head office. We want to ensure
that our customers and employees can shop
and work in a safe environment. The Board has
the ultimate responsibility for ensuring health
and safety compliance. The business regularly
monitors a number of KPIs, including the
number of accidents, particularly those that
are required to be reported to the Health and
Safety Executive.

In 2018 there were seven accidents reportable
to the Health and Safety Executive. In 2017
there were four reportable accidents, and we
continue to focus on reducing the number
of reportable accidents though a review of
the root causes and revisions to operating
procedures. During 2018 we did see an increase
in incidents across the business, the accident
frequency rate increasing from 1.14 (per
100,000 hours worked) in 2017 to 3.04 (per
100,000 hours worked). Whilst this result
remains better than our 2016 rate (7.2 per
100,000 hours worked), a review has been
undertaken to understand why the rate has
increased. During 2018 we fully implemented
our online accident management system and
we believe that the increase is a result of better
reporting and greater visibility on all incidents
and near-misses across the business. Data from
this reporting will be used to identify areas
of focus to ensure the risk of accidents and
incidents is minimised across our business.

Our Health and Safety Policy is communicated
throughout the business and all our colleagues
receive health and safety training that is
appropriate to their job role. Observance of
policy is monitored through regular health and
safety audits and we ensure that we are abreast
of all current statutory requirements. Retail
and distribution managers’ bonus earnings are
reduced for poor Health and Safety Audit results.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsSUSTAINABILITY, PEOPLE AND COMMUNITY CONTINUED

Gender pay gap
We are confident that men and women are paid
equally for doing equivalent jobs across our
business. The furniture sector has traditionally
been male dominated. Retail sales teams make
up the majority of our workforce, a division
within which our average gap is 5% mean,
however, as a business we provide a full service
for our customers and roles in distribution and
upholstery do attract a predominantly male
workforce, which explains why our hourly pay
gap is higher than the national average.

We have been very successful in recruiting
female workers into roles within our head office
and administrative roles within our stores,
where we are able to offer a higher degree of
flexibility. We are committed to continuing to
promote our flexible working policies across
our business with a view to attracting and
retaining female candidates and supporting
their progression through the business.

Percentage male/female employees

M
69%

F
31%

Proportion of male and female employees
receiving bonus pay

M
89%

F
76%

Pay gap and bonus difference between male
and female employees

Hourly rate of pay
Bonus pay

Mean

28%
45%

Median

29%
78%

Proportion of male and female employees
according to quartile pay bands

M
84%

78%

68%

45%

Upper

Upper Middle

Lower Middle

Lower

16%

22%

32%

55%

Understanding our results
• Retail sales teams make up the majority of
our workforce. If we made the same gender
comparison across sales and retail managers
our mean gender pay gap would decrease
to 5% mean, and 7% median.

• 18% of our store managers are female and we
are actively encouraging more of our female
workforce to progress into management
roles. At store manager level our gender
pay gap is -10% mean and -18% median,
indicating that our average female manager
is earning more than a male manager.
• Our mean bonus pay gap is +45% and our
median bonus pay gap is +78%. These
calculations are based not only on bonus
payments but include any additional pay
such as commission payments, monthly
store bonuses and annual bonuses. The
reason that our bonus gap is higher than our
hourly pay gap can be explained as follows:

– We have significantly more men than
women working in retail sales and
management roles who are eligible for
commission and store bonus payments.
– We have significantly more women than
men working in administrative roles that
attract no commission and smaller
bonus opportunities.

– We have more women than men working

part-time and bonus payments are
pro-rated to reflect part-time working.

ScS Group plc Annual Report 2018

Training and development
ScS has held the Investors in People standard
for the past 17 years, and we undertake regular
culture surveys across our organisation to
ensure that every employee has the opportunity
to provide us with feedback about our workplace;
our 2018 survey achieved a 81% return rate,
and the overall results were positive with
improvements shown across all areas that were
reviewed as part of the survey. The feedback
received is used to drive improvements across
the business with a view to making ScS a great
place to work.

We offer apprentice opportunities within
our business and in 2018, nine apprentices
are working with us via the levy programme.
Our Time to Train policy gives colleagues
the opportunity to engage in other external
training opportunities and, if the course meets
relevant business criteria, the Company offers
financial support towards this and, where
required, a flexible work arrangement to allow
them to attend their chosen course. Using this
approach is key to the development of our
distribution teams in identifying potential
drivers whilst offering career progression
and promotion.

In addition to external courses we produce
bespoke development events to increase the
capability of our people and support them
through product and policy changes. Using
technology to deliver some learning interventions
means our training can be more cost-effective
and highly responsive in terms of identifying
best working practices. This drives a consistent
performance standard throughout the business.

We reward our store teams through results-
focused bonus and commission schemes,
which allow our retail sales teams to earn
rewards commensurate with performance.
In May 2015, we launched a share incentive plan
that will allow all employees the opportunity
to participate in the future success of ScS.

“ We work hard to keep
deliveries moving, but we
still have a chuckle each
day at work. It’s fast-
paced, and definitely
not boring!”

Phil Averill, Senior Administrator
at our distribution centre in Seaham,
has reached 35 years’ service.

Our people are RIGHT at the heart
of our business and the community

Our people are the heart of our business, we simply couldn’t
do business without them. During the year, 180 members of
our team reached significant milestones in their long service
with the Group. From five years to 35 years, together our
team celebrated more than 1,600 years service.

35 years for Phil
Phil has worked for the business for an
amazing 35 years, and he first started when
we had only five stores. He has been part of
our growth and development and has seen
the business go from strength to strength. He
is responsible for ensuring stock is booked in,
items are delivered to customers homes and
the processing of all the necessary paperwork
that comes with the job.

Phil manages a small team who he enjoys
working with and says “We work hard to keep
deliveries moving, but we still have a chuckle
each day at work. It’s fast-paced, and definitely
not boring!”.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsSUSTAINABILITY, PEOPLE AND COMMUNITY CONTINUED

Community
From our family to yours
During the year, the Group and its employees
continued to support many local and national
great causes, close to the hearts and minds of
the ScS family, and roll-out initiatives which
engage with local communities and raise
awareness of important matters. From
‘eggs-cellent’ fundraising efforts to celebrating
creativity in the classroom, we shine a light on
the fantastic initiatives and people fundraising
efforts happening across our Group over the
course of the financial year:

Supporting our foundations

CFO Chris Muir and Reporting Analyst
Lee French visited Oxclose Primary School,
Washington, to see and hear more about
the impact of our donations.

Youngsters across the North East are
benefitting from our ongoing support of
Sunderland’s sporting charity Foundation
of Light.

Having been an active supporter since
2013, our contributions which total more
than £50,000 continue to support the
delivery of their education and disability
coaching ‘Making Moves’ sessions, which
provide opportunities for youngsters and
adults with disabilities to take part in a wide
variety of sports and physical activities.

Liz Barton-Jones, Foundation of Light’s
Head of Sport and Wellbeing said: “Over
the years ScS have made a huge impact
on the lives of young people in the area
and without their help we would not
have been able to deliver the amount of
sessions we have. Their ongoing support
will continue making a real difference to
many people in our communities.”

Members of the ScS team have visited
schools and taken part in sessions to see
the impact our support is having.

ScS Group plc Annual Report 2018

Celebrating creativity in the classroom

From design to reality: Gracee’s winning design is brought to life.

To celebrate the natural creativity of
youngsters in classrooms across the UK,
we teamed up with Ashley Manor, a UK
award-winning upholstery expert, and
supplier to many of our sofa collections,
to launch a nationwide design competition
called ‘My Sofa is’.

After receiving more than 300 entries, the
front runners were revealed to our online
community, who voted in their masses to
decide the winning sofa design and crown
our champion as Gracee Denning, aged ten,
from Essex, whose design was inspired
by school.

The aim of the initiative was to inspire
school youngsters 11 years and under to put
pen to paper and share their sofa designs as
part of a competition, where the winning
young designer would see their creativity
transformed into a reality.

Gracee said: “My sofa is… all about my
school, it’s bright and will make people
happy when they see it. I came up with this
sofa because I realised school has lots of
equipment and subjects and I’ve put all these
all together in a Super School Sofa design.”

Family matters brought to the forefront

dining’, by raising important awareness of
the nutritional and social benefits of families
eating together.

We worked with Amanda Gummer, Child
Psychologist and founder of Fundamentally
Children, to spread the word and launched
a campaign to encourage people and
families to spare a moment to bring back
togetherness at the dining table.

Amanda said: “Regular family meals are
great at providing children with a routine,
valuable time with family and a chance to
take time away from a rushed ‘food on the
go’ culture we are adopting rapidly. Meal
times as a family allow parents to connect
with their children and are ideal for everyone’s
emotional wellbeing.”

Bringing families together is a huge part of
what we do, therefore, while introducing our
new dining and living collection, we looked
into the importance of eating together as
a family. We undertook research into family
dining habits finding seven out of ten UK
parents missed family dinnertimes, and set
ourselves a mission to ‘Bring back family

Stores connecting with
the community

Our excitement for Elmer’s parade!

Our team at Chelmsford collected
community wishes.

Our stores play an active role in their
local communities, creating new and
rewarding job opportunities for people,
generating investments in the locality’s
economy and connecting with people
and customers on a daily basis.

During the year we opened ScS store
101 in Chelmsford and to celebrate its
official opening we called on the local
community to share their good wishes
with us. We launched a Mother’s Day
Wishing Tree in store where the local
community could visit to leave a message
for the mother figures in their life.

All nominations were entered into a
prize draw to win the ultimate relaxation
package; a spa day for two. The prize
was won by Mum Kathryn, who was
nominated by her Mum’s best friend.

They say elephant’s never forget, and nor
could we! Following our involvement in the
2017 Great North Snowdogs community art
trail, we’re really excited to have confirmed
our commitment to be part of Elmer’s Great
North Parade taking place 2019.

The Group is proud to once again support
St Oswald’s Children’s Hospice in its quest
to raise awareness and vital funds for its
children’s services across the North East
region. We can’t wait to be part of the parade!

Everyone does their bit

The ScS team celebrating after raising £1,000.

Employees in our Customer Service team
did a cracking job collecting Easter eggs to
donate to domestic abuse charity Wearside
Women in Need (WWIN). Sandra Wales,
Aftercare Section Head, rounded up the
team to donate as many chocolate eggs as
possible to help brighten up the days of
children who find themselves in a very
unfortunate situation.

Marie Robson, from our Customer Service
team, rallied together our budding bakers to
bake a difference for St Oswald’s Hospice in

time for Christmas 2017. The team put on
an amazing spread of fundraising activities,
and through a mouth-watering bake sale,
tombola, dress down day and prize raffle,
the team raised £1,000 for this great cause.

The team also put their baking skills into
action to raise vital funds for Macmillan,
a charity close to our hearts. Colleagues in
many parts of the business donned their
aprons, rolled up their sleeves as part of the
World’s Biggest Coffee Morning fundraiser.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements
BOARD OF DIRECTORS

Alan Smith
Non-Executive Chairman

Date of Appointment

22 October 2014

Committee Membership

N A R
Biography

David Knight
Chief Executive Officer

Chris Muir
Chief Financial Officer

Ron McMillan

Non-Executive Director

Paul Daccus

Non-Executive Director

George Adams

Non-Executive Director

1 January 2002

4 April 2016

22 October 2014

1 December 2014

9 July 2015

A R N

R A N

Alan has held a number of roles for retail companies
across the private equity and quoted sector
previously, including Chairman and Chief Executive
Officer of Robert Dyas, Chief Executive Officer of
Somerfield, Non-Executive Director of Flybe Group
and Managing Director of B&Q plc.

David joined ScS in 1988 as a General Manager from
Wades Department Stores, which he joined in 1978.
He progressed to become the Branch Manager of the
Group’s flagship store, located at the Metro Centre
in Gateshead. He became National Sales Manager
in October 1995 and was appointed to the Board
in November 1997 as Merchandising Director.
In October 1999 he was promoted to the position
of Managing Director, then to Chief Executive
Officer in January 2002.

Chris joined ScS on 4 April 2016 as Chief Financial
Officer. Prior to this he was Group Finance Director
of Northgate plc, Europe’s leading specialist in light
commercial vehicle hire. He joined Northgate in 2003
as a Group Accountant and held a number of senior
UK and group roles, including UK Finance Director
and acting group CEO in the summer of 2014. He is a
chartered accountant having qualified with Deloitte
in 1999.

Ron is the Senior Independent Director and

Paul is Managing Director of Sun European Partners,

George has a strong commercial and management

Chairman of the Audit Committee of N Brown

LLP. He has more than 20 years of experience in

background, with over 30 years of international

Group plc and 888 Holdings plc. He is a Non-

mergers and acquisitions, specialising in private

experience across Europe and Asia. George spent

Executive Director and Chairman of the Audit

equity and acquisition finance. Prior to joining Sun

16 years with Kingfisher plc, in roles which included

Committee of B&M European Value Retail S.A.

European Partners, LLP in 2005, Paul served as a

CEO of Europe Development, Group Commercial

and Homeserve plc. Until 2013 Ron worked in

Director on corporate finance teams at Deloitte and

Director and Commercial Managing Director for

PwC’s assurance business for 38 years and has deep

Touche LLP and Arthur Andersen LLC. He received

B&Q. He has also held CEO positions at Spicers

knowledge and experience of auditing, financial

his Bachelor of Accountancy degree with Honours

Group and Maxeda DIY Group and has both plc

reporting issues and governance. As the Regional

from Dundee University.

and private equity experience in the retail and

consumer goods sector.

Chairman of PwC in the UK and Deputy Chairman

of PwC in the Middle East, he acted as engagement

leader to a number of major listed companies,

including many in the retail sector.

Key Strengths

Retail, finance, strategy, marketing

Retail, strategy, marketing, supply chain

External Appointments

Displayplan Holdings Limited
Displayplan Limited
The Navy, Army and Air Force Institutes
The Royal Air Force Charitable Trust Enterprises
Brambledown Aircraft Hire

Financial and risk management, sales and operational
planning, restructuring, change management

Finance, financial reporting, governance,

Finance, corporate finance, investment

Retail, strategy, marketing, supply chain

risk management

appraisal, restructuring

N Brown Group plc

888 Holdings plc

B&M European Value Retail S.A.

Homeserve plc

FFX Ltd

Nobia AB

Stiga S.A.

Sun European Partners LLP

SAG Advisory 1 Ltd

Dreams Holdco Ltd

Dreams Topco Ltd

DRL Topco Ltd

DRL Holdings plc

Zara UK Holdco Ltd

Seagull Bidco Ltd

Seagull Midco Ltd

Seagull Topco Ltd

Committee Membership key

A Audit Committee Chair
A Audit Committee Member
R Remuneration Committee Chair
R Remuneration Committee Member
N Nomination Committee Chair
N Nomination Committee Member

ScS Group plc Annual Report 2018

Executive/Non-Executive

Board tenure

1 Chairman

1 Chief Executive

1 Chief Financial
Officer

3 Non-Executives

1-5 years

15 years +

Alan Smith

Non-Executive Chairman

Date of Appointment

22 October 2014

Committee Membership

N A R

Biography

Key Strengths

External Appointments

Displayplan Holdings Limited

Displayplan Limited

The Navy, Army and Air Force Institutes

The Royal Air Force Charitable Trust Enterprises

Brambledown Aircraft Hire

David Knight

Chief Executive Officer

Chris Muir

Chief Financial Officer

Ron McMillan
Non-Executive Director

Paul Daccus
Non-Executive Director

George Adams
Non-Executive Director

1 January 2002

4 April 2016

22 October 2014

1 December 2014

9 July 2015

Alan has held a number of roles for retail companies

David joined ScS in 1988 as a General Manager from

Chris joined ScS on 4 April 2016 as Chief Financial

across the private equity and quoted sector

Wades Department Stores, which he joined in 1978.

Officer. Prior to this he was Group Finance Director

previously, including Chairman and Chief Executive

He progressed to become the Branch Manager of the

of Northgate plc, Europe’s leading specialist in light

Officer of Robert Dyas, Chief Executive Officer of

Group’s flagship store, located at the Metro Centre

commercial vehicle hire. He joined Northgate in 2003

Somerfield, Non-Executive Director of Flybe Group

in Gateshead. He became National Sales Manager

as a Group Accountant and held a number of senior

and Managing Director of B&Q plc.

in October 1995 and was appointed to the Board

UK and group roles, including UK Finance Director

in November 1997 as Merchandising Director.

and acting group CEO in the summer of 2014. He is a

In October 1999 he was promoted to the position

chartered accountant having qualified with Deloitte

of Managing Director, then to Chief Executive

in 1999.

Officer in January 2002.

A R N

R A N

Ron is the Senior Independent Director and
Chairman of the Audit Committee of N Brown
Group plc and 888 Holdings plc. He is a Non-
Executive Director and Chairman of the Audit
Committee of B&M European Value Retail S.A.
and Homeserve plc. Until 2013 Ron worked in
PwC’s assurance business for 38 years and has deep
knowledge and experience of auditing, financial
reporting issues and governance. As the Regional
Chairman of PwC in the UK and Deputy Chairman
of PwC in the Middle East, he acted as engagement
leader to a number of major listed companies,
including many in the retail sector.

Paul is Managing Director of Sun European Partners,
LLP. He has more than 20 years of experience in
mergers and acquisitions, specialising in private
equity and acquisition finance. Prior to joining Sun
European Partners, LLP in 2005, Paul served as a
Director on corporate finance teams at Deloitte and
Touche LLP and Arthur Andersen LLC. He received
his Bachelor of Accountancy degree with Honours
from Dundee University.

George has a strong commercial and management
background, with over 30 years of international
experience across Europe and Asia. George spent
16 years with Kingfisher plc, in roles which included
CEO of Europe Development, Group Commercial
Director and Commercial Managing Director for
B&Q. He has also held CEO positions at Spicers
Group and Maxeda DIY Group and has both plc
and private equity experience in the retail and
consumer goods sector.

Retail, finance, strategy, marketing

Retail, strategy, marketing, supply chain

Financial and risk management, sales and operational

planning, restructuring, change management

Finance, financial reporting, governance,
risk management

Finance, corporate finance, investment
appraisal, restructuring

Retail, strategy, marketing, supply chain

N Brown Group plc
888 Holdings plc
B&M European Value Retail S.A.
Homeserve plc

FFX Ltd
Nobia AB
Stiga S.A.

