Triumph Bancorp Inc
Annual Report 2019

Plain-text annual report

125 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This document contains certain forward-looking statements. These forward-looking statements include matters that are not historical facts or are statements regarding the Company’s intentions, beliefs or current expectations concerning, among other things, the Company’s results of operations, financial condition, liquidity, prospects, growth, strategies, and the industries in which the Company operates. Forward-looking statements are based on the information available to the Directors at the time of preparation of this document and will not be updated during the year. The Directors can give no assurance that these expectations will prove to be correct. Due to inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. CONTENTS STRATEGI C REPO RT CHA IR MAN’S STATE MENT ......................................................................................................................................... 4 B USIN ESS MOD EL AND STRATEGY .............................. ............................................................................................. 8 B USIN ESS R EV IEW .................................................................................................................................................... 12 FI N AN CIAL RE VIEW . .. .............................................................................................................................................. 17 P RIN CI PAL RI SKS AND UNCERTAINTIES ................................................................................................................. 20 SUS TAI NABILI TY ........................................................... ........................................................................................... 27 P EOP LE . .. .. .. .. . ... . ... . ... . ............................................................................................................................................... 30 D IR EC TORS’ REPORT B OAR D OF DIR ECTORS ................................................ ........................................................................................... 34 COR POR AT E GOVERNANCE STATEMENT .................... ........................................................................................... 36 AUD I T CO MMI TTEE REPORT ................................................................................................................................... 39 N OM INATI ON COMMITTEE REPORT ........................................................................................................................ 44 DI RE C TORS’ REMUNERATION REPORT .................................................................................................................. 46 OT HE R STATUTORY AND REGULATORY DISCLOSURES ......................................................................................... 66 STATEMENT OF DIRECTORS’ RESPONSIBILITIES .......... ........................................................................................... 70 IN D E P ENDENT AUDITOR’S REPORT TO THE MEMB ERS O F TED BAKER PLC ................................................ 71 F IN ANCI AL STATEMENTS GROUP AND COMPAN Y PRIMARY FINANCIAL STATEMENTS ................................................................................ 78 N OT ES TO THE FINANCIAL STATEMENTS ............................................................................................................... 85 F IVE Y EA R SUMMARY .......................................................................................................................................... 123 Registered Office: Company Secretary: Financial Advisers and Sponsor: Auditors: Bankers: Registrars: The Ugly Brown Building, 6a St. Pancras Way, London NW1 0TB Charles Anderson ACMA Liberum Capital Limited, 25 Ropemaker St, London EC2Y 9LY Goldman Sachs International, Peterborough Court, 133 Fleet St, London, EC4A 2BB KPMG LLP, 15 Canada Square, Canary Wharf, London E14 5GL Barclays Bank Plc, 1 Churchill Place, London E14 5HP The Royal Bank of Scotland Plc, 62-63 Threadneedle Street, London EC2R 8LA HSBC Bank Plc, 8 Canada Square, Canary Wharf, London E14 5HQ Link Asset Services, 34 Beckenham Road, Beckenham, Kent BR3 4TU Ted Baker Plc – Registered in England No: 03393836 1 Ted Baker Plc Annual Report and Accounts 2018/19 DISTRIBUTION CHANNELS Ted carefully manages distribution through three main channels: RETAIL £461.0m (4.2% I NCREAS E) WHO LESALE £156.5m (4.8% I NCREAS E) LICENS ING £22.1m (3.1% I NCREAS E) UK AND EUROPE 48 STO RES* 25 4 CONCESSIONS 21 O U TLETS NORTH AMERICA 57 STO RES* 61 CONCESSIONS 12 OU TLETS REST OF THE WORLD 95 STO RES* 11 CONCESSIONS 1 OU TLET …and wholesale and licensing relationships in over 35 countries across the globe. *Store numbers include licence partner stores. STRATEGIC REPORT CHA IRMAN’S S TATEMEN T Group revenue increased by 4.4% (5.0% in constant currency)1 to £617.4m (2018: £591.7m) and profit before tax and exceptional items2 decreased by 14.3% to £63.0m (2018: £73.5m) for the 52 weeks ended 26 January 2019 (the “period”). Profit before tax decreased by 26.1% to £50.9m (2018: £68.8m). Performance has been impacted by the very difficult trading conditions throughout the year, including competitive discounting across the retail sector, consumer uncertainty, the well-publicised challenges facing some of our UK trading partners and the unseasonable weather across our global markets at different points throughout the period. STRATEGIC REPORT Despite this challenging backdrop, Ted Baker continues to develop as a global lifestyle brand, reflecting the strength of the brand, the design and quality of our collections and the B OAR D C H AN GES As recently announced on 4 March 2019, acting Chief Executive Officer Lindsay Page has passion and commitment of our talented teams across