Sun European Partners LLP
SAG Advisory 1 Ltd
Dreams Holdco Ltd
Dreams Topco Ltd
DRL Topco Ltd
DRL Holdings plc
Zara UK Holdco Ltd
Seagull Bidco Ltd
Seagull Midco Ltd
Seagull Topco Ltd

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsCORPORATE GOVERNANCE STATEMENT

This corporate governance statement sets
out the main elements of the Company’s
corporate governance structure and how it
complies with the UK Corporate Governance
Code. It also includes information required
by the Listing Rules and the Disclosure Rules
and Transparency Rules.

Alan Smith
Chairman

Directors attendance
The Board held six meetings during 2018 and the attendance at the meetings was as follows:

Total no. of meetings

David Knight
Chris Muir
Alan Smith
Ron McMillan
George Adams
Paul Daccus

PLC

6
6
6
6
6
6

Audit
Committee

Remuneration
Committee

Nomination
Committee

3
3
3
3
3
3

4
4
4
4
4
4

2
2
1*
1*
2
2

Further meetings of the Board, Audit, Remuneration and Nomination Committees have also
been held since the year end.

* Alan Smith and Ron McMillan did not attend the Nomination Committee meeting where their respective

re-appointments were discussed.

ScS Group plc Annual Report 2018

Role of the Board
The Board is committed to high standards
of corporate governance. The Company has
complied (except where otherwise stated
below) and intends to continue to comply
with the requirements of the UK Corporate
Governance Code.

The Company is led and controlled by the Board
which is collectively responsible for the long-term
performance of the Group. The Board focuses
on the strategy, performance and governance
of the Group. The Board has delegated certain
responsibilities to committees to assist in
discharging its duties and the implementation
of matters approved by the Board. A summary
of the terms of reference of each committee
is set out on page 46 and reports of each
committee are set out on pages 48 to 64.

Detailed implementation of matters approved
by the Board and operational day-to-day
matters are delegated to the Executive
Directors. The Executive Directors are also
supported by experienced and able operational
senior management.

Matters reserved for the Board
A formal schedule of matters is reserved for
the Board for its approval, which includes:

• Approval of the Group’s strategic aims
and objectives, reviewing performance
and business planning and oversight
of the Group’s operations.

• Approving any changes to the capital

structure of the Group.

Structure chart

Executive
Directors

Operating
Company Board

Group Board

Committees

Audit

Remuneration

Nomination

• Approving the financial reporting, budgets,
dividend policy and any significant changes
in accounting policies and practices of the
Group.

• Ensuring maintenance of a sound system
of internal control and risk management.
• Approval of any major capital projects and

materially significant contracts for the Group.

• Ensuring a satisfactory dialogue with
shareholders based on the mutual
understanding of objectives.

• Approval of the structure, size and
composition of the Board and the
remuneration policy for all Directors
and Senior Executives.

• Setting the division of responsibilities

between the Chairman, Chief Executive
Officer and the Chief Financial Officer.
• Undertaking a formal and rigorous review
of the Board performance and corporate
governance matters.

• Approval and supervision of any material
litigation, insurance levels of the Group
and the appointment of the Group’s
professional advisors.

There is a rolling programme of Board meetings
throughout the year and there are six Board
meetings presently scheduled for 2019.

All Board and committee members receive
sets of board packs in advance of the Board
and Committee meetings. For Board meetings
this includes current trading, management
accounts and detailed papers on other matters
where Board approval is required. The CEO
and CFO present reports to the Board at each
meeting on trading, financial performance
and operational matters, along with updates
on any significant health and safety, litigation
or regulatory matters.

Composition of the Board
The Board comprises the Non-Executive
Chairman, two Executive Directors, two
independent Non-Executive Directors and
a Non-Executive Director appointed by Sun
Capital Partners Management V, LLC in their
capacity as the principal shareholder.

The UK Corporate Governance Code
recommends that smaller companies have
at least two independent Non-Executive
Directors, excluding the Chairman. The
Company has met this requirement and
Ron McMillan (Senior Independent Director),
appointed 22 October 2014, and George
Adams, appointed 9 July 2015, are both
considered by the Group to meet the definition
of an independent Director. Each of them is
considered by the Board to be independent
in character and judgement and free from
relationships or circumstances which may
affect, or could appear to affect, the Director’s
judgement. Independence is determined by
ensuring that the Non-Executive Directors do
not have any material business relationships or
arrangements (apart from their fees for acting
as Non-Executive Directors) with the Group or
its Directors which in the opinion of the Board
could affect their independent judgement.
Paul Daccus is not regarded as independent for
the purpose of the UK Corporate Governance
Code in view of his position as a Partner of Sun
European Partner LLP and his interests in Sun
Capital Partners Management V, LLC which
hold shares in the Company.

On 22 October 2014, Sun Capital Partners
Management V, LLC entered into a Relationship
Agreement with the Company. Under the
terms of that agreement Sun Capital Partners
Management V, LLC are entitled to appoint one

Non-Executive Director to the Board. At the
year ended 28 July 2018, Sun Capital Partners
Management V, LLC held 40.25% of the total
issued shares in the Company.

The Board believe that the terms of the
relationship agreement referred to above will
ensure that the Company and other members
of the Group are capable of carrying on their
business independently of Sun Capital Partners
Management V, LLC and that transactions
and relationships between those parties and
the Group are at arm’s length on normal
commercial terms.

All Directors have service agreements or letters
of appointment in place and the details of the
terms of these are set out in the Directors’
Remuneration Report on pages 52 to 64.

The Nomination Committee will review
on an annual basis the Board’s composition,
experience and skills to ensure the effective
working of the Board and the Standing
Committees and the commitment of their
members. The Chairman has met with each
of the Non-Executive Directors during the year
on a one-to-one basis, without the Executive
Directors being present, to discuss matters
relating to the Board, its balance and the
monitoring powers of the Executive Directors.

The Chairman believes the current Board and
Standing Committees have an appropriate
balance of skills and experience to enable them
to discharge their responsibilities effectively.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsCORPORATE GOVERNANCE STATEMENT CONTINUED

Where Directors have external appointments,
the Board is satisfied that they do not impact
on the time the Director needs to devote
to the Company.

Division of responsibilities
The positions of Chairman and CEO are occupied
by different individuals. There is a clear division
of the roles and responsibilities between the
Chairman and the CEO and no individual has
unrestricted powers of decision making.

Alan Smith, as Chairman of the Board,
is responsible for leading the Board, setting
its agenda and overseeing its effectiveness.
The Chairman facilitates the contribution
of the Non-Executive Directors and
constructive relations between them
and the Executive Directors.

David Knight as CEO, together with
Chris Muir as CFO, is responsible for the
day-to-day management of the Group and
the implementation of strategies approved
by the Board and the implementation of
other Board decisions.

Diversity
The Group is satisfied overall with its record
on diversity, and is aware of the need to
monitor and review its level of diversity. Whilst
the Group would have preferred to appoint
a female Non-Executive Director following
the IPO, appointments will always be made
on merit as opposed to on the basis of gender
targets, and this is considered in the best
interests of the Group and its shareholders.

Conflicts of interest
Paul Daccus has an interest in the shares held
by Sun Capital Partners Management V, LLC,
which holds 40.25% of the ordinary share
capital and voting rights in the Company as
a result of his partnership in Sun European
Partners LLP.

Except as referred to above there are no
potential conflicts of interest between any
of the Directors or senior management within
the Group and their private interests.

meetings of shareholders under England and
Wales Company Law. This process also includes
consideration of the extent to which the Board
may require external and any other reports
and evaluations to be presented to it on any
proposed transactions.

Committees of the Board
The Board has established and delegated
authority to an Audit Committee, a
Remuneration Committee and a Nomination
Committee. A summary of the terms of reference
of each of these committees is set out below. The
full terms of reference of each of the committees
is available at ScS Group plc head office.

Sub-Committee Responsibilities
Audit Committee
• Financial reporting
• External audit
• Risk management and internal audit
• Whistleblowing, fraud and anti-bribery

Remuneration Committee
• Chairman and Executive Director pay
• Senior Executive pay
• Bonus schemes
• Long-term incentive plans
• Non-Executive Director pay

Nomination Committee
• Board structure
• Board appointments
• Board succession plans
• Senior Executive appointments

Audit Committee
The Audit Committee is chaired by Ron
McMillan. The duties of the Audit Committee
as delegated by the Board are contained in the
terms of reference available at ScS Group plc
head office, which in summary include:

• Monitoring the quality, effectiveness
and independence of the external
auditors approving their appointment,
re-appointment and fee levels;

• Reviewing and monitoring the integrity of

the financial statements and any other price
sensitive information of the Group, and

The Committee as a whole have competence
relevant to the retail sector, in which we
operate. All members served on the Committee
throughout 2018 and all three remain in place
at the date of this report.

The Audit Committee meets not less than
three times a year. Details of the activities
of the Committee in the last financial year
are set out in pages 48 to 51.

Remuneration Committee
The Remuneration Committee is chaired
by George Adams. The Remuneration
Committee sets the policy for the Group on
executive remuneration. It determines the
level of remuneration of the Chairman and
the Executive Directors of the Company and
makes recommendations in relation to other
senior management.

In accordance with its terms of reference,
the Committee prepares an annual Directors’
Remuneration Report for approval by
shareholders at the Annual General Meeting
of the Company. The terms of reference for
the Remuneration Committee are available
at ScS Group plc head office.

The members of the Remuneration Committee
are George Adams (Chair), Alan Smith and Ron
McMillan. All members served on the Committee
throughout 2018 and all remain in place at the
date of this report.

The Remuneration Committee meets not less
than two times a year. Details of the activities
of the Committee in the last financial year are
set out on pages 52 to 58.

Nomination Committee
The Nomination Committee comprises
all of the Non-Executive Directors. It is chaired
by Alan Smith and its other members are Ron
McMillan, George Adams and Paul Daccus.
The duties of the Nomination Committee as
delegated to it by the Board are contained in
the terms of reference available at ScS Group
plc head office, which in summary include:

• Keeping under review the adequacy

• Reviewing the structure, size and

There is an established process of the Board for
regularly reviewing actual or potential conflicts
of interest. In particular, there is a process for
reviewing transactions proposed to be entered
into by related parties of Directors with any
entities in the Group, including professional
advice and consideration of it by the Board
and the Company’s corporate brokers on the
application of the Listing Rules, the applicability
and the appropriateness of any exemptions
in respect of any transactions in the ordinary
course of business and reporting to general

and effectiveness of the Group’s internal
financial controls and internal control
and risk management systems.

The members of the Audit Committee are
Ron McMillan (Chair), Alan Smith and George
Adams. Ron McMillan is an ICAEW chartered
accountant and his experience formally as an
audit partner of PwC fulfils the requirement
under the UK Corporate Governance Code
that one member of the Committee has recent
and relevant financial experience.

composition of the Board, including the
balance of Executive and Non-Executive
Directors;

• Putting in place plans for the orderly
succession of appointments to the
Board and to Senior Management, and
Identifying and nominating candidates
for the approval of the Board, to fill Board
vacancies when they arise.

•

The Committee meet at least annually.

ScS Group plc Annual Report 2018

During the 2018 financial year the Nomination
Committee has reviewed the size, structure and
composition of the Board, with regard to the
experience and skills represented on it and
the balance of Executive and Non-Executive
Directors represented on it.

The Committee recognised the need to keep
under review certain areas where over the course
of time, appointments may be appropriate to
consider. The Nomination Committee also
recognises the need to monitor and review
diversity in relation to how the Group is led and
represented. Appointments will always be made
on merit-based, objective criteria, recognising
diversity policy but without setting gender
targets and this is considered to be in the best
interests of the Group and its shareholders.

Board performance evaluation
A review was undertaken during the 2018
financial year. This will be repeated on an
annual basis going forward and at least once
every three years with an external consultant
to assist in the process are required by the UK
Corporate Governance Code.

Re-election of Directors
Based on the performance review by the
Nomination Committee of the size, structure
and composition of the Board with regard to
the experience and skills represented on it, the
Nomination Committee has recommended
that each of the Directors be re-elected to the
Board, as they each continue to be effective
members of the Board and demonstrate
commitment to their roles.

Risk management and internal control
The Board has overall responsibility for ensuring
that the Group maintains a strong system of
internal control.

The system of internal control is designed to
identify, manage and evaluate, rather than
eliminate, the risk of failing to achieve business
objectives. It can therefore provide reasonable,
but not absolute, assurance against material
misstatement, loss or failure to meet objectives
of the business due to the inherent limitations
of any such system.

The key elements of the Group’s system
of internal controls are as follows:

Financial reporting: Monthly management
accounts are provided to members of the
Board which contain current financial reports.
Reporting included an analysis of actual verses
budgeted performance and reasons for any
significant differences. The annual budget is
reviewed and approved by the Board. The
Company reports half-yearly and publishes
trading updates in line with market practice.

Compliance statement
The Company has complied with the provisions
of the Corporate Governance Code (April 2016)
during 2018, as applicable, except where stated
above in this report.

Shareholder relations
The Board recognises that good communication
is key to maintaining shareholder relations, and
as such we will endeavour to explain our actions
and financial results on a regular basis and to
respond to investor inquiries and feedback.

Meetings and calls are regularly made with
institutional investors and analysts in order
to provide the best quality information to
the market.

The Company will communicate with its
shareholders through the Annual General
Meeting, at which the Chairman will give an
account of the progress of the business over
the past year, and will provide the opportunity
for shareholders to raise questions with the
Chairman and the Chairs of each of the
Committees of the Board.

The Company also runs a corporate website
at www.scsplc.co.uk, which is regularly updated
with our releases to the market and other
information and which includes a copy of this
Annual Report and financial statements.

Alan Smith
Chairman
1 October 2018

Risk management: The Group maintains a
risk register, which is continually updated and
monitored, with full reviews occurring on at
least an annual basis. Each risk identified on the
risk register is allocated an owner, at least at
the level of senior manager within the business.
The action required (where necessary) or
acceptance of the risk is also recorded. The
risk registers are provided to the Board, key
risks and appropriate mitigating actions are
monitored by the Board.

Information on key risks and uncertainties of
the Group are set out on pages 30 to 33.

Monitoring of controls: There are formal
policies and procedures in place to ensure the
integrity and accuracy of accounting records
of the Group and to safeguard its assets.
The Board has carried out a review of the
effectiveness of the internal controls during the
year ended 28 July 2018 and for the period up
to the date of approving the Annual Report and
financial statements. The Board were satisfied
after a review of the key risks to the business
and relevant mitigating actions that they were
acceptable for a business of the type, size and
complexity as that operated by the Group.

Internal audit: The Group has established an
Internal Audit function who are responsible
for the monitoring of the Group’s role
management approach and provides a line
between operational managers and the
Audit Committee.

Staff policies: There are formal policies in
place in relation to anti-bribery and corruption
and whistleblowing policies in relation to the
reporting of any suspected malpractice or
wrongdoing. In addition, the Group have
provided all employees with access to an
independent organisation (Safecall) where
any concerns regarding wrongdoing can be
reported to the Group.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsAUDIT COMMITTEE REPORT

The Audit Committee is an important
element of the Group’s governance structure.
Our role is to advise the Board on financial
reporting, viability and going concern,
risks and controls, and whether the Annual
Report provides the information necessary
for shareholders to assess the Group’s
performance, business model and strategy.

Ron McMillan
Chairman of the Audit Committee

Member and meetings in 2018

Member since

Meetings attended

Ron McMillan (Chairman)

Alan Smith

George Adams

2014

2015

Dear Shareholder
The Audit Committee exercises oversight of
the Group’s financial policies and reporting,
monitors the integrity of the financial statements
and reviews and considers significant financial
and accounting estimates and judgements. The
Committee satisfies itself that the disclosures in
the financial statements about these estimates
and judgements are appropriate and obtains
from the external auditors an independent
view of the key disclosure issues and risks. In
relation to risks and controls, the Committee
ensures that these have been identified and that
appropriate responsibilities and accountabilities
have been set.

A key responsibility of the Committee is
to review the scope of work undertaken
by the internal and external auditors and
to consider their effectiveness.

During the year, the Committee again oversaw
the process used by the Board to assess the
viability of the Group, the stress testing of
key trading assumptions and the preparation
of the viability statement, which is set out
on page 34, in the principle risks section
of the Strategic Report. The Committee also
monitored the proposed implementation
of IFRS 16.

The Committee has also considered the
narrative at the front end of the Annual Report
and believes that sufficient information has
been provided to give shareholders a fair,
balanced and understandable account of
the Group’s business.

The Committee reviewed, on behalf of the
Board, the Group’s compliance with the
Modern Slavery Act and it’s policies in
relation to money laundering, anti-bribery
and whistleblowing.

Further information on the Committee’s
responsibilities and the manner in which
they have been discharged are set out below.

I shall be available at the Annual General
Meeting on 21 November 2018 to answer
any questions you may have on this report
and would like to thank my colleagues for
their continued help and support.

ScS Group plc Annual Report 2018

Committee composition
The Committee comprises three members,
two of whom are independent Non-Executive
Directors. Two members constitute a quorum
and the Committee must include one
financially qualified member with recent and
relevant financial experience. The Committee
Chairman fulfils this requirement. All members
are expected to have an understanding of
financial reporting, the Group’s internal control
environment, relevant corporate legislation,
the roles and functions of Internal Audit and
external audit and the regulatory framework
of the business.

The members of the Committee during the
year were Ron McMillan, Alan Smith and
George Adams. Details of Committee meetings
and attendance are set out in the Corporate
Governance Statement on page 44. The timing
of Committee meetings is set to accommodate
the dates of releases of financial information
and the approval of scope of and outputs from
work programmes executed by the internal
and external auditors. The biographies of the
members of the Committee can be found
on pages 42 and 43 and reflect the significant
experience that the Committee members have
of working in or with companies in the retail
and consumer goods sectors.

Although not members of the Committee,
David Knight, as CEO, Chris Muir, as CFO,
and Paul Daccus, as a Non-Executive Director,
attend meetings, together with representatives
from the Internal Audit function and the
external auditors.

In addition to scheduled meetings, the
Committee Chairman meets with the Head
of Internal Audit, the external auditors and
the CFO during the year, and the internal
and external auditors are provided with the
opportunity to raise any matters of concern
that they may have in the absence of the
Executive Directors whether at the Committee
Meetings, or more informally, outside of them.

Responsibilities
The responsibilities of the Committee,
as delegated by the Board, are set out in the
terms of reference and are available from the
Group’s head office. They include the following:

• Reviewing and monitoring the integrity

of the financial statements and other price
sensitive financial releases of the Group;
• Monitoring the quality, effectiveness and
independence of the external auditors and
approving their appointment;

• Monitoring the activities of the Internal

Audit function;

• Assisting the Board with the development and
execution of a risk management strategy, risk
policies and current risk exposures, including
the maintenance of the Group’s risk register;

• Keeping under review the adequacy

and effectiveness of the Group’s internal
financial controls and internal control and
risk management system, and

• Making recommendations to the Board
in relation to the appointment of the
external auditor.

Activities
In discharging its oversight of the matters
referred to above and in the introductory
letter to this report, the Committee was
assisted by management and the internal
and external auditors.

The recurring work of the Committee comprised:

• Consideration of the Annual Report and

financial statements of the Group;

• Consideration of the interim results report
and non-statutory financial statements
of the Group for the half year;

• Consideration of the significant areas

of accounting estimation or judgement;

• Consideration of the significant risks

included in the Annual Report;

• Approval of the external auditors terms
of reference, audit plan and fees, and

• Approval of the internal audit plan.

The significant matters considered by the
Committee during the year were:

• Volume rebates with suppliers
The Group receives volume rebates from
suppliers. The Committee gained an
understanding of these arrangements,
discussed them with management and
the external auditors and satisfied itself
with the controls that are in place to ensure
that amounts received and receivable
from suppliers are properly accounted for
on a monthly basis and that the related
judgements are limited.

The volume rebate arrangements are

pre-negotiated with suppliers and are split
between suppliers with rebate ‘hurdle’ rates
dependent on spend and those that have
a flat rate. At the year end, the vast majority
of hurdle rates were exceeded and therefore
the level of judgement involved was
significantly reduced. Where hurdle rates
were not surpassed and the arrangements
were not coterminous with the year-end,
judgements were required but the amounts
involved were not material.

• Completeness of stock provisions
The Group policy in relation to stock
provisioning is to provide for obsolete,
slow-moving and defective stocks. The
Committee discussed with the CFO and the
external auditors the judgements related to
stock provisioning and the appropriateness
of these in light of the aged stock analysis.
The Committee satisfied itself that stock
was not materially misstated.

• Loss making stores and onerous

lease provisions

The Committee discussed with management
the work performed in their calculation
of the future cash flow models of poor-
performing stores, which had been used to
determine whether any impairment had
been suffered over the carrying value of
the assets held at these stores, and whether
any of the lease commitments held at those
stores had become onerous in nature and
required providing for. The Committee
discussed with management and the
external auditors the validity of cash flow
projections and the significant financial
assumptions used, including the selection
of appropriate discount and growth rates
used over the remaining lease period. The
Committee satisfied itself that asset values
were not materially misstated, and that
the current onerous lease provision was
appropriate, as set out in note 15 on page 87
to the consolidated financial statements.

•

Implementation of new
accounting standards

The Committee received papers

from management in relation to the
implementation of IFRS 9, 15 and 16
and satisfied itself that IFRS 9 (Financial
Instruments) and IFRS 15 (Revenue from
Contracts with Customers) will not have
a material impact on the Group’s financial
statements.

IFRS 16 (Leases) will have a material impact
on the financial statements for the financial
year beginning on 28 July 2019 and the
Committee considered the proposed
disclosures in relation to IFRS 16 in the
Group’s financial statements for the year
ended 28 July 2018.

Internal control and risk management

•
The Board has overall responsibility for

ensuring that the Group maintains a sound
system of internal control. There are inherent
limitations in any system of internal control
and no system can provide absolute assurance
against material misstatements, loss or failure.
Equally, no system can guarantee elimination
of the risk of failure to meet the objectives of

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial Statements

AUDIT COMMITTEE REPORT CONTINUED

the business. Against that background, the
Committee has helped the Board develop and
maintain an approach to risk management
which incorporates risk appetite, the
framework within which risk is managed and
the responsibilities and procedures pertaining
to the application of the policy.

The Group is proactive in ensuring that
corporate and operational risks are identified
and managed. A corporate risk register is
maintained which details:

1. the risks and the impact they may have;
2. actions to mitigate risks;
3. risk scores to highlight the implications

of occurrence;

4. ownership of risks, and
5. target dates for actions to mitigate risks.

A description of the principal risks is set out on
pages 30 to 33.

The Board has confirmed that it has carried out
a robust assessment of the principal risks facing
the Group, including those which threaten its
business model, future performance, solvency
or liquidity.

The Board considers that the processes
undertaken by the Committee are appropriately
robust and effective and in compliance with
the guidelines issued by the Financial Reporting
Council. During the year, the Board has not been
advised by the Committee nor has it identified
itself, any failings, frauds, or weaknesses in internal
control which it has determined to be material in
the context of the financial statements.

The Committee continues to believe that
appropriate controls are in place throughout
the Group, that the Group has a well-defined
organisational structure with clear lines of
responsibility and a comprehensive financial
reporting system. The Committee also believes
that the Company complies with the FRC
guidance on Risk Management, Internal Control
and related Financial Business Reporting.

• Going concern
The Committee considered the going
concern position of the Group. In so
doing, the Committee ensured that the
assumptions underpinning forecasts were
stress tested and that the factors which
impact risks and uncertainties were
properly considered.

Other areas of focus for the Committee were:

• The Group’s significant accounting policies

and practices;

• The Group’s exposure to tax and VAT issues;
• Fraud risk and its mitigation;
• The Group’s business continuity and
disaster recovery procedures, and

• The adequacy of the Group’s IT systems.

a programme of work which was discussed
and agreed with both management and the
Committee and which was designed to address
both risk management and areas of potential
financial loss. Internal Audit has also established
procedures within the business to ensure that
new risks are identified, evaluated and managed
and that necessary changes are made to the
risk register.

In addition to the above, the Committee
undertook the following:

During the year the Committee reviewed
reports from Internal Audit in relation to:

• Approval of the external auditors terms

of engagement;

• Consideration of the level of non-audit

services provided by the external auditors
and the application of the Group’s policy
to these;

• Fraud risk, anti-money laundering,
anti-bribery and corporate crime,
whistleblowing and compliance with
the Modern Slavery Act;

• Compliance assessments of the Group’s
retail outlets and distribution centres;

• Consideration of the significant risks

• Risk management, including the

included in the Annual Report;

• Consideration of the interim results and
non-statutory financial statements
of the Group for the half-year ended
27 January 2018;

• Consideration of the processes that are
in place to ensure that assurance can be
provided on whether the Annual Report
and Financial Statements are considered to
be fair, balanced and understandable. The
Committee receives drafts and working
papers relating to the Annual Report and
Financial Statements in order to facilitate
its review and input. Management
representations and external and Internal
Audit reviews have also taken place to
provide this assurance to the Audit
Committee and the Board;

• Consideration of significant areas of

accounting estimation or judgement;

• Consideration of the Market Abuse

Regulations and Insider Dealing Policies, and

• Making recommendations to the Board in
respect of the Committee’s findings, and
reporting on how the Committee has
discharged its duties.

Board reporting
I provide an update of matters discussed
to the Board and the minutes of Audit
Committee meetings are circulated to
the Board.

Internal Audit
The Head of Internal Audit has a direct
reporting line to the Committee and attends
every Committee meeting to present Internal
Audit and Risk Management reports. During
the financial year Internal Audit has undertaken

effectiveness of mitigating actions in
relation to the Group’s principle risks,
including IT systems, business continuity
and cyber risk;
• Group tax matters;
• Supply chain and logistics;
• Stock and receivable balances;
• Merchandising processes

and procedures;
• Estate management;
• Cash and banking controls;
• Fleet management;
• Marketing costs, including e-commerce

and digital marketing;
• GDPR implementation, and
• Customer complaints.

In relation to each of the above, Internal Audit
made recommendations for improvement,
the vast majority of which were agreed by
management and either have been or are
being implemented.

The Committee has evaluated the performance
of Internal Audit during the year and concluded
that significant progress has again been made.
Internal Audit is viewed as a function which
has a strategic plan developed in collaboration
with the Committee, and which provides
constructive challenge and demonstrates a
realistic and commercial view of the business.

External auditors
Corporate Governance rules in the UK for
FTSE 350 companies require the external audit
appointment to be formally retendered after
ten years, and for the auditors to be changed
after 20 years. PwC have been the Group’s
auditors for nine years, with the current year

ScS Group plc Annual Report 2018

being the fourth audit signed off by Jonathan
Greenaway, who is currently responsible.
As part of the Audit Committee’s desire to
operate within best practices, during the year
the Committee oversaw an external audit
tendering process and invited PwC and two
other firms to submit proposals for 2019 and
beyond. Following this process, the Committee
recommended to the Board that PwC be asked
to continue as the Group’s auditors.

The Committee has, in conjunction with the
Board and the management team, reviewed the
effectiveness of the external auditors, both in
relation to audit and non-audit services and has
satisfied itself that the work undertaken by the
external auditors was effective.

The Committee has established policies
in relation to the provision of non-audit services
by the auditors. The external auditors are not
permitted to perform any work that they may
be later required to audit or which might affect
their objectivity and independence or create
a conflict of interest. Furthermore, the external
auditors may not perform any work prohibited
by the Ethical Standards published by the
Financial Reporting Council.

All fees for non-audit work require pre-
authorisation by the Chief Financial Officer and
the Audit Committee, and non-audit fees paid
to the auditors are not permitted to exceed 70%
of audit fees over a three-year period. Fees paid
and payable to PwC in respect of the year under
review are as shown in note 4 on page 82.

The Committee reviewed the reports prepared
by PwC on key audit findings and any significant
deficiencies in the control environment, as well
as the recommendations made by PwC to
improve processes and controls, together
with managements responses to those
recommendations. PwC did not highlight
any significant internal control weaknesses
and management has committed to making
appropriate changes in controls in other areas
highlighted by PwC.

Ron McMillan
Chairman of the Audit Committee
1 October 2018

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsDIRECTORS’ REMUNERATION REPORT

On behalf of the Board, I am pleased to
present the Director’s Remuneration Report
for the year ended 28 July 2018.

George Adams
Chairman of the Remuneration Committee

Member and meetings in 2018

Member since

Meetings attended

George Adams (Chairman)

Ron McMillan

Alan Smith

2015

2014

Dear Shareholder
Our Annual Report on Remuneration outlines
how the Remuneration Policy, approved at the
2015 Annual General Meeting, was applied
for 2018. Our Remuneration Policy has been
reviewed and the Committee is conscious that
there has been considerable development in
broader market pay and Remuneration Policy
over the three-year life of our current policy.
We have adopted a conservative approach to
setting pay, an approach we wish to maintain
in our refreshed policy. We have concluded
that our current policy continues to provide an
appropriate framework, although some limited
revisions were felt to be necessary.

The Company has recently refreshed its three
year strategy and is keen to ensure that the
incentive arrangements remain appropriate to
successfully deliver this. The Board believes that
maintaining the highest standards of corporate
governance is essential to protecting shareholder
value; the alignment of remuneration with the
forward looking business strategy is an integral
part of this process. As such the Committee
has fully debated the proposed remuneration
changes to ensure that the incentive plans
in place appropriately reward the delivery
of our strategy, whilst ensuring alignment
with shareholders.

The Annual Report on Remuneration is
subject to an advisory vote at our 2018 Annual
General Meeting.

There will be a resolution on the Policy at the
2018 Annual General Meeting. The revised
policy is set out for shareholders’ information
starting on page 59.

Remuneration principles
The key aims of the Remuneration Policy are to:

• Attract, retain and motivate high-calibre

senior management;

• Focus senior management on the delivery

of the Group’s business objectives;
• Promote a strong and sustainable

performance culture;
Incentivise profitable growth, and

•
• Align the interests of the Executive Directors
and senior management with those of the
shareholders.

In promoting these objectives, the Committee’s
aims are to develop a remuneration policy in a
simple, transparent and understandable way.

ScS Group plc Annual Report 2018

Key changes to the Remuneration Policy:

The key elements to our Remuneration Policy are as follows:

1. Base salaries
We intend to continue our approach to reviewing base salaries, giving consideration to the Group’s performance, market conditions, individual
performance and the increases awarded across the Group to employees. Salaries will be benchmarked periodically against companies that are both
main and AIM listed who are of similar size and complexity. Salaries will generally be set at the mid-market level. It is not our intention to increase the
current base salaries of the CEO and CFO in 2019.

2. Bonus
The Committee remains committed to ensuring that the majority of our bonus arrangements will be based on financial measures, but retains
discretion to introduce corporate, divisional and individual performance measures if it is felt appropriate for the business to do so. In 2019 the
Committee intends to set bonus performance conditions purely on financial measures, there are no proposed changes to the level of award
which remain at a maximum of 140% of basic salary for the CEO and 100% of basic salary for the CFO.

3. LTIP
Whilst there has been considerable debate by the market generally as to the suitability of LTIP’s, the Committee considers that the current LTIP of the
Company based on earnings per share (EPS) targets does provide an appropriate mechanism to align the Executive Directors with the shareholder
experience. EPS is well understood by shareholders and participants alike, is consistent with previous awards and supports the delivery and execution
of our long-term business strategy.

The Committee has noted a significant increase in the prevalence of holding periods, and in view of the recent changes to the UK Corporate Governance
Code, a two year holding period will be applied to awards from 2019 onwards, the Committee believes that the current three year performance period
remains an appropriate mechanism.

The Committee also wishes to ensure that the LTIP remains competitive; the current policy has an annual grant limit of 100% of basic salary. We propose
to amend the rules and set an upper limit of 150% of basic salary, in choosing to make an award at 150% of basic salary, the Committee have ensured that
the EPS targets set are stretching.

4. Shareholding guidelines
Our current shareholding guidelines require a minimum holding of 100% of basic salary once that level has been obtained. It is proposed, in line with
best practice, to increase this level to 200% of basic salary.

2018 Performance related pay
For 2018, the annual bonus was based solely on EBITDA. Sales and revenue for 2018 grew despite the challenging market backdrop.

EBITDA of £18.8m was above the minimum target set for the year, as a result the bonus was paid out at 99.76% of the maximum. The Committee
considers that this fairly reflects the results for the year. Further information on the bonus and targets can be found on page 54 of our Annual Report
on Remuneration.

As set out in our Remuneration Policy on pages 59 to 64 the Committee considered the long-term incentive plan to be awarded to the Executive
Directors. A long-term incentive plan was awarded during 2018, the details of which can be found in our 2017 Annual Report. A long-term incentive
plan vested during the year, however, as previously reported, the performance-based £nil cost options granted on 30 March 2015 have been forfeit as
of the 29 July 2017, as the earnings per share (EPS) for the Group was lower than the performance condition set. There is no long-term incentive plan
award vesting based on performance to 28 July 2018.

Remuneration proposals for 2019
Base salary
During the year, the remuneration of the two Executive Directors of the Company, along with the senior management of the Group, was reviewed.

The Remuneration Committee decided that, given the uncertain market conditions, the salaries of the CEO and the CFO will remain unchanged from
their remuneration in 2018. No basic pay awards were given to any of the senior management team. Details of the average increase given to other
employees is detailed on page 57.

There will be no change in pension provision or benefits framework for Executive Directors.

Annual bonus
The 2019 bonus will continue to be based on EBITDA performance supporting our strong emphasis on delivering profitable growth. The maximum
award opportunity remains 140% of salary for the CEO and 100% of salary for the CFO. The Committee considers the forward-looking EBITDA targets
to be commercially sensitive, but full disclosure of the targets and performance against them will be provided on a retrospective basis in next year’s
Remuneration Report.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsDIRECTORS’ REMUNERATION REPORT CONTINUED

2019 Long-Term Incentive Plan (LTIP)
The Committee has agreed to a LTIP award in 2019 which is in keeping with our remuneration policy. Awards will be granted at 150% of salary for the
CEO and 150% of salary for the CFO. The awards will be subject to an EPS performance condition. Taking into account internal forecasts for business
performance over the next three years, as well as external expectations of performance, the Committee agreed targets for 2019 awards which are set
out on page 55.

In moving towards compliance with the 2018 Corporate Governance Code, the committee has included a two year hold period for these awards.
The Committee considers that the targets are stretching and will ensure that significant reward is only available for delivery of a strong performance.

Shareholder feedback
We value the views of our shareholders and we actively welcome any feedback on our remuneration policy and its implementation. We have reviewed
our Remuneration Policy and we are presenting a revised Policy for approval at the 2018 Annual General Meeting. As part of this review process we
sought the views of our larger investors.

We hope you find this report helpful and informative and we hope to receive your support for our Annual Report on Remuneration at our Annual
General Meeting on 21 November 2018.

Annual Remuneration Report
Executive Directors remuneration in 2018
Elements of remuneration
Salary
The decision was made to leave the CEO and CFO’s salaries unchanged.

The current basic salaries as at 1 October 2018 are:

• David Knight: £306,000
• Chris Muir: £240,000

The CEO’s salary and the current CFO’s salary benchmark broadly in line with the market median.

Pension and other benefits
The Executive Directors are eligible to pension benefits equating to 20% of their basic salary, which are non-contributory. The CEO and the CFO
receive £10,000 and £9,960 per annum, respectively, of pension benefits into their pension fund, the balance is paid as cash allowance.

The CEO and the CFO receive a car allowance of £18,624 and £17,000, respectively.

The Executive Directors are also provided with private medical insurance and Life Assurance that provides cover of up to four times base salary.

Annual bonus
The Executive Directors received annual bonuses in 2018. The bonuses were based on EBITDA. No bonus is payable unless a threshold level of EBITDA
is achieved. The details of the targets and how the bonus was calculated are set out below.

Pre-bonus EBITDA
% maximum
David Knight
Chris Muir

£16,463,669
12.5%
£53,550
£30,000

£18,654,676
50%
£214,200
£120,000

£20,082,014
75%
£321,300
£180,000

£21,509,352
100%
£428,400
£240,000

Bonuses are calculated on a straight-line basis for performance between target levels.