the world. agreed to continue in this role and I have been asked by the Board to act as Executive The retail channel performed well, with retail sales including e-commerce up 4.2% (4.8% in constant currency)1 to £461.0m (2018: £442.5m) on an increase in average square footage of 5.2%. Our flexible business model, including a relatively low number of own Chairman to provide additional support to Lindsay and ensure continued stability in the Group’s leadership. I will remain in this position until no later than 30 November 2020, by which time a new Non-Executive Chair will be appointed. Sharon Baylay has agreed to act stores that showcase the brand, and our e-commerce business enable us to adapt to as the designated Non-Executive Director for engagement with Ted Baker team members structural changes in the retail sector. We continued our controlled geographic expansion and has also taken on the role of Chair of the Nomination Committee. with openings across the UK and Europe, North America and the Rest of the World and we continue to invest and build brand awareness in our newer markets for the long-term development of the brand. OUR TEAM S Against a backdrop of very difficult market conditions, the period’s credible performance is Our e-commerce business is an integral and increasingly important component within testament to our talented teams across the world, whose commitment and passion remain our retail proposition and has performed well, delivering strong sales growth of 20.4% (20.8% in constant currency)1 to £121.7m (2018: £101.1m) and represented 26.4% of total retail sales (2018: 22.8%). We continue to invest in our e-commerce channels to key to our success. I would like to take this opportunity to thank all my colleagues across the world for their continued hard work as we continue to grow the business and develop Ted Baker as a global lifestyle brand. support further growth. The wholesale channel performed in line with our expectations, with sales up 4.8% (5.7% in constant currency)1 to £156.5m (2018: £149.2m). This reflects a good performance from our UK wholesale business, which includes the supply of goods to our licensed I T SYSTEM S A ND DI STRI BU TIO N FAC IL I TIES In January 2019 we completed the final phase of the implementation of Microsoft Dynamics AX system across our Asia business. The ERP system has now been successfully stores and our export business as well as our North American wholesale business. implemented globally and will enable improved efficiency and streamline operations. Licence income delivered growth of 3.1% to £22.1m (2018: £21.4m). Underlying We have now also completed the transition to our new distribution facility in North growth in licence income was 5.5%, adjusting for the acquisition of the footwear licence, America. The new facility will serve our retail, wholesale and e-commerce businesses which completed on 1 January 2019. During the period, our licence partners opened across North America, supporting our long-term growth strategy in this territory. further stores and concessions in Malaysia, Mexico, Saudi Arabia, Singapore, Taiwan, This marks the end of a significant period of change for the Group, where it has Thailand and United Arab Emirates. We also opened our first licensed partner stores enhanced its IT systems and consolidated its distribution facilities. These provide a in the Canary Islands, India, Kazakhstan, Kosovo and Ukraine. platform that will support the future development of the business including omni-channel initiatives such as ship from store. RESIGNATION OF RAY KELVIN A ND IN DE PEN DE N T EXT ERNAL INVESTIGATIO N Ray Kelvin took a voluntary leave of absence from his role as Chief Executive Officer of Ted Baker in December 2018, after allegations of misconduct were made against him. ACQUI S ITI ON O F N O ORD I N ARY SHO ES LI M ITED AN D N O OR DI NA RY S HOES USA L LC The acquisition of No Ordinary Shoes Limited and No Ordinary Shoes USA LLC from Since that date an internal Independent Committee has been in the process of investigating Pentland Group Plc and Pentland USA Inc, the Group’s former footwear licensee, was those allegations. The Committee commissioned the law firm Herbert Smith Freehills completed on 1 January 2019 for cash consideration of £20.3m, subject to the finalisation LLP (HSF) to investigate the allegations and the Group’s policies, procedures and handling of completion accounts. This is an exciting opportunity to drive further growth in our of HR-related complaints. Ray Kelvin has denied all allegations of misconduct, however, footwear business by leveraging our global footprint and well invested infrastructure. The on 4 March 2019 he agreed to resign with immediate effect from his position as Chief acquisition is expected to enhance the earnings of Ted Baker from the new financial year. Executive Officer and as a Director of Ted Baker Plc. The primary focus of the remainder of the investigation will be on Ted Baker’s policies, procedures and handling of HR-related complaints. It is expected that HSF will L I CE NC E PA RTNERS We are pleased to have signed two new global licence agreements, with partners who conclude its investigation early in Q2 2019. The Board is committed to ensuring that all have a global reach and capability. In June 2018 we signed a new men’s underwear and employees feel respected and valued. We are determined to learn lessons from what loungewear global licence with Delta Galil. In October 2018 we signed a new global has happened and from what our employees have told us and to ensure that, while the watch licence with Timex Group, which will allow us to benefit from its expertise and many positive and unique aspects of Ted Baker’s culture are maintained, appropriate long history as an authentic watchmaker. Both of these new partners reflect our changes are made. commitment to working with the best product specialists that are able to support our status as a truly global lifestyle brand. 