In light of performance in 2018 (pre-bonus EBITDA of £21,495,498), the Remuneration Committee approved payments of £427,372 for David Knight
(CEO) and £239,424 for Chris Muir (CFO), representing a pay-out at 99.76% of the maximum. Malus and clawback rules apply to all bonuses awarded.

For 2019 the maximum bonus opportunity is unchanged at 140% of base salary for the CEO and 100% of base salary for the CFO. The bonus is based
on the achievement of stretching EBITDA targets. The Committee does not disclose the targets in advance as they are commercially sensitive.
Retrospective disclosure of the EBITDA targets will be included in next year’s report.

Long-term incentives
The LTIP due to vest during 2018 for the performance-based £nil cost options granted on 30 March 2015 have been forfeit as of the 29 July 2017, as the
EPS for the Group was lower than the performance condition set. The awards required an EPS for 2017 of at least 24 pence for threshold vesting. Actual
EPS for 2017 was 23.5p. Full details of the awards and the performance conditions attached are set out in the 2015 Annual Report.

There are no long-term incentive plan awards vesting based on performance to 28 July 2018.

ScS Group plc Annual Report 2018

During the year, the Executive Directors were granted a long-term incentive plan award with a face value of 100% of salary each. The awards were
made in the form of nil-cost options and were over 176,909 and 138,752 shares respectively for the CEO and CFO. The awards have a three-year vesting
period (no holding period) and the share price on the date of grant, 16 October 2017 was £1.73. As disclosed in last year’s annual report, the following
EPS targets were applied:

EPS figure (in 2020)

Less than 25.1p
25.1p
Greater than 27.0p but less than 31.0p
31.0p

Percentage of award that vests

Nil
25%
Straight-line basis between 25% and 100%
100%

The Committee has agreed to award a long-term incentive plan in 2019. The CEO and CFO will be awarded shares with a face value of 150% of base salary
subject to EPS targets being met. The awards have a three-year vesting period, plus a two year holding period, and are subject to the following targets:

EPS figure (in 2021)

Less than 28.9p
28.9p
Greater than 28.9p but less than 37.0p
37.0p

Percentage of award that vests

Nil
25%
Straight-line basis between 25% and 100%
100%

All-employee share plans
The Company adopted an all-employee UK Share Incentive Plan (SIP) immediately prior to admission. All employees on completion of six months
service become eligible to join. Under the SIP employees may elect to acquire up to £150 worth of shares in the Company every month or pay
a maximum one-off lump sum of £1,800 in a tax year.

The Executive Directors are eligible to participate in the SIP on the same basis as other employees.

Single figure table of total remuneration Executive Directors – audited
The audited table below shows the aggregate remuneration of the Directors of the Company during 2018 and 2017:

David Knight
2017

2018

Chris Muir
2017

2018

Ron Turnbull (left 12 August 2016)
2017

2018

Salary
£

Benefits
£

***

Bonus
£

LTIP
£

Pension
£

Total
£

306,000

240,000

7,692

–

20,685

20,836

18,518

17,818

458

–

203,418*

427,372

94,030

239,424

14,229*

–

61,200

48,000

1,538

–

591,303

815,408

400,548

545,242

23,917

–

*
**

The bonus figures include a one-off payment to David Knight and Ron Turnbull for £35,574 and £14,229, respectively, in lieu of the interim dividend payment in 2015.
Ron Turnbull has reached his lifetime limit and received a payment in lieu of pension contributions equating to 20% of his basic salary. David Knight and Chris Muir opt
to receive part of their pension contributions as a cash allowance.

*** Benefits of the Directors are discussed in detail on page 54.

Payments to past Directors and loss of office payments – audited
There were no payments to past Directors for loss of office in the year ended 28 July 2018.

Remuneration of the Chairman and Non-Executive Directors – audited
The structure of Non-Executive Directors fees, and their levels, were set by the Board on admission. No review is expected during 2019.

The fees of the Non-Executive Directors are set by the Board and take account of the Chairmanship of Board committees and the time and
responsibility of the roles of each Director.

The fees paid for 2018 to the Non-Executive Directors were as follows:

Alan Smith
Ron McMillan
George Adams

There were no other amounts disclosable for the Non-Executive Directors for the year.

2018
£

125,000
60,000
60,000

2017
£

125,000
60,000
60,000

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsDIRECTORS’ REMUNERATION REPORT CONTINUED

Directors’ shareholding and share interests – audited
The table below sets out the number of shares held or potentially held by Directors (including connected persons or related parties where relevant)
as at the financial year end 2018.

Director

Alan Smith
Ron McMillan
George Adams
Paul Daccus

As at 11 September 2018

David Knight
Number

Value at year end

Chris Muir
Number

Value at year end

Shares held
beneficially

18,096
–
2,000
–

Share interests
held beneficially

Nil cost options
subject to
performance
*

Option
awards vested
on admission
**

Unvested
options

–
–
–
–

Total

1,476,958

£3,293,616

–

349,935

£780,355

274,459

£612,044

22,772

£50,782

1,849,665

£4,124,753

–

274,459

£612,044

* Awards vest subject to EPS performance over a three-year period. This relates to awards granted in 2017 and 2018.
** Option awards are vested and are exercisable until 20 January 2025 at an exercise price of £1.75.

The value of share interests at the year-end is based on the closing share price at 27 July 2018 of £2.23.

The Executive Directors are required to build and maintain a shareholding equivalent to 200% of base salary. The shareholding for David Knight
was significantly in excess of this level at the year end. The beneficial shareholding for Chris Muir is currently nil, but he is required to build up
a shareholding, which will be achieved by the retention of share options awarded under the LTIP.

Performance graph and pay table
The chart below illustrates the Company’s Total Shareholder Return (TSR) performance against the performance of the FTSE Fledgling Index, from the
date of the IPO of the Company. This index was selected as it represents a broad equity market index which includes companies of a comparable size.

ScS

FTSE Fledgling Index

180

160

140

120

100

)
d
e
s
a
b
e
R
(
n
r
u
t
e
r

r
e
d
o
h
e
r
a
h
s
l

a
t
o

60T

27 O ct 2016
27 O ct 2017
27 O ct 2015
27 A pr 2016
27 A pr 2017
27 A pr 2015
27 Jan 2017
27 Jan 2015
27 Jan 2016
27 Jan2018
27 Jul 2015
27 Jul 2016
27 Jul 2017

27 A pr2018

27 Jul 2018

Source: Datastream (Thomson Reuters).

This graph shows the value, by 27 July 2018, of £100 invested in SCS Group on 27 January 2015 compared with the value of £100 invested in the FTSE
Fledgling Index.

ScS Group plc Annual Report 2018

Changes in the remuneration of the CEO
Total remuneration of individuals undertaking the role of CEO in each of the past eight years is as follows:

David Knight
2018

2017

2016

2015

2014

2013

2012

2011

Salary
£

Bonus
£

Benefits
£

LTIP
£

Pension
£

Total
£

306,000

300,000

247,500

427,372

203,418

420,000

–

177,450

274,073

199,635

–

20,836

20,685

21,290

20,183

20,336

16,302

13,929

17,265

–

61,200

60,000

49,500

71,625

49,500

815,408

591,303

801,290

380,183

557,786

587,375

532,689

314,265

The table below shows the percentage changes in the CEO’s remuneration between the financial year ended 28 July 2018 and the year ended 29 July
2017 compared to the amounts for UK full-time employees of the Group for each of the following elements of pay:

CEO
Salary
Benefits
Bonus

Average per employee (excluding the CEO)
Salary
Benefits
Bonus

2018
£

2017
£

%
Change

306,000
20,836
427,372

24,646
832
2,531

306,000
20,685
203,418

23,878
748
2,107

0.00%
0.73%
110.10%

3.22%
11.23%
20.12%

Relative importance of the spend on pay
The table below shows the movement in spend on pay for all employees compared with the distributions to shareholders.

Total pay for employees
Distributions to shareholders

2018
£’000

61,279
6,032

2017
£’000

58,728
5,893

%
Change

4.34%
2.35%

Remuneration Committee
The members of the Committee for the 2018 financial year were George Adams (Committee Chairman), Alan Smith and Ron McMillan.
All of the current members are independent Non-Executive Directors.

The responsibilities of the Committee are set out in the Corporate Governance section of the Annual Report on page 46.

The Committee may invite the Executive Directors or other members of the senior management to attend meetings and assist the Committee in its
deliberations as appropriate. No person is present during any deliberations relating to their own remuneration or involved in determining their own
remuneration. During the course of the year David Knight, Chris Muir, Paul Daccus and Marie Liston, Corporate Services Director, were in attendance
as required.

The attendance of members of the Committee at meetings of it was as follows:

Name

George Adams
Alan Smith
Ron McMillan

Attendance

4
4
4

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsDIRECTORS’ REMUNERATION REPORT CONTINUED

Advisers to the Committee
During the year the Committee received independent advice on executive remuneration matters from New Bridge Street, a trading name of Aon
Hewitt Ltd. New Bridge Street were appointed by the Remuneration Committee following a selection process.

New Bridge Street is a member of the Remuneration Consultants Group and, as such, voluntarily operates under the code of conduct in relation to
executive remuneration consulting in the UK. The Committee has received advice provided by New Bridge Street during the year and is comfortable
that it has been objective and independent. Total fees received by New Bridge Street in relation to remuneration advice provided to the Committee
during 2018 amounted to £10,083, excluding VAT, based on the required time commitment.

Shareholder voting
At the Annual General Meeting on 22 November 2017, the total number of shares issued with voting rights was 40,009,109. The resolution to approve
the Remuneration Report received the following votes from shareholders.

Resolution

To approve the Annual Report
on Remuneration

Votes for

Percentage of votes
cast in favour

Votes against

Percentage of votes
cast against

Votes withheld

Total votes cast

Percentage of issued
share capital voted

29,454,970

99.96%

11,495

0.04%

51,644

29,518,109

73.78%

This report has been approved by the Board of Directors of the Company and signed on behalf of the Board by:

George Adams
Chairman of the Remuneration Committee
1 October 2018

ScS Group plc Annual Report 2018

Remuneration Policy Report
Remuneration Policy overview
Total remuneration packages for the Executive Directors established at the time of the IPO will provide the basis for the structure of Director Remuneration
for the Group. Variable elements of reward including performance-based annual bonuses and long-term incentives will form a significant part of the overall
remuneration package for Executive Directors and senior management.

How the views of shareholders are taken into account
The Committee recognises that developing a dialogue with shareholders is constructive and informative in developing and applying the Remuneration
Policy. The Committee monitors the feedback received from shareholders during year and takes into account the best practice guidance issued by
institutional shareholders and their representative bodies.

The Directors’ Remuneration Policy
The Directors’ Remuneration Policy requires approval by shareholders at the 2018 AGM and, if approved, will take effect from that date. This report
has been prepared on behalf of, and has been approved by, the Board. It complies with The Large and Medium-sized Companies and Groups (Accounts
and Reports) (Amendment) Regulations 2013.

Changes from the previously approved policy
The previous policy was approved by shareholders at the 2015 AGM. The key changes between the previous policy and this new policy being put to
shareholders for approval are:

• Broadening the structure of the bonus scheme to include non-financial measures.
• The introduction of a minimum two year holding period for LTIP awards and an increase in the maximum award that can be granted from 100%

of basic salary to 150% of basic salary.

• An increase in shareholding requirements from 100% of basic salary to 200% of basic salary.
• Further minor amendments have been made either to clarify aspects of the previous policy or to reflect consequential amendments following the

material amendments described above.

Policy

Remuneration element

Purpose

Operation

Maximum

Base salary

This is the basic pay and reflects the
individual’s role, responsibilities and
contribution to the Group.

Benefits

To provide Benefits which are valued
by the individual and assist them in
carrying out their duties.

Base salaries will be
benchmarked periodically
against companies that are
both main and AIM listed,
who are of a similar size, sector
and complexity.

Salaries will generally be set at
the mid-market levels.

We will ensure that the benefits
offered are in line with the market.

Base salaries are reviewed annually with changes
typically taking effect from the beginning
of the relevant financial year. On reviews,
consideration is given by the Committee to a
range of factors, including the Group’s overall
performance, market conditions and individual
performance of Executives and the level of
salary increases given to employees across
the Group.

The Group will provide market competitive benefits,
which may periodically be reviewed. Executives
will generally be eligible to receive those benefits
on similar terms to other senior Executives.

Executives are entitled to a car allowance
or a Company car, car insurance, other running
costs and fuel, death in service life assurance,
private medical care and any other Group-wide
benefits including employee discount. Business
travel and associated hospitality are provided
in the normal course of business.

The Committee has the discretion to
add or remove benefits to remain market
competitive or to meet the needs of the
business. In addition, where the Committee
considers it appropriate to do so, additional
relocation expenses may be paid.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsDIRECTORS’ REMUNERATION REPORT CONTINUED

Remuneration element

Purpose

Operation

Maximum

Pension

Bonus

Provide a market competitive
pension contribution (or equivalent
cash allowance).

Provide an incentive linked to the
financial performance of the Group
and any other appropriate individual
or business measures.

Long-term incentives To align the directors with the
long-term performance of the
business and the returns received
by shareholders.

A total maximum value
of 20% of base salary for
existing Executive Directors.

The current annual bonus
potential for the CEO is 140%
of base salary and 100% of base
salary for the CFO and senior
managers. The threshold bonus
levels will be no more than 25%
of their respective maxima.
As the regulations require a
formal cap for a three-year
period, future bonus potential
will only increase where
appropriate against market
data and, in any event, will be
subject to an overall maximum
of 200% of salary for any
Executive Director.

The policy is to award
Executive Directors £nil-cost
share options equating to
no more than 150% of their
basic salary in respect of each
financial year.

No more than 25% of an award
can be earned for a threshold
performance.

A two-year post-vesting
holding period will be applied
to awards from 2019 onwards.

Executive Directors may take pension benefits
as a contribution to defined contribution
personal pension plans, or on reaching the
lifetime limit for pension contributions the
Executive Director can receive cash in lieu.

The Committee intends the majority of the
bonus to be based on financial measures, but
has the discretion to introduce operational,
corporate, divisional and/or individual
performance measures if appropriate
to the business.

Performance conditions, once set, will generally
remain unaltered, but the Committee has
the right in its absolute discretion to make
adjustments during any performance period
to reflect any events arising which were
unforeseen when the performance conditions
were originally set by the Committee. Bonuses
are normally paid in cash.

Awards may be made annually as options
(including £nil-cost options) or as conditional
share awards based on performance conditions.
The Committee may set performance conditions
typically over a three-year period.

Performance is normally based on earnings per
share targets, but different measures and targets
may by be used alongside or instead of earnings
per share for future awards at the discretion of
the Committee.

Performance conditions, once set, will generally
remain unaltered, but the Committee has the
right in its absolute discretion to substitute, vary
or waive the performance conditions during any
performance period in case of events arising which
were unforeseen when the performance conditions
were first set by the Committee, provided that such
substitution, variation or waiver is reasonable
and (other than in the case of a waiver)
produces a fairer measure of performance and
is not materially less difficult to satisfy.

Dividend equivalents will be made as either a cash
payment or delivery of Plan Shares in an amount
equal in value to the dividends that would have
payable on the number of vested Plan Shares
under the Award in respect of the period between
the Award Date and the date on which the Award
vested or, where the award is an option and a
holding period applies, to the date of expiry of
the holding period or exercise (if earlier).

A two-year post-vesting holding period shall apply
to LTIP awards granted to Executive Directors and
may apply (at the discretion of the Committee)
in relation to LTIP awards granted to others.

ScS Group plc Annual Report 2018

Remuneration element

Purpose

Operation

Maximum

Shareholding
guidelines

Executive Directors are expected to
maintain their minimum shareholding
levels once they have been obtained.

Employee
share plan

To encourage share ownership by
employees and participation in the
long-term success of the Group, the
Group operates an employee share
incentive plan for UK employees
which was adopted in April 2015.

The Committee will review shareholding
annually against policy. The Committee reserves
the right to alter the shareholding guidelines
during the period of the policy but without
making the guidelines any less onerous overall.

Executive Directors can participate in the
employee share incentive plan (SIP) on the
same terms as other employees of the Group
in the UK.

The minimum required level
of shareholding is 200% of base
salary of the relevant Executive.

Under the rules of the SIP
employees can purchase shares
from their pre-tax and pre-
national insurance salary through
a resident SIP trust. Although
the Company has no current
intention to do so, the Company
may also award matching shares
(in proportion to the number of
shares an employee chooses to
purchase), or to make an award
of free shares.

The maximum amount that can
be purchased, offered as a match
or awarded for free under the SIP
is subject to the published HRMC
annual limits.

Existing awards
In putting this Directors’ Remuneration Policy to an binding vote by shareholders, the Company will honour any commitments already entered with
the Executive Directors into under the previously approved policy, which are detailed in the annual Remuneration Report.

Payment of statutory entitlements and settlement of claims
The Company may pay any statutory entitlements to which an Executive Director is entitled, or settle or compromise any claims made in connection
with the termination of employment of the Executive Director where the Committee considers such claims to have a reasonable prospect of success
that it is in the best interests of the Company to do so.

Remuneration Policy and other employees
As well as the Executive Directors, other senior management will also participate in the performance based annual incentive plan to be adopted under
the Remuneration Policy above. A small group of senior management also participate in the long-term incentive plan for performance share awards.

The Company is committed to widespread share ownership. The Company employee share incentive plan (SIP), which was adopted prior to admission,
has been launched. Under the SIP, Executive Directors are eligible to participate on a consistent basis to all other employees.

In setting the Remuneration Policy going forward, the Committee will also have regard to pay structures across the broader Group. The Committee
takes into account the general base salary increase for the broader workforce when undertaking annual salary reviews for the Executive Directors,
and will consider consultation with the wider workforce should it be felt appropriate to do so.

Operation of variable pay
Annual incentive plan
The Committee will set the performance targets annually under the annual incentive plan to take account of the Company’s strategic plan and
financial performance. The performance targets are set by the Committee based on a range of factors including against the budget for the financial
year. The metrics adopted by the Committee and the weighting of them may vary in relation to the Company’s strategy each year.

The Committee sets a threshold pay-out, target and maximum pay out target under the plan.