5 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT BR EX I T We have developed a number of strategies and contingency plans which will assist store in Detroit and two further concession openings, along with two further licence partner concessions in Mexico. in minimising disruption caused by Brexit. A number of indirect risks remain which In the Rest of the World, we continue to refine and define our strategy for success and are beyond our control and the resulting risk that they pose is highly reliant on the we remain focused on building brand awareness. In line with our development strategy in preparedness of national authorities and other businesses. The key risks are discussed in this territory, we plan to open an outlet in Hong Kong. further detail in the principal risks and uncertainties section on page 3. FIN ANCIAL RESULTS Group revenue for the period increased by 4.4% (5.0% in constant currency)1 to £617.4m (2018: £591.7m). The Group gross margin was lower at 58.3% (2018: 61.0%). WH OL ESA L E We anticipate further growth across our wholesale businesses, which should result in low to mid-single digit sales growth (in constant currency) in the coming period. We had anticipated a slightly lower retail margin, as the prior year had benefited from an improved full price sell through. The resultant margin was further reduced by an L I CE NC E I NCOM E Our product and territorial licences continue to perform well. We have opened our increase in promotional activity in response to the challenging trading conditions. This was first licensed partner store in Malta, with plans to open further licensed stores during the partly offset by an increased wholesale margin, due to a greater proportion of sales being year in Croatia, Egypt, Indonesia and Mexico. made to our wholesale partners, known as “Trustees of the brand”, which carry a higher margin than sales to our retail licence partners and some foreign exchange benefits. Profit before tax and exceptional items2 decreased by 14.3% to £63.0m (2018: £73.5m) and profit before tax decreased by 26.1% to £50.9m (2018: £68.8m). Adjusted GRO UP We have a very clear strategy for the continued expansion of Ted Baker as a global lifestyle brand across both established and newer markets. Our flexible business model basic earnings per share, which excludes exceptional items, decreased by 10.6% to 114.2p ensures that our customers have multiple channels to engage with the brand. Our (2018: 127.7p) and basic earnings per share decreased by 23.1% to 91.5p (2018: 119.0p). growing e-commerce business, underpinned by a relatively low number of own stores that Exceptional items in the period amounted to £12.1m (2018: £4.7m) and comprised the showcase the brand, means that we are well positioned to deal with the structural changes impairment of retail assets in the UK, Europe, US and Asia, debtor balances owed by House of in an evolving retail environment and continue Ted Baker’s long-term development. Fraser which are no longer expected to be recovered following its entry into administration on Led by our acting Chief Executive Officer, Lindsay Page, we are confident that the 10 August 2018, costs in respect of the independent investigation referred to previously, and costs strong and experienced team we have in place will continue to implement our strategy and in respect of the acquisition of No Ordinary Shoes Limited and No Ordinary Shoes USA LLC. develop Ted Baker as a global lifestyle brand. The Group’s net borrowing position at the end of the period was £123.8m (2018: To deliver our expansion plans, capital expenditure in the new financial period is £111.8m), being the secured term loan of £47.0m (2018: £52.5m) used to purchase The planned to be £31.0m (2019: £30.3m). This relates to further store openings and Ugly Brown Building and other net debt of £76.8m (2018: £59.3m). Net debt increased refurbishments and a number of omni-channel initiatives as we start to benefit from our due to the cash consideration paid on acquisition in respect of No Ordinary Shoes Limited new IT systems. We continue to explore options for the development and expansion and No Ordinary Shoes USA LLC of £20.3m, offset by benefits from our ongoing focus on of the Ugly Brown Building to support our future growth plans. working capital efficiencies. Trading continues to be impacted by ongoing consumer uncertainty and an elevated level of promotional activity across many of our global markets as well as recent unseasonal D IVI DENDS Reflecting the strength of the Group’s underlying performance, the Board is recommending weather in North America. Despite this, we remain confident in our collections for Spring/ Summer and the Board remains focused on identifying opportunities in the evolving retail a final dividend of 40.7p per share (2018: 43.5p), making a total for the period of 58.6p per market to progress the long-term development of the brand. We intend to make our share (2018: 60.1p per share), a decrease of 2.5% on the prior period. Subject to approval trading statement covering trading from the start of the financial period in mid-June 2019. by shareholders at the Annual General Meeting to be held on 11 June 2019, the final dividend will be paid on 21 June 2019 to shareholders on the register on 17 May 2019. CU R RENT TRADING AND OU TLOO K RETA IL In the UK and Europe, we plan to open our first full price stores in Antwerp, Belgium and Hamburg, Germany, and an outlet in Metzingen, Germany, along with two further concessions in Germany. We will continue to invest in our e-commerce sites to enhance the customer experience and journey, with our localised Spanish website due to launch in late May. In North America, we will continue to develop our presence with plans to open a David Bernstein CBE Executive Chairman 21 March 2019 NOTES: 1 Constant currency comparatives are obtained by applying the exchange rates that were applicable for the 52 weeks ended 27 January 2018 to the financial results in overseas subsidiaries for the 52 weeks ended 26 January 2019 to remove the impact of exchange rate fluctuations. 2 Profit before tax and exceptional items is a non-GAAP measure. For further information about this measure, and the reasons why we believe it is important for an understanding of the performance of the business, please refer to page 17 in the Financial Review and Note 1(y) and Note 3 of the financial statements. The Directors believe these measures provide a consistent and comparable view of the underlying performance of the Group’s ongoing business. 6 STRATEGIC REPORT BU SIN ESS MOD EL AND STRATEGY The wholesale business in the UK serves countries across the world, primarily in the UK and Europe, as well as supplying products to stores operated by our territorial licence Ted Baker has grown steadily from its origins as a specialist shirt store in Glasgow to the partners. In addition, we operate a wholesale business in North America serving the US global lifestyle brand it is today. TED BAKER’S MISSION STATEM EN T Our mission is to build a successful company through the creation of a leading designer and Canada. Our wholesale partners (“Trustees”) are custodians of our collections and uphold our brand integrity by ensuring that their retail environment and brand adjacencies are in keeping with the profile and positioning of the brand. We have built up strong relationships with some of the best independent retailers, online retailers and department brand. By conducting ourselves in an efficient and courteous manner and by maintaining stores around the world. Ted’s high standards of integrity, we pride ourselves on always being in a position to satisfy We operate both territorial and product licences. Our licence partners are all experts the needs of our customer. In order to protect the ethos and persona for which we in their field and share our passion for unwavering attention to detail and firm commitment have gained an enviable reputation, we always ask ourselves the question: “Would Ted do to quality. it that way?” P RODUCT Ted Baker is a quintessentially British brand that travels well with a quirky yet commercial Territorial licences cover specific countries or regions in Asia, Australasia, Europe, the Middle East, Africa and Central America, where our partners operate licensed retail stores and, in some territories, wholesale operations. Product licences cover Bedding; Childrenswear; Eyewear; Footwear; Fragrance fashion offering that prides itself in always being able to satisfy the needs of our customer. and Skinwear; Gifting and Stationery; Jewellery; Lingerie and Sleepwear; Luggage; Our approach is focused on unwavering attention to detail and firm commitment to quality. Neckwear; Rugs; Suiting; Technical Accessories; Tiles; and Watches. For much of the year, We offer a wide range of collections including Menswear; Womenswear; Global; footwear was also operated under licence to Pentland. On 1 January 2019, the Group Phormal; Endurance; Colour By Numbers; Accessories; Bedding; Childrenswear; Eyewear; acquired its footwear licence and will use this exciting opportunity to drive further Footwear; Fragrance and Skinwear; Gifting and Stationery; Jewellery; Lingerie and growth in its footwear business by leveraging the Group’s global footprint and well Sleepwear; Luggage; Neckwear; Rugs; Suiting; Technical Accessories; Tiles; and Watches. invested infrastructure. The menswear collection is a reflection of popular contemporary culture, with a sense of humour and style mixed in. It also includes our Phormalwear range, offering a number of distinctive suiting collections that combine heritage British tailoring with a GE OGR APH I C REAC H Ted Baker is a global lifestyle brand with 560 stores and concessions worldwide, comprised modern outlook. The womenswear collection is a fresh and feminine mix of European of 201 in the UK, 122 in Europe, 130 in North America, 98 in the Middle East, Africa elegance with London flair and is a celebration of beauty, individuality and exquisite and Asia, and 9 in Australasia. attention to detail. The Group opened its first shop in the UK in Glasgow in 1988 and has since established itself in all the major fashion destinations in the UK. We have also built a growing presence D ISTR IBUTION CHANN ELS The brand operates through three main distribution channels: retail (including in Europe with stores and concessions in Belgium, France, Germany, Ireland, Italy, the Netherlands, Portugal and Spain. Our e-commerce and wholesale businesses complement e-commerce), wholesale, and licensing, which includes territorial and product licences. our locations in Europe. We want our customers to enjoy a seamless experience regardless of how they choose to In 1998, the Group opened its first store in North America in New York. Since then, shop and interact with the brand. the Group has established a presence across the US from the East to West Coasts and into The retail channel comprises stores, concessions and e-commerce, which is now an Canada through both own stores and concessions. In addition, the Group has a standalone integral part of our retail experience. We operate stores and concessions across the UK, e-commerce site in North America that is localised to each of Canada and the US, and a Europe, North America, Africa and Asia, and localised e-commerce sites for the UK, France, growing wholesale business. Germany, US, Canada and Australia. We also have e-commerce businesses with some of As part of our strategy to invest for the longer-term development of the brand, we our concession partners. Stores and concessions are designed to showcase the brand’s unique style of retail have launched the brand in Asia with stores and concessions in China, Hong Kong and Japan. We also understand the growing desire of our customers to buy our products theatre and to ensure our customers enjoy a welcoming and pleasurable shopping online and trade on renowned local websites in this region. We continue to refine and experience. Each store boasts a fully bespoke design that is full of innovative and develop our strategy for success in Asia. distinctive touches. Through our territorial licences we also trade in many other countries across Africa, E-commerce enables us to offer our customers access to an extended product Asia, Australasia, Europe and the Middle East. range and provides us with a means to talk directly with our customers and engage them with the brand. We focus on ensuring that we provide a user-friendly online brand and shopping experience across multiple devices. 