Long-Term Incentive Plan (LTIP)
The Committee will regularly review the performance targets in relation to the LTIP to take account of the Company’s strategic plan and financial
performance. Targets will be set by the Committee at the time of the grant of each award.

The Committee will operate the scheme in accordance with the plan rules which were approved by shareholders in January 2015. Under the plan rules
the Committee has authority to vary the terms of an existing award in certain circumstances. This includes the ability to:

•
•
•

to settle awards in cash in extremis;
to make adjustments to the number of shares under option, in the event of a change in the share capital of the Company, and
to permit the early vesting of awards in the event of a change in control of the company or, if appropriate to do so, on cessation of employment
(see policy on service contracts and payments for loss of office).

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsDIRECTORS’ REMUNERATION REPORT CONTINUED

Clawback
The Annual Incentive Plan and the LTIP rules include provisions for malus and clawback within a three-year period following payment or vesting if the
Committee concludes that there has been a material mis-statement of financial results; an error has been made in assessing any performance targets;
conduct of the individual which amounts to fraud or gross misconduct; events or behaviour of the individual leading to censure of the Company
by a regulatory authority which has an impact on the reputation of the Company which justify clawback being operated, or where the Committee
discovers information from which it concludes that a bonus or award was paid or vested to a greater extent than it should have been. Malus and
clawback provisions have applied to awards made since January 2015.

Potential reward scenarios
The graphs below show an estimate of the Executive Directors’ remuneration package as it will be implemented for 2019. Share price movements and
dividend accrual have been excluded from the indicative scenarios below.

Assumptions
• The minimum scenario reflects fixed remuneration only which is base salary, pension and benefits.
• The on target scenario reflects the fixed remuneration plus 50% of the maximum annual bonus under the annual incentive plan, and 25% vesting

under the LTIP being the threshold level (assuming an award of 150% of salary to Executive Directors under the LTIP).

• The maximum scenario reflects fixed remuneration plus 100% of the maximum annual bonus under the annual incentive plan which is 140% of

base salary for the CEO and 100% of base salary for the CFO and 150% vesting under the LTIP (assuming an award of 150% of salary under the LTIP).

£’000

1,500

1,200

900

600

300

1,275,436

36%

34%

30%

716,986
16%
30%

54%

388,036

100%

Maximum

Target

Minimum

£’000

1,200

1,000

800

600

400

200

905,818
40%

26%

34%

515,818
17.5%
23.5%
59%

305,818
100%

Maximum

Target

Minimum

David Knight, Chief Executive Oﬃcer

Chris Muir, Chief Financial Oﬃcer

Fixed

Variable

LTIP

Discretions retained by the Committee in operating variable pay schemes
The Committee operates the Group’s various incentive plans according to their respective rules and (in the case of the Share Incentive Plan) in accordance
with relevant legislation and HMRC guidance. In order to ensure efficient administration of these plans, certain operational discretions are reserved to the
Committee. These include:

• determining who may participate in the plans;
• determining the timing of grants of awards and/or payments under the plans;
• determining the quantum of any awards and/or payments (within the limits set out in the policy table above);
•
in exceptional circumstances, determining that a share-based award shall be settled (in full or in part) in cash;
• determining the performance measures and targets applicable to an award (in accordance with the statements made in the policy table above);
• where a participant ceases to be employed by the Group or relocates abroad, determining whether ‘good leaver’ status shall apply;
• determining the extent of vesting of an award based on assessment of the performance conditions, including discretion as to the basis on which

performance is to be measured if an award vests in advance of normal timetable (on cessation of employment as a ‘good leaver’ or on the
occurrence of corporate events);

• whether, and to what extent, pro ration shall apply in the event of cessation of employment as a ‘good leaver’ or on the occurrence of corporate events;
• whether malus and/or clawback shall be applied to any award and, if so, the extent to which they shall apply, and
• making appropriate adjustments to awards on account of certain events, such as major changes in the Group’s capital structure.

ScS Group plc Annual Report 2018

Recruitment and promotions
The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s Remuneration Policy at the time
of the appointment.

Additionally on appointment of any new Executive Director (whether by external recruitment of internal promotion) the Remuneration Policy will
permit the following:

• The UK regulations do not require that caps on fixed pay apply to a new recruit and the Committee reserves the right to set fixed pay at such levels
as it considers necessary although, in practice, it envisages abiding by the caps set out in this policy. Variable pay will be capped at the limits set out
in the policy for existing directors.
If a new Executive Director’s salary is set on appointment below the median market rates, phased increases (as a percentage of salary) above those
granted generally to other employees may be awarded subject to the individual’s performance and development.

•

• On pensions, the intention is to limit the pension provision (provided either through a company contribution to a defined contribution scheme
or paid as a cash allowance in lieu of pension) to 12.5% of salary to all new Executive Directors and members of the senior management team.
However, the Committee reserves the discretion to provide a pension provision in excess of this and up to a maximum of 20% of salary if necessary
to do so in a recruitment situation.

• The Company may compensate a new Executive Director for amounts forgone from the individual’s former employer in addition to ongoing

remuneration provided under the policy (as permitted under Listing Rules) taking account of the amount forfeited, the extent of any performance
conditions, the nature of the award and the time period for vesting.

• The annual incentive plan would operate in accordance with its terms pro-rated for the period of employment, and depending on the appointment

timing, different performance targets might be set as the Committee considers appropriate.

• On an internal appointment, any variable pay element awarded in respect of the individual’s former role would be allowed to pay out according to
its terms, with any relevant adjustment to take account of the appointment. Any other ongoing remuneration obligations existing prior to the
appointment would also continue.

• On any appointment, the Committee may agree that the Company will meet the appropriate relocation expenses.

Service contract and payments for loss of office
Main provisions on termination
The service contract for the CEO and CFO is indefinite but terminable either by the Company or the Executive Director on 12 months’ notice. The service
contract for the CEO is dated 19 December 2014 and for the CFO 8 January 2016.

An Executive Directors’ service contract can also be terminated without notice or payment of compensation except for pay accrued up to the termination
date on the occurrence of certain events such as gross misconduct.

Payment in lieu of notice equal to the base salary only for the unexpired period of notice can be paid under the Executive Directors’ Service agreements.

Ordinarily, an Executive Director shall not ordinarily be entitled to receive any benefits or allowances following their cessation of employment.
However, the Committee may in exceptional circumstances allow an Executive Director to continue to receive appropriate benefits or allowances
(such as reasonable outplacement or legal fees) for a limited period following cessation.

There are no enhanced provisions on a change of control under the Executive Directors’ service contracts. Should a change of control event occur then
awards under the bonus and long term incentive plans shall become payable as soon as practicable after the event date. The awards will be pro-rated
to reflect the extent to which the relevant performance targets have been met at the date of the relevant event, and on a time-apportioned basis
although the Committee has discretion to disapply time-apportionment if it considers it appropriate to do so.

Any new contracts will be on similar terms.

The service contracts of the Executive Directors are available for inspection at the registered office of the Company.

Annual bonus on termination
There is no contractual entitlement to annual bonus on termination or if an Executive Director is under notice. Under the annual incentive plan, the
Committee has absolute discretion to permit a bonus to be paid to a leaver or under notice based on the full or part-year performance, subject to
consideration by the Committee of the reasons for the individual leaving. A full or pro-rata time based bonus may be awarded, and this may be paid
either at or before the normal payment date.

Performance share plans on termination
Share-based awards made under the Company’s share plans are governed by the relevant plan rules. Under the rules of the LTIP, unvested awards
shall ordinarily lapse on the individual giving or being given notice of termination of employment, except in certain prescribed ‘good leaver’ scenarios
or unless the Committee in its discretion permits an award to vest on such terms as it may specify in its absolute discretion.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsDIRECTORS’ REMUNERATION REPORT CONTINUED

In determining the extent of any vesting, the Committee will take into account the achievement of any applicable performance targets. A pro-rata
reduction would normally be applied on a time-apportioned basis, although the Committee has discretion to disapply this requirement if it considers
it appropriate to do so. Early vesting of outstanding awards may be permitted at the discretion of the Committee.

Awards which may have vested before giving or receiving notice of termination of employment remain exercisable for a period of six months after
leaving or (if later) the expiry of any holding period which the award was subject to. The Committee has the discretion to extend this period.

Chairman and Non-Executive Directors
Fees
The level and structure of fees for the Non-Executive Directors was set by the Board from admission. The fees of the Non-Executive Directors are set
by the Board taking account of the Chairmanship of Board Committees and the time and responsibility of the roles of each of them. The fees are paid
in cash. The Committee has responsibility for determining fees paid to the Chairman of the Board. All fees are subject to the aggregate fee cap for
Directors in the articles of association, which is currently £400,000 per annum.

Details of the fees paid to the Non-Executive Directors are set out in the Remuneration Report. The Chairman and the Non-Executive Directors are
entitled to be reimbursed of all expenses reasonably incurred by them in the performance of their duties. The Chairman and Non-Executive Directors
do not participate in any bonus or share plans of the Company.

The Non-Executive Directors do not have service contracts. They are appointed for an initial three year period subject to being re-elected by members annually.

Remuneration element

Purpose

Operation

Maximum

Non-Executive
Directors fees

Helps recruit and retain high quality,
experienced individuals.

Reflects time commitment and role.

The aggregate amount of Directors’
Fees is limited by the Company’s
Articles of Association.

The level and structure of fees was set
by the Board at admission. The fees
consist of an annual basic fee plus
additional fees paid for the Chairmanship
of Board Committees. Limited benefits
relating to travel and accommodation
may be provided in relation to the
performance of any Director’s duties.

Non-Executive Directors fees are set by
the Executive Directors with reference
to external data on fee levels in similar
businesses, having taken account of the
responsibilities of individual Directors
and their expected annual time
commitment.

Letters of appointment
All of the Non-Executive Directors of the Company have letters of appointment dated 22 October 2014 for an initial period of three years and are
subject to three months’ notice of termination by either side at any time and subject to annual re appointment as a Director by the shareholders,
save for George Adams whose letter of appointment is dated 9 July 2015. Alan Smith and Ron McMillan were reappointed for a further term of three
years commencing 22 October 2017. George Adams was re-appointed for a further term of 3 years commencing 9 July 2018. The appointment letters
provide that no other compensation is payable on termination. Paul Daccus is appointed under the terms of a Relationship Agreement with Sun
Capital Partners Management V, LLC dated 22 October 2014.

Insurance
All of the members of the Board have the benefit of Directors and Officers liability Insurance which gives them cover for legal action which may arise
against them personally.

ScS Group plc Annual Report 2018

DIRECTORS’ REPORT

Activities and results
The Directors have pleasure in presenting their Annual Report and audited consolidated financial statements for the year ended 28 July 2018. Some
of the information required to be part of the Directors’ Report can be found elsewhere in this document as detailed in the following paragraphs and
is incorporated into this report by cross-reference.

ScS is one of the UK’s leading furniture and flooring retailers, operating from 101 ScS stores principally located in modern retail park locations and
27 House of Fraser concessions across the country.

Management report
The Directors’ Report, together with the Strategic Report, set out on pages 1 to 41, form part of the Management Report for the purposes of
DTR 4.1.5R.

Strategic report
The strategic report sets out a review of the business of the Group during the year ended 28 July 2018 and the position of the Group at the end of
that period to enable shareholders to assess how the Directors have performed their duty under section 172 of the Companies Act. The review also
describes the principal risks and uncertainties facing the Group and provides a fair review of the Group’s business at the end of the financial year and
the Group’s future developments.

Risk management
The Board oversees the development of processes to manage risks appropriately. The Executive Directors and Operating Board Directors implement
and oversee risk management processes and report to the Board on them. The Board also identifies and reviews key business risks. Further details can
be found on pages 28 to 33.

UK Corporate Governance Code
The corporate governance statement setting out how the Company complies with the UK Corporate Governance Code 2016 and which includes
a description of the main features of its Internal Control and risk management arrangements in relation to the financial reporting process is set out
on pages 44 to 47, which form part of this report.

Corporate social responsibility (CSR)
Our CSR activity is set out in the Sustainability, People and Community report on pages 35 to 41, which form part of this report.

Results and dividend
The financial statements set out the Group’s results for the year ended 28 July 2018 and are contained in pages 69 to 90.

The Group’s profit after tax for the financial year ended 28 July 2018 of £10.7m (2017: £9.4m) is reported in the consolidated statement of
comprehensive income on page 74.

The Board is recommending a final dividend of 10.90p per ordinary share, which together with the interim dividend of 5.30p per ordinary share paid
in May 2018, results in a full-year dividend of 16.20p. This dividend, if approved, will be paid on 26 November 2018 to shareholders on the register on
2 November 2018. The ex-dividend date is 1 November 2018.

Movements in reserves are shown in the Statement of Changes in Equity on page 75.

Share capital
Details of the Group’s issued share capital are shown in note 17 on page 87.

The Group has one class of ordinary shares which carry no fixed income. Each share carries the right to one vote at general meetings of the Group.
The ordinary shares are listed on the Official List and are traded on the London Stock Exchange. No person has any special rights over the Group’s
share capital and all issued shares are fully paid.

Details of outstanding employee share options and the operation of relevant schemes are shown in note 19 on page 88 and 89.

Going concern
Having considered the Group’s current trading and cash flow generation, including severe but plausible stress testing scenarios, the Directors have
concluded that it is appropriate to prepare the Group financial statements on a going concern basis.

Events since the balance sheet date
On 10 August 2018, House of Fraser (Stores) Limited, the entity with which the Group had agreement to operate the House of Fraser concessions with,
entered into administration. The business and assets were subsequently bought by Sports Direct International plc and, whilst we continue to trade from
all 27 concessions, order performance has continued to be disappointing. We are currently in discussions with the new owners with a view to agreeing
a mutually beneficial arrangement, which will allow us to continue trading in a profitable manner in as many of the current concessions as possible.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsDIRECTORS’ REPORT CONTINUED

Directors and their interests
Details of the Directors of the Company as at 28 July 2018 are shown on pages 36 and 37 and their interests in shares and share awards made to them
under share incentive schemes in the Company are shown in the Directors’ Remuneration Report on page 50, which form part of this report. There
have been no changes in the Board of the Company since that date.

The Directors who served throughout the year in review were as follows:

Alan Smith
George Adams
Paul Daccus
Ron McMillan
David Knight
Chris Muir

Non-Executive Chairman
Non-Executive Director
Non-Executive Director
Non-Executive Director
Chief Executive Officer
Chief Financial Officer

Directors’ indemnities
As permitted by the Company’s Articles of Association, the Directors have the benefit of an indemnity which is applicable in certain circumstances.
The Company also purchased and maintained throughout the financial year Directors’ and Officers’ liability insurance.

Employee involvement
The Group’s policy is to actively involve its employees in the business and to ensure that matters of concern to them, including the aims and objectives
and the financial and economic factors which impact thereon, are communicated in an open and regular manner. This is achieved principally through
three sales conferences held at appropriate times during the year supported by regular senior management meetings and briefings, both on a national
and regional basis, and a comprehensive regular newsletter which is made available to all employees.

The Group is committed to providing equality of opportunity to employees and potential employees. This applies to recruitment, training, career
development and promotion for all employees, regardless of physical ability, gender, sexual orientation, religion, age or ethnic origin. Full and fair
consideration is given to employment applications by disabled persons wherever suitable opportunities exist, having regard to their particular
aptitudes and abilities. Training and career development support is provided where appropriate. Should an employee become disabled, efforts
are made to ensure their continued employment with the Group, with retraining being provided if necessary.

Charitable and political donations
During the year, the Group made charitable donations, including funds raised by employees, of £20,000 (2017: £57,000). No political donations have
been made (2017: £nil).

Employee Benefit Trust
The Group established the ScS Group plc Employee Benefit Trust (EBT) with Sanne Fiduciary Services Limited as the Trustees in Jersey in January 2015.
The purpose of the EBT continues to be to hold shares in trust in connection with the Group’s share incentive schemes.

The EBT has waived any dividends which it may be entitled to receive in respect of ordinary shares held by it, and has also agreed to waive voting rights
to such shares.

Major interest in shares
As at 11 September 2018 the following shareholders have notified the Company of their interest in 3% or more of the Company’s issued share capital:

Parlour Product Holdings (Lux Sarl)*
Artemis Investment Management
Milton Asset Management
Mr David Knight
Columbia Threadneedle Investments

* A Sun Capital Partners company.

Number of
shares held

% of issued
share capital

16,103,024
4,260,305
1,824,816
1,476,958
1,200,000

40.25
10.65
4.56
3.69
3.00

Annual General Meeting
A notice convening the Company’s Annual General Meeting on 21 November 2018 will be issued to shareholders separately.

ScS Group plc Annual Report 2018

Auditors
The Group’s independent auditors, PricewaterhouseCoopers LLP (PwC), have indicated their willingness to continue in office and the Audit Committee
has recommended the PwC remain in office. A resolution to re-appoint PwC as auditors will be put to the members at the Annual General Meeting.

So far as the Directors are aware, there is no relevant audit information of which the auditor is unaware. The Directors have taken all steps that they
ought to have to make themselves aware of any relevant information and to establish that the auditors are aware of that information.

By order of the Board

Chris Muir
Company Secretary
1 October 2018

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsSTATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group
financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Company financial
statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101
‘Reduced Disclosure Framework’, and applicable law). Under company law the Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for
that period. In preparing the financial statements, the Directors are required to:

• Select suitable accounting policies and then apply them consistently;
• State whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom

Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed
and explained in the financial statements;

• Make judgements and accounting estimates that are reasonable and prudent, and
• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial
statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4
of the IAS Regulation.

The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors consider that the Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group and Company’s performance, business model and strategy.

Each of the Directors, whose names and functions are listed in the Board of Directors section on pages 42 and 43 confirm that, to the best of
their knowledge:

• The Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice

(United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law), give a true and fair view of
the assets, liabilities, financial position and profit of the Company;

• The Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view

of the assets, liabilities, financial position and profit of the Group, and

• The Directors’ Report includes a fair review of the development and performance of the business and the position of the Group and Company,

together with a description of the principal risks and uncertainties that it faces.

By order of the Board

Chris Muir
Company Secretary
1 October 2018

ScS Group plc Annual Report 2018

INDEPENDENT AUDITORS’ REPORT
TO THE MEMBERS OF SCS GROUP PLC

Report on the audit of the financial statements
Opinion
In our opinion:

•

• ScS Group plc’s group financial statements and company financial statements (the “financial statements”) give a true and fair view of the state
of the group’s and of the company’s affairs as at 28 July 2018 and of the group’s profit and the group’s and the company’s cash flows for the year
then ended;
the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted
by the European Union;
the company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law), and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation.

•

We have audited the financial statements, included within the Annual Report, which comprise: the Consolidated and Company Statements of
Financial Position as at 28 July 2018; the Consolidated Statement of Comprehensive Income, the Consolidated and Company Statements of Cash
Flows, and the Consolidated and Company Statements of Changes in Equity for the year then ended; and the notes to the financial statements,
which include a description of the significant accounting policies.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under
ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group
or the company.

Other than those disclosed in note 4 to the financial statements, we have provided no non-audit services to the group or the company in the period
from 30 July 2017 to 28 July 2018.

Our audit approach
Overview

Materiality

Audit scope

Key audit
matters

• Overall group materiality: £1,180,000 (2017: £1,165,000), based on 0.35% of total revenues.
• Overall company materiality: £700,000 (2017: £700,000), based on 1% of total assets.

• We performed an audit of the complete financial information of the Group’s trading entity A Share & Sons

Limited as well as its three holding companies.

• The timing of the audits for the statutory accounts for the Group, Company and the subsidiary companies took
place at the same point in time and, as such, as at the date of this opinion we have audited all material balances
across the Group.

• Completeness and accuracy of stock provisions.
• Volume rebates from suppliers.
•

Impairment of assets in relation to loss making stores.

The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we
looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain.

We gained an understanding of the legal and regulatory framework applicable to the group and the industry in which it operates, and considered the
risk of acts by the group which were contrary to applicable laws and regulations, including fraud.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsINDEPENDENT AUDITORS’ REPORT
TO THE MEMBERS OF SCS GROUP PLC CONTINUED

We designed audit procedures at group and significant component level to respond to the risk, recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example,
forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations that could give rise to a material misstatement in
the group and company financial statements, including, but not limited to, the Companies Act 2006, the Listing Rules and UK tax legislation. Our tests
included, but were not limited to, the review of financial statement disclosures to underlying supporting documentation, review of correspondence
with legal advisors, enquiries of management and review of internal audit reports in so far as they related to the financial statements. There are inherent
limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions
reflected in the financial statements, the less likely we would become aware of it.

We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of management
override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of
material misstatement due to fraud.

Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors,
including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit
of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not
a complete list of all risks identified by our audit.

Key audit matter
Completeness and accuracy of stock provisions
Refer to pages 49 (Audit Committee Report).

The Group holds £21.9m of inventory at the year end. The nature of the
business is such that stock held at the stores to display certain ranges is
likely to become aged or sell at a lower price, which could be lower than
its cost. As such there is a material element of inventory that has a risk
that this may be held at a cost higher than its net realisable value.

In addition to this, the uncertainty in relation to the future viability of House
of Fraser gives rise to a risk that stock held in House of Fraser concessions
may also be sold at a discounted value and require a further provision.

We recognise that there is judgement in arriving at any potential value of
provision for these items with management needing to take into account
future saleability of the item, potential proceeds and underlying cost.
As such, the judgements involved were an area of focus.

Volume rebates from suppliers
Refer to pages 49 (Audit Committee Report).

Volume rebates are negotiated by ScS Group plc as part of its dealings
in the normal course of business with suppliers. Judgement arises when
agreements are not co-terminus with the Group’s year end and contain
spending thresholds or ‘hurdle rates’ that may change the rebate
percentage offered for all spend in the period. In mitigation, hurdle rates
are not included in all contracts, there is quarterly settlement of rebates
and the vast majority of non-coterminous agreements exceeded the
hurdle rate at the year end.

How our audit addressed the key audit matter
The integrity of the aged stock listing was tested, with the inventory type
and stock ageing being vouched to invoice on a sample basis. There were
no issues noted with the underlying data used in calculating the provision.

To check whether stock items were being sold at less than book value,
a sample of stock items sold in the year was selected and the book
value compared to proceeds and any associated provision. No material
exceptions were noted and we concurred with the provision held by
management for aged stock items.

Where a calculation was involved, management’s calculation of the provision
was reperformed and alternative calculation methodologies considered.
Our results showed that management’s calculations were reasonable.

To check the provision against House of Fraser stock was reasonable, we
obtained evidence of sales from a recent store closure. We then challenged
the judgements made by management in arriving at the level of provision
against House of Fraser stock. Our results showed that management’s
judgement was reasonable.

We sent confirmation requests to a sample of suppliers, asking them to
confirm the rebate terms and percentage included in the contract as well
as the overall spend in the year. Where a response was not received, we
agreed the rebate terms and percentage to the underlying contract. For
the total supplier spend during the year, we tested on a sample basis to
invoice and settlement. We then agreed that the rebate was calculated
in line with the rebate agreement.

We tested on a sample basis amounts received through the year to bank
with no exceptions noted.

The total rebate earned in the year was recalculated using the contracted
rates and spend in the year. Our calculation showed the rebate amounts
were materially correct.

ScS Group plc Annual Report 2018

Key audit matter

How our audit addressed the key audit matter

Impairment of assets in relation to loss making stores
Refer to pages 49 (Audit Committee Report).

ScS Group plc has 101 stores at year end. The nature of the business is
such that, when costs have been allocated on a store by store basis, some
stores are considered to be loss making. This gives rise to a risk that fixed
assets on a store by store level may not be recoverable and therefore an
impairment may need to be charged.

We recognise that there is judgement in arriving at any potential
impairment of assets with management needing to take into account
lease lengths, future forecasts, remaining net book value and allocation
of costs. As such, the judgements involved were an area of focus.

We obtained the impairment workings from management and checked
their arithmetical accuracy and agreed them to the underlying trial balance.
We then tested on a sample basis the store by store asset allocation
vouching to invoice. We also checked costs had been allocated to stores on
an accurate and appropriate basis through sampling to invoice. We agreed
that central costs had been allocated on a reasonable basis to the underlying
stores with no exceptions noted. There were no issues noted with the
underlying data used in calculating the impairment provision.

Management’s assessment of which stores were at risk of impairment
was based on the forecasted future performance of individual stores in
the group’s portfolio. In order to assess the reasonableness of this we
considered the robustness of the groups forecasting process and their
underlying historic accuracy. Managements forecasting was considered
to be suitably robust and accurate.

For the stores most at risk, we reviewed the future plans to return the
stores to profitability. We concluded that the level of impairment in the
store portfolio provided by management was materially correct.

We determined that there were no key audit matters applicable to the company to communicate in our report.

How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate.

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we
looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls,
including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.

Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial
statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Overall materiality

How we determined it

Rationale for benchmark applied

Group financial statements

£1,180,000 (2017: £1,165,000).

0.35% of total revenues.

Company financial statements

£700,000 (2017: £700,000).

1% of total assets.

Based on our professional judgement and our
knowledge of the client our materiality was
based on 0.35% (2017: 0.35%) of revenue giving
an overall materiality of £1,180,000 (2017:
£1,165,000). We used 0.35% of revenue as the
benchmark for our materiality calculations due
to the low margin nature of the business and
our judgement around what would affect the
decisions of the members.

Based on our professional judgement and our
knowledge of the client our materiality was
based on 1.0% (2017: 1.0%) of total assets
giving an overall materiality of £700,000 (2017:
£700,000). We used 1.0% of total assets as the
benchmark for our materiality calculations due
to the entity being a holding company with
limited activity and our judgement around what
would affect the decisions of the members.

For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. Our only component in
scope, A Share and Sons Limited was allocated £1,165,000. We agreed with the Audit Committee that we would report to them misstatements identified
during our audit above £59,000 (Group audit) (2017: £58,000) and £35,000 (company audit) (2017: £35,000) as well as misstatements below those amounts
that, in our view, warranted reporting for qualitative reasons.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsINDEPENDENT AUDITORS’ REPORT
TO THE MEMBERS OF SCS GROUP PLC CONTINUED

Going concern
In accordance with ISAs (UK) we report as follows:

Reporting obligation

Outcome

We are required to report if we have anything material to add or draw
attention to in respect of the directors’ statement in the financial
statements about whether the directors considered it appropriate to adopt
the going concern basis of accounting in preparing the financial statements
and the directors’ identification of any material uncertainties to the group’s
and the company’s ability to continue as a going concern over a period of at
least twelve months from the date of approval of the financial statements.

We are required to report if the directors’ statement relating to
Going Concern in accordance with Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.

We have nothing material to add or to draw attention to. However,
because not all future events or conditions can be predicted, this
statement is not a guarantee as to the group’s and company’s ability
to continue as a going concern.

We have nothing to report.

Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon.
The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly,
we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material
misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have
been included.

Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and the
Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK)
unless otherwise stated).

Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the
year ended 28 July 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06).

In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify
any material misstatements in the Strategic Report and Directors’ Report. (CA06).

The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:

• The directors’ confirmation on page 50 of the Annual Report that they have carried out a robust assessment of the principal risks facing the group,

including those that would threaten its business model, future performance, solvency or liquidity.

• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The directors’ explanation on page 34 of the Annual Report as to how they have assessed the prospects of the group, over what period they have

done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group
will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.

We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal
risks facing the group and statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit and
only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment
with the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering whether the statements are consistent with the
knowledge and understanding of the group and company and their environment obtained in the course of the audit. (Listing Rules).

ScS Group plc Annual Report 2018

Other code provisions
We have nothing to report in respect of our responsibility to report when:

• The statement given by the directors, on page 65, that they consider the Annual Report taken as a whole to be fair, balanced and understandable,
and provides the information necessary for the members to assess the group’s and company’s position and performance, business model and
strategy is materially inconsistent with our knowledge of the group and company obtained in the course of performing our audit.

• The section of the Annual Report on page 46 describing the work of the Audit Committee does not appropriately address matters communicated

by us to the Audit Committee.

• The directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from a relevant provision of

the Code specified, under the Listing Rules, for review by the auditors.

Directors’ remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06).

Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ Responsibilities set out on pages 44 and 45, the directors are responsible for the preparation
of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are
also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate
the group or the company or to cease operations, or have no realistic alternative but to do so.

Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud
or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.

Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16
of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:

• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not

visited by us; or

• certain disclosures of directors’ remuneration specified by law are not made; or
•

the company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting
records and returns.

We have no exceptions to report arising from this responsibility.

Appointment
Following the recommendation of the audit committee, we were appointed by the directors on 3 November 2009 to audit the financial statements for
the year ended 1 August 2009 and subsequent financial periods. The period of total uninterrupted engagement is 10 years, covering the years ended
1 August 2009 to 28 July 2018.

Jonathan Greenaway (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Newcastle upon Tyne
1 October 2018

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 JULY 2018

Gross sales

Revenue
Cost of sales

Gross profit
Distribution costs
Administrative expenses

Operating profit

Finance costs
Finance income

Net finance costs

Profit before taxation
Taxation

Profit for the year

Attributable to:
Owners of the parent
Profit and total comprehensive income for the year

Earnings per share (expressed in pence per share):
Basic earnings per share

Diluted

All results arise from continuing operations. There are no other sources of comprehensive income.

Note

6
7

2018
£’000

352,317

337,313
(179,975)

157,338
(17,873)
(126,223)

13,242

(228)
205

(23)

13,219
(2,541)

10,678

26.8p

26.0p

2017
£’000

349,502

332,965
(179,224)

153,741
(16,503)
(125,249)

11,989

(96)
70

(26)

11,963
(2,561)

9,402

23.5p

22.9p

ScS Group plc Annual Report 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 JULY 2018

At 31 July 2016
Total comprehensive income
Share-based payments
Dividend paid

At 29 July 2017

At 30 July 2017
Total comprehensive income
Share-based payments
Purchase of own shares into

treasury (note 27)

Dividend paid

At 28 July 2018

Share
capital
£’000

Share
premium
£’000

Capital
redemption
reserve
£’000

40
–
–
–

40
–
–

–
–

16
–
–
–

16
–
–

–
–

13
–
–
–

13
–
–

–
–

Merger
reserve
£’000

25,511
–
–
–

25,511

25,511
–
–

–
–

25,511

Treasury
shares
£’000

–
–
–
–

–

–
–
–

(268)
–

(268)

Retained
earnings
£’000

4,036
9,402
154
(5,893)

7,699

7,699
10,678
542

(897)
(6,032)

11,990

Total
equity
£’000

29,616
9,402
154
(5,893)

33,279

33,279
10,678
542

(1,165)
(6,032)

37,302

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsCONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 28 JULY 2018

Non-current assets
Intangible assets
Property, plant and equipment

Total non-current assets

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total current assets

Total assets

Current liabilities
Current income tax liabilities
Trade and other payables

Total current liabilities

Non-current liabilities
Trade and other payables
Deferred tax liability

Total non-current liabilities

Total liabilities

Capital and reserves attributable to the owners of the parent
Share capital
Share premium
Capital redemption reserve
Treasury reserve
Merger reserve
Retained earnings

Equity attributable to the owners of the parent

Total equity

Total equity and liabilities

Note

2018
£’000

2017
£’000

10
11

12
13

15
16

17
17

1,151
21,450

22,601

21,865
8,536
48,162

78,563

101,164

1,650
54,566

56,216

7,001
645

7,646

63,862

40
16
13
(268)
25,511
11,990

37,302

101,164

1,077
23,878

24,955

22,084
9,699
40,126

71,909

96,864

2,121
53,794

55,915

7,140
530

7,670

63,585

40
16
13
–
25,511
7,699

33,279

96,864

The notes on pages 78 to 90 are an integral part of these consolidated financial statements.

The financial statements on pages 74 to 90 were approved by the Board and authorised for issue on 1 October 2018 and signed on its behalf by:

David Knight
Chief Executive Officer

ScS Group plc: Registered number 03263435

ScS Group plc Annual Report 2018

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 28 JULY 2018

Cash flows from operating activities
Profit before taxation
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Share-based payments
Finance costs
Finance income

Changes in working capital:
Decrease in inventories
Decrease/(increase) in trade and other receivables
Increase in trade and other payables

Cash generated from operating activities
Interest paid
Income taxes paid

Net cash flow generated from operating activities

Cash flows used in investing activities
Purchase of property, plant and equipment
Payments to acquire intangible assets
Interest received

Net cash flow used in investing activities

Cash flows used in financing activities
Dividends paid
Purchase of own shares

Net cash flow used in financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Note

11
10
19
6
7

12
13

11
10
7

2018
£’000

13,219

5,035
518
542
228
(205)

19,337

219
1,163
314

21,033
(228)
(2,896)

17,909

(2,306)
(575)
205

(2,676)

(6,032)
(1,165)

(7,197)

8,036
40,126

48,162

2017
£’000

11,963

4,806
599
154
96
(70)

17,548

1,104
(685)
12,123

30,090
(96)
(1,220)

28,774

(4,728)
(476)
70

(5,134)

(5,893)
–

(5,893)

17,747
22,379

40,126

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. General information
ScS Group plc (the ‘Company’) is a company limited by shares incorporated and domiciled in England, within the UK (Company registration number
03263435). The address of the registered office is 45-49 Villiers Street, Sunderland, SR1 1HA. The Company’s principal activity is to act as a holding
company for its subsidiaries. The Company and its subsidiaries’ (the ‘Group’) principal activity is the provision of furniture and flooring, trading under
the names ScS, the Sofa Carpet Specialists, and ‘House of Fraser Made to Order Sofas, Furniture and Flooring’. The shares in the Company were
admitted to the Official List of the London Stock Exchange (LSE) on 28 January 2015.

2. Accounting policies
Basis of preparation
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European
Union (IFRS) as they apply to the financial statements of the Group for the year ended 28 July 2018 and applied in accordance with the Companies
Act 2006 as applicable to companies using IFRS and interpretations issued by the IFRS Interpretations Committee (IFRS IC) and under the historic
cost convention. The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended
28 July 2018. These policies have been consistently applied to all of the years presented, unless otherwise stated.

The Group financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£’000) except when otherwise indicated.

Going concern
The Group generates strong cash flows, reflecting the negative working capital requirements of the business model. In addition, the Group has a
committed £12.0m revolving credit facility in place, which was extended during the year to November 2021. The Group’s forecasts and projections
show that the Group has adequate resources to continue to operational existence for the foreseeable future.

Having considered the Group’s current trading and cash flow generation, including severe but plausible stress testing scenarios, the Directors have
concluded that it is appropriate to prepare the Group financial statements on a going concern basis.

New standards, amendments and interpretations
Standards, amendments and interpretations effective and adopted by the Group:

A number of new standards and interpretations and amendments to existing standards have been issued but not are yet effective nor adopted by
the EU, including IFRS 15 ‘Revenue from Contracts with Customers’, IFRS 9 ‘Financial Instruments’ and IFRS 16 ‘Leases’, and have not been applied in
preparing these consolidated financial statements. Management have completed a full assessment of the impact of each of these standards, and of
these, only IFRS 16 is expected to have a material impact to the Group.

•

IFRS 16 ‘Leases’ will be effective for the year ending 25 July 2020 onwards and the impact on the financial statements will be significant. IFRS 16 requires
lessees to recognise a lease liability reflecting future lease payments and a right-of-use asset for all lease contracts. Therefore, the substantial majority
of the Group’s operating lease commitments (£166,540,000 on an undiscounted basis, as shown in note 22) would be brought on to the balance sheet.
Depreciation of the right of use asset will be recognised in the income statement on a straight-line basis, with interest recognised on the lease liability.
This will result in a change to the profile of the net charge taken to the income statement over the life of the lease. Depreciation and interest charges
will replace the lease costs currently charged to the income statement and consequently there will be a significant adjustment to the quoted
unadjusted Group EBITDA. There will be no impact on cash flows, although the presentation of the cash flow statement will change significantly.
Management has begun to model and quantify the expected impact using the current lease portfolio and presented initial thoughts on the expected
impact to the Board, however the impact will greatly depend on the facts and circumstances at the time of adoption and upon transition choices
adopted. It is therefore not yet practicable to provide a reliable estimate of the financial impact on the Group’s consolidated results.