8 STRATEGIC REPORT STR ATEGY Our strategy is to enhance our position as a leading global lifestyle brand by the continuous development of three main elements of our business model: • considered extension of the Ted Baker collections to achieve our brand growth potential. We review our collections continually to ensure we anticipate and react to trends and meet our customers’ expectations. In addition, we look for opportunities to extend the breadth of our collections and enhance our offer; • controlled distribution through three main channels: retail (including concessions and e-commerce), wholesale and licensing. We consider each new opportunity to ensure it is right for the brand and will deliver margin-led growth; and • carefully managed development of existing and new international markets. We continue to manage growth in existing territories while considering new territories for expansion. Underlying our strategy is an emphasis on design, product quality and attention to detail, delivered by the passion, commitment and dedication of our teams, licence partners and wholesale customers. 9 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT K EY PERFORM ANCE INDICATO RS We review the ongoing performance of the business using key performance indicators. The key performance indicators (KPIs) that the Directors judge to be most effective in assessing progress against the Group’s objectives and strategy have been detailed below and are considered throughout the Strategic Report. KEY PERFORMANCE INDICATOR 52 WEEKS ENDED 26 JANUARY 52 WEEKS ENDED 27 JANUARY VARIANCE Group Revenue Gross margin Profit before tax (excluding exceptional items) as a % of revenue2 Profit before tax (including exceptional items) as a % of revenue2 Retail Total revenue Store revenue E-commerce revenue Gross margin Average square footage3 Closing square footage3 Sales per square foot excluding e-commerce sales Wholesale Revenue Gross margin Licence income Revenue Group Working capital4 2019 £617.4m 58.3% 10.2% 8.2% £461.0m £339.3m £121.7m 63.1% 431,646 443,049 £786 £156.5m 44.1% £22.1m £195.8m 2018 £591.7m 61.0% 12.4% 11.6% £442.5m £341.4m £101.1m 67.0% 410,190 420,158 £832 £149.2m 43.3% £21.4m £168.6m 4.4% (270 bps) (220 bps) (340 bps) 4.2% (0.6%) 20.4% (390 bps) 5.2% 5.4% (5.5%) 4.8% 80 bps 3.1% 16.1% CONSTANT CURRENCY VARIANCE1 5.0% 4.8% 0.1% 20.8% (4.9%) 5.7% 1 Constant currency comparatives are obtained by applying the exchange rates that were applicable for the 52 weeks ended 27 January 2018 to the financial results in overseas subsidiaries for the 52 weeks ended 26 January 2019 to remove the impact of exchange rate fluctuations. 2 For information about exceptional items please refer to page 17 in the Financial Review and Note 1(y) and Note 3 of the financial statements. 3 Excludes licensed partner stores. 4 Working capital comprises inventories, trade and other receivables, and trade and other payables. 11 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT BU SIN ESS REVIEW D ISTR IBUTION CHANN ELS The brand operates through three main distribution channels: retail, which includes concessions and e-commerce; wholesale; and licensing, which includes territorial and product licences. As part of our strategy we look to further develop each of these routes to market, while ensuring the controlled distribution of our product. RETA IL Our retail channel comprises stores, concessions and e-commerce, providing an omni- The wholesale gross margin increased to 44.1% (2018: 43.3%) due to a greater proportion of sales to our wholesale partners, known as “Trustees of the brand”, which carry a higher margin than sales to our retail licence partners and some foreign exchange benefits. COL L EC TI ONS Ted Baker Womenswear sales were up 11.8% to £382.2m (2018: £342.0m) and represented 61.9% (2018: 57.8%) of total sales. Ted Baker Menswear sales were down 5.8% to £235.2m (2018: £249.7m) and represented 38.1% of total sales (2018: 42.2%). The increase in womenswear sales was in part due to the increased proportion channel experience. We operate stores and concessions across the UK, Europe, North of e-commerce sales, which accounts for a higher proportion of womenswear sales America and the Rest of the World, and localised e-commerce sites in the UK, continental than menswear, and the difficult market conditions which had a disproportionate impact Europe, the US, Canada and Australia. We also have e-commerce businesses with some of on menswear sales. our concession partners. Our unique stores showcase the Ted Baker brand and are key to the growth and success of our e-commerce business. Our relatively low number of own stores and higher number of concession locations allow us to maintain a flexible store business model. Retail sales grew by 4.2% (4.8% in constant currency)1 to £461.0m (2018: £442.5m). Performance was impacted by competitive discounting across the retail sector, consumer L I CE NC E I NCOM E We operate both territorial and product licences. Our licence partners are carefully selected as experts in their field and share our passion for unwavering attention to detail and firm commitment to quality. On 1 January 2019, we acquired the issued share capital of No Ordinary Shoes Limited uncertainty, the well-publicised challenges facing