Basis of consolidation
The Group financial statements consolidate the financial statements of ScS Group PLC and the entities it controls (its subsidiaries) drawn up to within
seven days of 31 July each year.

Subsidiaries
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial
and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable
or convertible are taken into account. Control is generally accompanied by a shareholding of more than one-half of the voting rights. The financial
information of subsidiaries is included in the consolidated financial information from the date that control commences until the date that control ceases.

ScS Group plc Annual Report 2018

2. Accounting policies continued
Transactions eliminated on consolidation
Intra-Group balances, and any gains and losses or income and expenses arising from intra-Group transactions, are eliminated in preparing the
consolidated financial information. Gains arising from transactions with jointly controlled entities are eliminated to the extent of the Group’s
interest in the entity. Losses are eliminated in the same way as gains, but only to the extent that there is no evidence of impairment.

Segmental reporting
Segments are reported in a manner consistent with the internal reporting to the Board of Directors (see note 3 – Segment information on page 82).

Revenue
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net
of discounts, charges associated with interest-free credit sales, returns and value added taxes. The Group recognises revenue when the amount of
revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when the significant risks and rewards
of ownership of the goods and warranty contracts have passed to the buyer. This is deemed to be when the goods and any associated warranty
contracts have been delivered to the customer. Warranty services, once sold, are subsequently provided by third parties.

Intangible assets
Intangible assets purchased separately are capitalised at cost and amortised on a straight-line basis over their useful economic life. The useful
economic lives used are as follows:

Computer software – 20-33% straight-line per annum.

The carrying value of intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not
be recoverable.

Property, plant and equipment
Property, plant and equipment are stated at historic purchase cost less accumulated depreciation and accumulated impairment losses. Cost includes the
original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is provided
on all tangible fixed assets, at rates calculated to write off the cost, less estimated residual value, of the tangible fixed assets over their anticipated useful
lives at the rates shown below:

Fixtures and fittings
Computer equipment
Leasehold property improvements straight-line per annum
Freehold land and buildings

10-20% straight-line per annum
20-33% straight-line per annum
The shorter of the term of the lease or 2% straight-line per annum
2% straight-line per annum

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying
value may not be recoverable.

Inventories
Inventories are stated at the lower of cost and net realisable value and consist of finished goods held for resale. Where necessary provision is made for
obsolete, slow-moving and defective stocks. Cost comprises the purchase price of goods and other directly attributable costs incurred in bringing the
product to its present location and condition. Net realisable value is the estimated selling price less any further costs to be incurred to disposal.

Trade receivables
Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. If collection is expected
in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as
non-current assets.

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision
for impairment.

Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable
are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsStrategic ReportCorporate GovernanceFinancial Statements2. Accounting policies continued
Payments received on account
The Group operates a negative working capital model whereby customers pay a deposit at the point of order and, unless the order is to be financed
using consumer credit, settle outstanding balances before delivery. Deposits taken from customers are shown as payments received on account within
current liabilities until the goods or services are delivered.

Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference
between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings
using the effective interest method.

Cash and cash equivalents
In the consolidated statement of cash flows, cash and cash equivalents includes cash in hand and deposits held at call with banks.

Treasury shares
The Employee Benefit Trust (EBT) provides for the issue of shares to Group employees, principally under share option schemes. Shares in the Company
held by the EBT are included in the balance sheet as treasury shares at cost, including any directly attributable incremental costs. Subsequent consideration
received for the sale of such shares is also recognised in equity, with any difference between the sale proceeds and the original cost being taken to retained
earnings. No gain or loss is recognised in the financial statements on transactions in treasury shares.

The number of such shares is also deducted from the number of shares in issue when calculating the earnings per share.

Share capital
Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Pre-opening and launch costs
Pre-opening and launch costs are charged to the income statement in the year they are incurred.

Advertising expenditure
All routine and general advertising costs are expensed as incurred. Advertising costs paid to media companies are recognised as a prepayment until
the advertising is placed in the media and communicated to the public, at which point the expenditure is expensed to the income statement.

Supplier contributions
Contributions received from suppliers towards the cost of displaying and promoting their product are recognised as a reduction in the advertising
and marketing costs to which they relate.

Supplier rebates
Rebates receivable from suppliers are based upon the volume of business with each supplier and are recognised in the income statement in cost
of sales or credited to stock as appropriate on an earned basis, by reference to the supplier revenue.

Leases
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease term.

Provisions for onerous leases are recognised when the expected benefits to be derived by the Group from a location are lower than the unavoidable
cost of meeting its obligation under the lease.

Lease incentives
The aggregate benefit of lease incentives is recognised as a reduction of rental expense. The benefit is allocated on a systematic basis over the period
to the end of the lease. The balance is carried forward within accruals.

Lease premiums
Premiums paid on entering into a lease are classified as short leasehold property within property, plant and equipment and depreciated over the life
of the lease.

Pension costs
Contributions to the defined contribution scheme are charged to the income statement in the year in which they become payable. The assets of the
scheme are held separately from those of the Group in an independently administered fund.

ScS Group plc Annual Report 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED2. Accounting policies continued
Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates
to a business combination, or items recognised directly in equity or other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the
balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised using the liability method, on temporary differences at the balance sheet date between the tax base of assets and liabilities
and their carrying amounts for financial reporting purposes, to the extent that the Director considers that it is more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Deferred tax is measured on an undiscounted basis at the average tax rates that are expected to apply in the periods in which timing differences
reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.

Foreign currency
Transactions in foreign currencies are translated at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated at the rate of exchange ruling at the balance sheet date. All exchange differences are taken to the income statement in the
period in which they arise.

Share-based payments
The Company operates an equity-settled, share-based payment plan for Directors of the trading subsidiary undertaking, A. Share & Sons Limited,
which includes the Executive Directors of the Group. The fair value of the Directors’ services received by the Group in exchange for the issue of shares
in the Company is recognised as an expense in the financial statements of the subsidiary company to which services have been supplied. The total
amount to be expensed over the vesting period is determined by reference to the fair value of the shares issued, excluding the impact of any non-
market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about
the number of shares that are expected to vest. At each balance sheet date, the Group revises its estimates of the number of shares that are expected
to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event, it is probable that a transfer of economic benefits will
be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

Critical accounting judgements and estimates
In applying the Group’s accounting policies various transactions and balances are valued using estimates or assumptions. Should these estimates or
assumptions prove incorrect, there may be an impact on the following year’s financial statements. In the course of preparing the financial statements,
no judgements have been made in the process of applying the Group’s accounting policies that have had a significant effect on the amounts recognised
in the financial statements, other than those involving estimations. These are considered below:

Volume rebates
The Group receives income from suppliers via volume rebates which are based on agreed rates affected by the level of spend with suppliers in the year.
Where these arrangements are not coterminous with the year-end, these are accrued based on management’s judgement as to whether the turnover
targets will be achieved for the individual supplier. Management considered the level of balance specifically associated with this judgemental element
and concluded in this financial year the value was not sensitive enough to change the balance materially.

Stock provisions
The Group holds £21.9m of inventory at the year end, and the majority of this stock is held for display in store. Due to the nature of this stock, it will often
be subject to the wear and tear associated with use in a showroom environment, and some items may have also been in store for an extended period of
time. As such, this stock is often unable to achieve the same margin as the ‘special order’ stock purchased and delivered direct to our customers, and may
occasionally be sold at a level lower than cost following a business decision to refresh the range or better utilise the space. The Group’s policy in relation
to stock provisioning is therefore to provide for obsolete, slow-moving and defective stock, and therefore ensure that stock is held at the most appropriate
estimate of net realisable value.

In determining an estimate of this value, management has made judgements in respect of the quality of the Group’s products and saleability, and applied
a provision based on historic sales levels. Whilst management considers that the methodologies and assumptions adopted in the valuation are supportable,
reasonable and robust, because of the inherent uncertainty of the sale price of stock current held, those estimated values may differ from the final sale
and the total differences could potentially be significant.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsStrategic ReportCorporate GovernanceFinancial Statements2. Accounting policies continued
Loss making stores and onerous leases
Management consider each store to be a cash-generating unit. Where there are indicators of impairment at a store level following poor performance,
management performs an impairment test over the carrying value of the assets held at these stores. Recoverable amounts for cash-generating units
are the higher of fair value less costs of disposal, and value in use. Value in use is calculated from cash flow projections based on the Group’s internal
budgets, which are then extrapolated over the remaining store lease length, and management’s expectations of estimated growth rates. Management
also separately considers whether any of the lease commitments held at those stores have become onerous in nature and require providing for, where
they believe that the unavoidable costs of meeting or exiting the lease obligations exceed the economic benefits expected to be received under
the lease. The key estimates for the value in use calculations are those regarding the discount rate used and expected changes to future cash flows.
Management set the budgets based on past experiences and expectations of future changes in the market and estimates discount rate using pre-tax
rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units, deriving from the
Group’s post-tax weighted average cost of capital.

3. Segment information
The Directors have determined the operating segments based on the operating reports reviewed by the senior management team (the Executive
Directors and the other Directors of the trading subsidiary, A. Share & Sons Limited) that are used to assess both performance and strategic decisions.
The Directors have identified that the senior management team are the chief operating decision makers in accordance with the requirements of IFRS 8
‘Segmental reporting’.

The Directors consider the Group operates one type of business generating gross sales and revenue from the retail of furniture and flooring. All gross
sales and revenue profit before taxation, assets and liabilities are attributable to the principal activity of the Group and other related services. All gross
sales and revenues are generated in the United Kingdom.

An analysis of gross sales is as follows:

Sale of goods
Associated sale of warranties

Gross sales
Less: costs of interest-free credit

Revenue

4. Operating profit
Operating profit is stated after charging:

Fees payable to the Company auditors for the audit of Company and consolidated financial statements
Fees paid for other services:
– audit of the Company’s subsidiaries
– other non-audit services
Depreciation of property, plant and equipment – owned
Amortisation of computer software
Operating lease rentals – plant and machinery
Operating lease rentals – land and buildings

5. Employees and Directors
5.1 Staff costs

Wages and salaries
Social security costs
Other pension costs
Share-based payments (note 19)

ScS Group plc Annual Report 2018

Year ended
28 July 2018
£’000

329,571
22,746

352,317
(15,004)

337,313

Year ended
28 July 2018
£’000

98
19
5,035
518
2,327
24,541

Year ended
28 July 2018
£’000

54,509
5,214
1,014
542

61,279

Year ended
29 July 2017
£’000

326,534
22,968

349,502
(16,537)

332,965

Year ended
29 July 2017
£’000

95
19
4,806
599
2,342
24,435

Year ended
29 July 2017
£’000

52,433
5,058
1,083
154

58,728

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED5. Employees and Directors continued
The average monthly number of employees (including Executive Directors) during the year was as follows:

Sales
Office and managerial
Services and warehousing
Cleaning

5.2 Directors’ emoluments

Aggregate emoluments
Other pension costs

Highest paid Director

Aggregate emoluments
Other pension costs

Year ended
28 July 2018
£’000

Year ended
29 July 2017
£’000

735
721
440
36

1,932

Year ended
28 July 2018
£’000

1,496
109

Year ended
28 July 2018
£’000

754
61

765
739
432
34

1,970

Year ended
29 July 2017
£’000

1,151
110

Year ended
29 July 2017
£’000

530
61

These have been disclosed in the Remuneration Report. The highest paid Director did not exercise any shares during the year.

5.3 Key management compensation
Key management comprises the Directors of the trading subsidiary, A. Share & Sons Limited and the Group Directors and excludes the Non-Executive
Directors disclosed in 5.2 above.

The key management compensation is as follows:

Aggregate emoluments
Deferred contribution pension cost
Share-based payments

6. Finance costs

Bank facility renewal fees
Bank facility non-utilisation fees

7. Finance income

Bank interest received

Year ended
28 July 2018
£’000

2,694
232
542

Year ended
29 July 2017
£’000

1,928
230
154

Year ended
28 July 2018
£’000

Year ended
29 July 2017
£’000

132
96

228

–
96

Year ended
28 July 2018
£’000

205

Year ended
29 July 2017
£’000

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsStrategic ReportCorporate GovernanceFinancial Statements8. Taxation
(a) Analysis of tax charge in the year

Current tax:
UK corporation tax on profits for the year
Adjustments in respect of prior years

Total current tax

Deferred tax:
Origination and reversal of temporary differences
Adjustments in respect of prior years

Total deferred tax charge/(credit) (note 16)

Income tax charge in the statement of comprehensive income

Year ended
28 July 2018
£’000

Year ended
29 July 2017
£’000

2,995
(569)

2,426

(398)
513

115

2,541

3,071
61

3,132

(533)
(38)

(571)

2,561

(b) Factors affecting tax expense for the year
The tax charge assessed on the profit for the year is higher (2017: higher) than the standard rate of corporation tax in the UK of 19.00% (2017: 19.67%).
The differences are explained below:

Profit before taxation

Profit before tax at 19.00% (2017: 19.67%)
Effects of:
Other expenses not deductible
Deduction on exercise of share options
Depreciation not eligible for tax purposes
Adjustments in respect of prior years
Impact of changes in tax rates

Total taxation charge in the statement of comprehensive income

Year ended
28 July 2018
£’000

13,219

2,512

120
(200)
128
(56)
37

2,541

Year ended
29 July 2017
£’000

11,963

2,353

128
–
108
20
(48)

2,561

(c) Factors that may affect future tax charges
The standard rate of corporation tax in the UK changed from 20% to 19% with effect from 1 April 2017. Further reductions in the corporation tax rate
from 19% to 17% from 1 April 2020 were substantively enacted as part of the Finance Bill 2016 (on 6 September 2016). Accordingly, the profits for this
period are taxed at an effective rate of 19.00% and deferred taxation has been calculated based on a rate of 17%.

9. Earnings per share

Profit attributable to owners of the Company

Weighted average number of shares in issue for the purposes of basic earnings per share

Effect of dilutive potential ordinary shares: – Share options

Weighted average number of ordinary shares for the purposes of diluted earnings per share

Basic earnings per share (in pence per share)

Diluted earnings per share (in pence per share)

Year ended
28 July 2018
£’000

10,678

Year ended
29 July 2017
£’000

9,402

39,804,480

40,009,109

1,220,656

1,085,096

41,025,136

41,094,205

26.8p

26.0p

23.5p

22.9p

ScS Group plc Annual Report 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED10. Intangible assets

Cost
At 30 July 2017
Additions

At 28 July 2018

Accumulated amortisation
At 30 July 2017
Charge for the year

At 28 July 2018

Net book amount
At 28 July 2018

At 29 July 2017

Cost
At 31 July 2016
Additions

At 29 July 2017

Accumulated amortisation
At 31 July 2016
Charge for the year

At 29 July 2017

Net book amount
At 29 July 2017

At 30 July 2016

Amortisation is charged through the administration expenses line.

28 July
2018
£’000

Computer
software

5,134
592

5,726

4,057
518

4,575

1,151

1,077

29 July
2017
£’000

Computer
software

4,603
531

5,134

3,458
599

4,057

1,077

1,145

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsStrategic ReportCorporate GovernanceFinancial Statements11. Property, plant and equipment

Freehold land
and buildings
£’000

Leasehold
property
£’000

Computer
equipment
£’000

Fixtures
and fittings
£’000

Cost
At 30 July 2017
Additions

At 28 July 2018

Accumulated depreciation
At 30 July 2017
Charge for the year

At 28 July 2018

Net book amount
At 28 July 2018

At 29 July 2017

Cost
At 31 July 2016
Additions
Disposals

At 29 July 2017

Accumulated depreciation
At 31 July 2016
Charge for the year
Disposals

At 29 July 2017

Net book amount
At 29 July 2017

At 30 July 2016

The net book value of leasehold properties is as follows:

Short leaseholds (up to 25 years)
Long leaseholds (greater than 25 years)

12. Inventories

Finished goods

159
–

159

88
3

159
–
–

159

85
3
–

50,799
1,072

51,871

31,695
3,343

35,038

16,833

19,104

47,695
3,407
(303)

50,799

28,780
3,217
(302)

31,695

19,104

18,915

3,293
398

3,691

2,159
628

2,787

904

1,134

12,369
1,004
(10,080)

3,293

11,767
472
(10,080)

2,159

1,134

602

28,008
1,137

29,145

24,439
1,061

25,500

3,645

3,569

27,269
773
(34)

28,008

23,359
1,114
(34)

24,439

3,569

3,910

Year ended
28 July 2018
£’000

16,768
65

16,833

Year ended
28 July 2018
£’000

21,865

Total
£’000

82,259
2,607

84,866

58,381
5,035

63,416

21,450

23,878

87,492
5,184
(10,417)

82,259

63,991
4,806
(10,416)

58,381

23,878

23,501

Year ended
29 July 2017
£’000

19,036
68

19,104

Year ended
29 July 2017
£’000

22,084

The cost of inventories as an expense and included in cost of sales amounted to £181,601,000 (2017: £184,329,000).

The charge for the year relating to inventories written off amounted to £1,095,000 (2017: £611,000).

13. Trade and other receivables

Trade receivables
Other receivables
Prepayment

Year ended
28 July 2018
£’000

Year ended
29 July 2017
£’000

1,232
2,704
4,600

8,536

3,029
2,272
4,398

9,699

The fair value of trade and other receivables is approximate to their carrying value. Trade and other receivables are considered due once they have
passed the contracted due date.

ScS Group plc Annual Report 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED13. Trade and other receivables continued
The carrying amounts of trade and other receivables are all denominated in Pounds Sterling.

The majority of the trade receivables are due from finance houses with which there are existing relationships and no history of default.

The bad debt provision is not considered material for disclosure.

14. Trade and other payables – current

Trade payables
Payments received on account
Other taxation and social security payable
Accruals

Year ended
28 July 2018
£’000

26,294
12,232
4,492
11,548

54,566

Year ended
29 July 2017
£’000

29,142
11,506
4,775
8,371

53,794

The fair value of financial liabilities approximates their carrying value due to short maturities. Financial liabilities are denominated in Pounds Sterling.

15. Trade and other payables – non-current

Lease incentives
Onerous lease provision

Year ended
28 July 2018
£’000

6,371
630

7,001

Year ended
29 July 2017
£’000

6,496
644

7,140

The onerous lease provision of £630,000 (2017: £644,000) relates to commitments on leases for stores identified as loss-making as part of managements
ongoing review of store profitability (2017 also included amounts for the West Thurrock and Thetford distributions centres, which were closed in
September 2017).

16. Deferred tax liability
The Group’s movements in deferred taxation during the current financial year and previous year are as follows:

Opening deferred tax liability
Charged/(credited) to profit and loss account arising from the origination and reversal of temporary differences (note 8)

Closing deferred tax liability

Deferred taxation has been fully provided for in respect of:
Accelerated capital allowances
Losses
Other timing differences
Capital gains held over

Closing deferred tax liability

17. Called-up share capital

At 31 July 2016
Shares issued/proceeds

At 29 July 2017 and as at 28 July 2018

Year ended
28 July 2018
£’000

530
115

645

716
(121)
(71)
121

645

Year ended
29 July 2017
£’000

1,101
(571)

530

550
(101)
(20)
101

530

Total
£’000

37
19

Number of shares

40,000,000
9,109

40,009,109

Ordinary shares
£’000

Share premium
£’000

37
3

–
16

Authorised, allotted and fully paid share capital is 40,009,109 of £0.001p each (2017: 40,009,109 of £0.001p each).

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsStrategic ReportCorporate GovernanceFinancial Statements18. Dividends
A final dividend for year ended 29 July 2017 of 9.80p was paid on 27 November 2017. It has been recognised in shareholders’ equity in the year to 28 July 2018.

An interim dividend of 5.30p per ordinary share was declared by the Board of Directors on 21 March 2018 and paid on 10 May 2018. It has been recognised in
shareholders’ equity in the year to 28 July 2018.

A final dividend for the year ended 28 July 2018 of 10.90p per ordinary share was proposed by the Board of Directors.

At 28 July 2018 the retained earnings of the Company amounted to £64,283,000.

19. Share-based payments
The Group operates equity-settled share schemes for certain employees that are intended to act as a long-term incentive to help retain key employees
and Directors who are considered important to the success of the business.

Post-admission incentive arrangements
The ScS Group plc Long-Term Incentive Plan (LTIP) was adopted on 21 January 2015 conditional upon admission. The LTIP allows for various types of
awards and the following grants over shares in ScS Group plc have been made:

(i) £Nil cost options conditional on the IPO taking place (approved on 21 January 2015).
(ii) Market value options under a HMRC approved Company Share Option Plan conditional on the IPO taking place (approved on 21 January 2015).
(iii) Unapproved market value options conditional on the IPO taking place (approved on 21 January 2015).
(iv) Performance-based £nil cost options granted on 30 March 2015 (the performance condition is based on EPS as set out in the consolidated audited
financial statements of the Group for 2017). As the EPS for the Group was lower than the performance condition set, these awards have been
forfeit as at 28 July 2018.

(v) Performance-based £nil cost options granted on 17 October 2016 (the performance condition is based on EPS as set out in the consolidated

audited financial statements of the Group for the financial year ended 27 July 2019).

(vi) Performance-based £nil cost options granted on 16 October 2017 (the performance condition is based on EPS as set out in the consolidated

audited financial statements of the Group for the financial year ended 26 July 2020).

Fair value of awards
The awards granted have been valued by an independent third party using the Black-Scholes model. No performance conditions were included in the
fair value calculations.

The expected life is the estimated time period to exercise. The expected volatility is calculated by reference to the historic volatility of the Company from
the period between admission and the date of grant and historic volatilities of comparator companies measured over a period commensurate with the
expected life. The dividend yield is based on the target dividend yield set at IPO (with the exception of awards that give an entitlement to receive dividend
equivalents). The risk-free interest rate is the yield on UK government bonds of a term consistent with the expected life. The level of vesting is estimated at
the balance sheet date and will be trued up until the vesting date.

LTIP (pre-IPO nil cost options)

LTIP (CSOP market value options)

Outstanding as at 31 July 2016
Granted
Forfeited
Exercised
Expired

Outstanding as at 29 July

2017
Granted
Forfeited
Exercised
Expired

Outstanding as at 28 July

2018

Exercisable at 28 July 2018
Exercisable at 29 July 2017

Share awards

551,421
–
–
–
–

Average
exercise price

£0.000001
–
–
–
–

551,421
–
–
(411,424)
–

£0.000001
–
–
£0.000001
–

139,997

£0.000001

139,997
–

£0.000001
£0.000001

Note: Weighted average share price for all LTIP awards during the year.

Share awards

Average
exercise price

59,550
–
–
–
–

59,550
–
–
(7,157)
–

52,393

52,393
59,550

£1.75
–
–
–
–

£1.75
–
–
£1.75
–

£1.75

£1.75
£1.75

2015, 2017 and 2018 LTIP
(Directors’ awards)

LTIP (all awards)

Share awards

354,918
474,125
(354,918)
–
–

Average
exercise price

£0.000001
£0.000001
£0.000001
–
–

Share awards

965,889
474,125
(354,918)
–
–

Average
exercise price

£0.11
£0.000001
£0.000001
–
–

474,125
554,141
–
–
–

£0.000001
£0.000001
–
–
–

1,085,096
554,141
–
(418,581)
–

£0.10
£0.000001
–
£0.029922
–

1,028,266

£0.000001

1,220,656

–
–

£0.000001
£0.000001

192,390
59,550

£0.08

£0.48
£1.75

ScS Group plc Annual Report 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED19. Share-based payments continued
The fair value of share options issued and the assumptions used in the calculation are as follows:

Grant date
Share price at grant date
Exercise price
Number of employees
Shares issued
Expected volatility
Expected life (years)
Risk-free interest rate
Expected dividend yield
Fair value per share
Estimated vesting

2015

2017

2018

21 January
2015
£1.75
£nil
25
571,421
33.7%
3
0.70%
8%
£1.38
100%

21 January
2015
£1.75
£1.75
6
68,659
36.2%
5
1.06%
8%
£0.24
100%

30 March
2015
£2.05
£nil
6
445,711
–1
3
–1
–1
£2.05
0%

17 October
2016
£1.83
£nil
6
474,125
–1
3
–1
–1
£1.83
40%

16 October
2017
£1.75
£nil
8
554,141
–1
3
–1
–1
£1.75
85%

1. LTIP participants are entitle to receive dividend equivalents on unvested awards, and therefore dividend yield does not impact the fair value calculation. Furthermore, volatility

and risk-free rates do not impact the fair value calculation for awards with no exercise price or market based performance conditions.

The total charge for the year relating to employee share-based payment plans was £542,000 (2017: £154,000) which is in relation to equity-settled
share-based payment transactions. There are no liabilities arising from share-based payment transactions.

20. Capital commitments
Capital commitments contracted for but not provided amounted to £nil (2017: £nil).

21. Pension commitments
The Group operates several defined contribution pension schemes for the benefit of its staff. The assets of the schemes are held separately from those
of the Group in independently administered funds. The pension charges represent contributions payable by the Group to these funds and are shown
in note 5 on page 83. Amounts outstanding at the year end were £181,000 (2017: £118,000) and are held in accruals.

22. Financial commitments
The future aggregate minimum lease payments under non-cancellable operating leases as set out below:

Group
Within one year
Within two to five years
After five years

Land and buildings

Plant and machinery

2018
£’000

2017
£’000

397
25,355
137,275

163,027

493
27,369
146,726

174,588

2018
£’000

336
3,177
–

3,513

2017
£’000

503
3,327
–

3,830

23. Financial instruments – risk management
Financial risk management policy
The Group’s principal financial instruments comprise cash and cash equivalents. The main purpose of these financial instruments is to provide
funds for the Group’s operations. The Group has other financial instruments being trade receivables and trade payables that arise directly from
its operations.

It is, and has been, under review throughout the year, the Group’s policy that no trading in financial instruments shall be undertaken. The Group has
not entered into derivative transactions during the years under review. The Group does not undertake any speculative transactions and continues
to pursue prudent treasury policies by investing surplus funds only with reputable UK financial institutions.

Credit risk
The finance for all Group’s credit sales is provided from external financing companies who bear the whole risk of customer defaults on repayment.
The Group’s financial assets which are past due and not impaired are deemed not material for disclosure. The remaining balance is deemed fully
recoverable due to the use of finance houses to mitigate the risk of recoverability. There have been no gains/losses on financial liabilities.

Cash and deposits are invested with Lloyds Bank plc.

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsStrategic ReportCorporate GovernanceFinancial Statements23. Financial instruments – risk management continued
Liquidity risk
The Group’s exposure to liquidity risk is low, as historically working capital requirements have been funded entirely by self-generated cash flow. The Group
has a £12.0m committed revolving credit facility.

Financial instruments by category
Financial assets and liabilities are classified in accordance with IAS 39. No financial instruments have been reclassified or derecognised in the year.
There are no financial assets which are pledged or held as collateral. The Group does not hold any financial assets or liabilities held as fair value through
the income statement, defined as being in a hedging relationship or any available for sale financial assets.

All financial assets are deemed to be loans and receivables at amortised cost and their carrying value equal to their fair value.

All financial liabilities are held at amortised cost and their carrying value equal to their fair value and there is no variance between this
at initial recognition and the transaction price.

All financial assets and liabilities are based on readily observable prices and market data (level 1).

Capital management
The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern and retain financial flexibility to provide
returns for shareholders and benefits for other stakeholders. The Group considers capital to be equity and cash. Equity and cash are disclosed in the
Consolidated Statement of Financial Position.

The Group manages its capital through continued focus on free cash flow generation and setting the level of capital expenditure and dividend in the
context of the current period and forecast free cash flow.

24. Related parties
Holdings in subsidiaries and any relevant related party transactions are disclosed in the Company financial statements in note 5. Only ScS Furnishings
Limited and the ScS Group Employee Benefit Trust are not included in the consolidation on the grounds of materiality.

25. Contingent liabilities
The subsidiary undertakings of the Group are party to a debenture with Lloyds Bank plc which grants fixed and floating charges over the assets of each
subsidiary undertaking.

26. Post-balance sheet events
On 10 August 2018, subsequent to the financial year, House of Fraser (Stores) Limited and James Beattie Limited, the trading entities with which the
Group held a contract with to operate the ‘House of Fraser Made to Order Sofas, Furniture and Flooring’ store concessions, entered into administration.
The business and assets were subsequently bought by Sports Direct International plc. At the date of publication of the Annual Report and financial
statements, we continue to trade from all 27 concessions, and have entered into discussions with management regarding ongoing trading terms.

27. Treasury shares

As at 29 July 2017
Purchase of own shares
Transfer to retained earnings

As at 28 July 2018

£’000

–
1,165
(897)

268

During the year the Group’s Employee Benefit Trust purchased 544,154 ordinary shares of 0.1 pence each in the Group at an average price of 214.2 pence
per ordinary share for the purposes of satisfying management share incentive awards. As at 28 July 2018, 418,581 of these shares had been used to satisfy
awards, with the remainder held as treasury shares.

ScS Group plc Annual Report 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDCOMPANY INFORMATION
STATEMENT OF FINANCIAL POSITION AS AT 28 JULY 2018

Investments

Current assets
Trade and other receivables
Cash at bank and in hand

Total current assets

Total assets

Current liabilities
Trade and other payables

Total current liabilities

Total liabilities

Capital and reserves
Called-up share capital
Share premium account
Capital redemption reserve
Treasury share reserve
Retained earnings

Total shareholders’ funds

Total equity

Total equity and liabilities

Note

8
8

2018
£’000

70,000

2017
£’000

70,000

10
–

30
–

70,010

70,030

5,926

40
16
13
(268)
64,283

64,084

70,010

4,163

40
16
13
–
65,798

65,867

70,030

The notes on pages 94 to 96 form an integral part of these financial statements.

The total comprehensive income for the year included within the accounts of the Company is £5,414,000 (2017: £5,180,000).

The financial statements on pages 91 to 96 were approved by the Board and authorised for issue on 1 October 2018 and signed on its behalf by:

David Knight
Chief Executive Officer

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsCOMPANY INFORMATION
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 JULY 2018

At 31 July 2016
Total comprehensive income
Dividends paid

At 29 July 2017

At 30 July 2017
Total comprehensive income
Purchase of own shares into treasury
Dividends paid

At 28 July 2018

Called-up
share
capital
£’000

Share
premium
account
£’000

Capital
redemption
reserve
£’000

40
–
–

40
–
–
–

16
–
–

16
–
–
–

13
–
–

13
–
–
–

Treasury
shares
£’000

–
–
–

–

–
–
(268)
–

(268)

Retained
earnings
£’000

66,511
5,180
(5,893)

65,798

65,798
5,414
(897)
(6,032)

64,283

Total
equity
£’000

66,580
5,180
(5,893)

65,867

65,867
5,414
(1,165)
(6,032)

64,084

ScS Group plc Annual Report 2018

COMPANY INFORMATION
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 JULY 2018

Cash flows from operating activities
Profit before taxation

Changes in working capital:
Decrease/(increase) in trade and other receivables
Increase in trade and other payables

Cash generated from operations
Net cash flow generated from operating activities

Net cash flow used in investing activities

Cash flows used in financing activities
Dividends paid
Purchase of own shares

Net cash flow used in financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Note

6
7

2018
£’000

5,414

20
1,763

7,197
7,197

–

(6,032)
(1,165)

(7,197)

–

2017
£’000

5,180

(5)
718

5,893
5,893

–

(5,893)
–

(5,893)

–

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsNOTES TO THE COMPANY FINANCIAL STATEMENTS

2. Accounting policies
Statement of compliance with FRS 101
These financial statements were prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (‘FRS 101’). The
Company meets the definition of a qualifying entity under FRS 100, ‘Application of Financial Reporting Requirements’ as issued by the Financial
Reporting Council.

Basis of preparation
These financial statements have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (FRS 101).
The financial statements have been prepared under the historical cost convention and in accordance with the Companies Act 2006.

No exemptions from the requirements of IFRS have been applied in the preparation of these financial statements.

Going concern
The Company is the ultimate holding company to a group which is highly cash generative, and which holds sufficient medium and long term facilities
in place to enable it to meet its obligations as they fall due. The Directors are therefore satisfied that the Company has adequate resources to continue
in operational existence for the foreseeable future.

Further information on the Group’s going concern and ongoing viability is provided in note 2 of the Group accounts.

Critical accounting estimates and judgements
The preparation of financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Company’s accounting policies. However, due to the nature of the Company,
we do not consider there to be any critical accounting estimates or judgements made in the preparation of these financial statements.

Capital management
The Company follows the same capital management as the Group – see page 90 in the Group accounts.

New standards, amendments and interpretations
For the latest amendments and interpretations, please refer to page 78 in the Group accounts.

Fixed asset investments
Fixed asset investments in subsidiary undertakings are recorded at cost plus incidental expenses less any provision for impairment.

Trade receivables
Trade receivables for the Company refer to prepayments made for services performed in the ordinary course of business. Trade receivables are
recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.

Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables
are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Taxation
The tax charge for the financial period is based on the profit for the financial period.

3. Income Statement exemption
The Company has elected to take the exemption under section 408 of the Companies Act 2006 from presenting the Income Statement of the
Company. Total comprehensive income for the Company for the year was £5,414,000 (2017: £5,180,000).

ScS Group plc Annual Report 2018

4. Directors emoluments
No Executive Directors received any remuneration for their services to the Company (2017: £nil). All Executive Directors remuneration was borne
by another Group company, A. Share and Sons Limited. These costs have been consolidated into the Group’s financial statements and are disclosed,
along with the Non-Executive Directors fees, within the Remuneration Report on pages 52 to 58.

The Company does not employ any staff other than the Non-Executive Directors noted above.

5. Investments

Cost and net book value
At 29 July 2017 and 28 July 2018

The subsidiaries, which were owned and incorporated in the United Kingdom were are as follows:

Name

Parlour Product Topco Limited

Held by subsidiary undertakings
Parlour Product Holding Limited
A. Share & Sons Limited
ScS Furnishings Limited

Principal activity

Holding company

Holding company
Specialist retailer of upholstered furniture
Dormant company

Class of shares held

Ordinary

Ordinary
Ordinary
Ordinary

The registered office address for all of the subsidiaries is 45-49 Villiers Street, Sunderland, SR1 1HA.

All shares carry equal voting rights and are deemed to be controlled by ScS Group plc.

The Directors believe that the carrying value of the investments is supported by their underlying net assets.

ScS Furnishings Limited is exempt from audit as it is dormant. It’s aggregate amount of capital and reserves is £1.

6. Trade and other receivables

Prepayments and accrued income

7. Trade and other payables

Amounts owed to Group undertakings
Accruals and deferred income

2018
£’000

5,746
180

5,926

Amounts owed to Group undertakings are unsecured, interest-free and repayable on demand.

8. Called-up share capital

At 31 July 2016
Shares issued/proceeds

At 29 July 2017 and 28 July 2018

Number of shares

40,000,000
9,109

40,009,109

Ordinary shares
£’000

Share premium
account
£’000

37
3

–
16

Authorised, allotted and fully paid share capital is 40,009,109 of £0.001p each (2017: 40,009,109 of £0.001p each).

Subsidiary
undertaking
£’000

70,000

% of holdings

100%

100%
100%
100%

2017
£’000

4,018
145

4,163

Total
£’000

37
19

ScS Group plc Annual Report 2018

Strategic ReportCorporate GovernanceFinancial StatementsNOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED

9. Dividends
A final dividend for year ended 29 July 2017 of 9.80p was paid on 28 November 2017. It has been recognised in shareholders’ equity in the year ended
28 July 2018.

An interim dividend of 5.30p per ordinary share was declared by the Board of Directors on 21 March 2018 and paid on 10 May 2018. It has been
recognised in shareholders’ equity in the year ended 28 July 2018.

A final dividend for year ended 28 July 2018 of 10.90p per ordinary share was proposed by the Board of Directors.

At 28 July 2018 the retained earnings of the Company amounted to £64,283,000.

10. Financial instruments
The Company has financial instruments, being trade receivables and trade payables, that arise directly from its operations. The financial instruments
– risk management policy has been included in note 23 of the Group financial statements.

11. Related parties
There is not deemed to be any one controlling party.

12. Treasury shares
Details of the Company’s share capital and share buybacks are given in note 27 of the notes to the Group financial statements.

ScS Group plc Annual Report 2018