some of our UK trading partners and the and No Ordinary Shoes USA LLC from Pentland. Pentland previously held the exclusive unseasonable weather across our global markets at different points throughout the year. global licence to manufacture and distribute footwear under the Ted Baker brand and Despite this, growth was driven by continued investment across the retail channel in new therefore the licence income earned ceased from the acquisition date. and existing stores and our e-commerce platform. Licence income grew by 3.1% to £22.1m (2018: £21.4m). Underlying growth in The total growth in retail sales of 4.2% (4.8% in constant currency)1 compares to an increase in average retail square footage of 5.2% to 431,646 sq ft (2018: 410,190 sq ft). Retail sales per square foot (excluding e-commerce) decreased 5.5% (decrease of 4.9% in constant currency)1 to £786 (2018: £832) demonstrating the challenging external trading conditions together with changing customer behaviour with customers shopping both online and in store. licence income was 5.5%, adjusting for the acquisition of the footwear licence. We saw a stronger performance from our product licences during the period despite a number being impacted by the external trading conditions in the UK. During the period, we signed two new global licence agreements which will commence in the year ending 25 January 2020. We signed a new men’s underwear and loungewear global licence with Delta Galil. We also signed a new global watch The retail gross margin decreased to 63.1% (2018: 67.0%) as the prior year had licence with Timex Group, allowing us to benefit from their expertise and long history benefited from an improved full price sell through and was further reduced by an increase as an authentic watchmaker. Both new partners reflect our commitment to working in promotional activity in response to the very difficult trading conditions. with the best product specialists that are able to support our status as a truly global Retail operating costs increased by 3.0% (3.6% in constant currency)1 to £231.9m lifestyle brand. (2018: £225.2m) and, as a percentage of retail sales, decreased to 50.3% (2018: 50.9%). WHO L ESALE Our wholesale business in the UK serves countries across the world, primarily in the UK and Europe, as well as supplying products to stores operated by our territorial licence partners. In addition, we operate a wholesale business in North America serving the US and Canada. Group wholesale sales increased by 4.8% (5.7% in constant currency)1 to £156.5m (2018: £149.2m), reflecting further growth in both our UK and Europe wholesale business, with sales increasing by 6.0% (6.0% in constant currency)1 to £99.7m (2018: £94.1m), and our North American wholesale business, with sales increasing by 3.1% (5.4% in constant currency)1 to £56.8m (2018: £55.1m). 12 STRATEGIC REPORT G EOG RAPHIC PERFORMANCE U NI T ED KINGDOM AND EURO PE Total retail revenue* Store revenue E-commerce revenue Average square footage* Closing square footage* Sales per square foot including e-commerce sales Sales per square foot excluding e-commerce sales Wholesale revenue Own stores Concessions Outlets Partner stores Total * Excludes licensed partner stores. 52 WEEKS ENDED 26 JANUARY 52 WEEKS ENDED 27 JANUARY VARIANCE 2019 £315.0m £217.0m £98.0m 272,554 279,312 £1,156 £796 £99.7m 40 254 21 8 323 2018 £301.1m £218.6m £82.5m 257,367 261,261 £1,170 £849 £94.1m 37 252 15 4 308 4.6% (0.7%) 18.8% 5.9% 6.9% (1.2%) (6.2%) 6.0% 3 2 6 4 15 CONSTANT CURRENCY VARIANCE1 4.5% (0.9%) 18.8% (1.4%) (6.5%) 6.0% Retail sales in UK and Europe increased by 4.6% (4.5% in constant currency)1 to £315.0m (2018: £301.1m) despite the widely reported ongoing difficult trading conditions, During the year, our expansion continued across the UK and Europe. We increased our travel footprint with store openings in Luton Airport, London Bridge and our first unseasonable weather at different points throughout the period and the impact on international airport location in Barcelona, Spain. We also opened our first outlet in our concession business with House of Fraser in the lead up to its administration in London at the O2 and our first outlet in Italy and opened further outlets in Germany August 2018. and France. We opened further concessions with premium department stores in the E-commerce sales increased by 18.8% to £98.0m (2018: £82.5m), demonstrating that UK, France, Germany and Spain. We also opened our first licence partner stores in the e-commerce sales are an integral part of the retail proposition in the UK and European Canary Islands, Ukraine and Kosovo. We are pleased with the performance of the new markets. As a percentage of UK and Europe retail sales, e-commerce sales represented openings and remain positive about further growth opportunities for our brand across 31.1% (2018: 27.4%). these markets. Given the ongoing challenging trading conditions, the Group has impaired Sales per square foot excluding e-commerce sales decreased reflecting changing three stores in the UK and two stores in Europe in the period. customer behaviour as customers move to online. However, our stores remain key to the Sales from our UK wholesale business, which include our wholesale export business success of the e-commerce business through initiatives such as order in store and click and the supply of product to our retail licence partners, increased by 6.0% to £99.7m and collect as well as showcasing the brand and the collections and contribute a healthy (2018: £94.1m), reflecting a good performance from sales to Trustees, particularly financial return. within our growing European export business and those Trustees with a strong online proposition. 13 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT NO RTH AMERICA Total retail revenue* Store revenue E-commerce revenue Average square footage* Closing square footage* Sales per square foot including e-commerce sales Sales per square foot excluding e-commerce sales Wholesale revenue Own stores Concessions Outlets Partner stores Total * Excludes licensed partner stores. 52 WEEKS ENDED 26 JANUARY 52 WEEKS ENDED 27 JANUARY VARIANCE 2019 £125.7m £105.1m £20.6m 131,678 137,031 £955 £798 £56.8m 37 61 12 20 130 2018 £120.1m £103.8m £16.3m 121,081 126,524 £992 £857 £55.1m 32 61 12 22 127 4.7% 1.3% 26.4% 8.8% 8.3% (3.7%) (6.9%) 3.1% 5 - - (2) 3 CONSTANT CURRENCY VARIANCE1 7.0% 3.7% 28.5% (1.6%) (4.7%) 5.4% We are confident that the Ted Baker brand is becoming more established and continues to gain recognition in this territory as reflected in the significant growth in e-commerce revenue. Our e-commerce business delivered a strong performance with sales increasing by 26.4% (28.5% in constant currency)1 to £20.6m (2018: £16.3m). As a percentage of North America retail sales, e-commerce sales represented 16.4% (2018: 13.6%). Sales from our retail division in North America increased by 4.7% (7.0% in constant currency)1 to £125.7m (2018: £120.1m), driven by our continued expansion in this region, and sales per square foot excluding e-commerce sales decreased in constant currency1. Performance was impacted by unseasonable weather at different points throughout Sales from our North American wholesale business increased by 3.1% (5.4% in constant currency)1 to £56.8m (2018: £55.1m), reflecting a strengthening relationship with key Trustees that attract domestic customers across North America, further demonstrating increased brand recognition in this territory. Sales in the second half of the period. the year were impacted by Trustees taking a more cautious stance as well as the timing of In the period, we opened new stores in Austin, Chicago, Orlando, San Diego and San deliveries around year end. Francisco and our first stores in Mexico with our licence partner. We closed four of our existing concessions and impaired four stores in light of the broader trading conditions. 14 STRATEGIC REPORT REST OF THE WORLD Total retail revenue* Store revenue E-commerce revenue Average square footage* Closing square footage* Sales per square foot including e-commerce sales Sales per square foot excluding e-commerce sales Own stores Concessions Outlets Partner stores Total * Excludes licensed partner stores. 52 WEEKS ENDED 26 JANUARY 52 WEEKS ENDED 27 JANUARY VARIANCE 2019 £20.3m £17.2m £3.1m 27,414 26,706 £740 £627 11 11 1 84 107 2018 £21.3m £19.0m £2.3m 31,742 32,373 £670 £599 12 14 2 69 97 (4.7%) (9.5%) 34.8% (13.6%) (17.5%) 10.5% 4.7% (1) (3) (1) 15 10 CONSTANT CURRENCY VARIANCE1 (2.9%) (7.8%) 38.4% 12.4% 6.7% We continue to develop the Ted Baker brand across the Middle East, Asia, Africa and During the year, we opened our first licence partner stores in India and our Asian Australasia through our retail and licensing channels. licence partners also opened stores across the region including Indonesia, Malaysia, Retail sales in Rest of the World decreased 4.7% (2.9% in constant currency)1 to £20.3m (2018: £21.3m). This decrease is partly due to the prior year transition of our Singapore, Taiwan and Thailand. Our Middle Eastern licence partners opened stores in Saudi Arabia, United Arab Emirates and Kazakhstan. As at 26 January 2019, our retail operations in South Korea to a distributor who has the knowledge and experience licence partners operated 75 stores and concessions across the Middle East, Asia and to drive growth locally as well as a further refinement of our store portfolio in this Africa (2018: 60). territory. In China, we opened a store in Shanghai and closed one store, one outlet The joint venture with our Australasian licence partner, Flair Industries Pty Ltd, and three concessions within China, as well as the closure of one store in Hong Kong. continued to perform well. As at 26 January 2019, we operated nine stores in Australasia We also impaired four stores that have failed to deliver on their potential. We continue (2018: nine stores). to refine and develop our strategy for success in Asia. NOTES 1 Constant currency comparatives are obtained by applying the exchange rates that were applicable for the 52 weeks ended 27 January 2018 to the financial results in overseas subsidiaries for the 52 weeks ended 26 January 2019 to remove the impact of exchange rate fluctuations. The Directors believe this measure provides a consistent and comparable view of the underlying performance of the Group’s ongoing business. 15 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT FI NA NCIAL REVIEW REVENUE AND GROSS MARGIN Group revenue increased by 4.4% (5.0% in constant currency)1 to £617.4m (2018: £591.7m), driven by a 4.2% (4.8% in constant currency)1 increase in retail sales to £461.0m (2018: £442.5m) and a 4.8% (5.7% in constant currency)1 increase in wholesale sales to £156.5m (2018: £149.2m). The Group gross margin was lower at 58.3% (2018: 61.0%). We had anticipated a slightly lower retail margin, as the prior year had benefited from an improved full price £4.5m, and restructuring costs of £1.3m, partially offset by income of £1.1m related to the release of provisions against the Group’s legacy warehouses following assignment of the leases. For further information about this measure, and the reasons why we believe it is important for an understanding of the performance of the business, please refer to Note 1(y) of the financial statements. FI N ANC E I N COME A ND EXP E N SE S Net interest payable during the period was £3.6m (2018: £3.2m). The increase was sell through. The resultant margin was further reduced by an increase in promotional largely due to higher average borrowings on the revolving credit facility as well as an activity in response to the difficult trading conditions. This was partly offset by an increased increase in LIBOR rates in the year. wholesale margin, due to a greater proportion of sales being made to our wholesale The net foreign exchange loss during the period of £0.5m (2018: gain of £0.7m) was partners, known as “Trustees of the brand”, which carry a higher margin than sales to our due to the translation of monetary assets and liabilities denominated in foreign currencies. retail licence partners and some foreign exchange benefits. The decrease from the prior period was due to the appreciation of Sterling at the end of the year compared to the prior year. O PE R ATING EXPENSES BEFORE EXCEP TIO NAL I TE MS 2 Distribution costs, which comprise the cost of retail operations and distribution centres, increased by 5.6% to £249.8m (2018: £236.5m). Distribution costs excluding exceptional costs2 increased by 3.7% (4.1% in constant currency)1 to £240.5m (2018: £232.0m) and as a percentage of sales decreased to 38.9% (2018: 39.2%). Administrative costs increased by 5.5% to £79.8m (2018: £75.6m). Administration expenses excluding exceptional costs2 increased by 1.9% (2.4% in constant currency)1 to £76.9m (2018: £75.5m). This increase is due to modest growth in our central functions, TA XATI ON The Group tax charge for the year was £10.1m (2018: £16.0m), an effective tax rate of 19.9% (2018: 23.3%). This effective tax rate is higher than the UK tax rate for the period of 19% largely due to higher overseas tax rates and the non-recognition of losses in overseas territories. During the second half, there has been a release of prior year tax provisions which has reduced the effective tax rate. The UK corporation tax rate reduced to 19% from 1 April 2017 and will reduce to 17% from 1 April 2020. The US federal corporate both in the UK and overseas and investment in customer engagement. The increase income tax rate has reduced to 21% with effect from 1 January 2018. has been partially offset by a measured and controlled approach to multiple cost saving Our closing UK deferred tax assets and liabilities have been largely measured at 17% initiatives across the central functions of the business which have started to deliver savings based on the corporation tax rate at which they are anticipated to unwind. Overseas as well as efficiency benefits from the investment in infrastructure. deferred tax assets and liabilities have been measured at the applicable overseas tax rates. Dual running costs incurred in respect of our new North American distribution Our future effective tax rate is expected to be higher than the UK tax rate as a result centre and the systems roll-out were £2.8m (2018: £2.1m) in the period. No further dual of overseas profits arising in jurisdictions with higher tax rates than the UK. We would running costs are expected to arise in the next financial year. expect future reductions in the effective tax rate given the UK rate reduction to 17% from 1 April 2020. PRO F I T BEFORE TAX AN D EXCE PTIO N AL IT E M S 3 AND PRO FI T BEFORE TAX Profit before tax and exceptional items3 was £63.0m (2018: £73.5m) and profit before tax was £50.9m (2018: £68.8m). EXC EPTIONAL ITEM S 2 Exceptional items in the period amounted to £12.1m (2018: £4.7m) and comprised provision for debtor balances owed by House of Fraser on its entry into administration of £0.6m, advisory and one-off integration costs in relation to the acquisition of the S H ARE HOL D ER R ETURN Basic earnings per share decreased by 23.1% to 91.5p (2018: 119.0p). Adjusted earnings per share, which exclude exceptional items4, decreased by 10.6% to 114.2p (2018: 127.7p). The proposed final dividend of 40.7p per share will make a total for the period of 58.6p per share (2018: 60.1p per share), a decrease of 2.5% on the previous period. C AS H FLOW The decrease in net cash and cash equivalents of £17.8m (2018: £21.9m) primarily reflected footwear business of £1.7m, costs incurred prior to the year end in relation to the ongoing the acquisition of the footwear business, an increase in working capital and further capital investigation into the allegations of misconduct of the former Chief Executive Officer and expenditure to support our long-term development. the Group’s policies, procedures and handling of HR-related complaints of £1.1m, and the On 1 January 2019, the Group acquired its footwear business from its previous licence impairment of retail assets across the Group of £8.7m. partner. The consideration paid was £20.3m (see Note 24). Exceptional items in the 52 weeks ended 27 January 2018 of £4.7m included the Total working capital, which comprises inventories, trade and other receivables and impairment of retail assets, relating to three stores in the US and one store in Europe of trade and other payables, increased by £27.2m to £195.8m (2018: £168.6m). 17 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT This was mainly driven by an increase in inventories of £38.6m to £225.8m (2018: £187.2m) reflecting the acquisition of the footwear business, some earlier phasing of stock TRE AS URY RI S K M AN AGEM ENT The most significant exposure to foreign exchange fluctuation relates to purchases made deliveries and the impact of the movement in foreign exchange rates. in foreign currencies, principally the US Dollar and the Euro. Trade and other receivables increased by £14.3m to £78.6m (2018: £64.3m). This was A proportion of the Group’s purchases are hedged in accordance with the Group’s driven by a number of factors including the acquisition of the footwear business, which is risk management policy, which allows for foreign currency to be hedged for up to principally a wholesale operation, the timing of payments around year end and the impact 24 months in advance. The balance of purchases is hedged naturally as the business of the movement in foreign exchange rates. operates internationally and income is generated in the local currencies. At the balance Trade and other payables increased by £25.7m to £108.6m (2018: £82.9m), reflecting sheet date, the Group has hedged a proportion of its projected commitments in respect the acquisition of the footwear business, the impact of the movement in foreign exchange of the period ending 25 January 2020 as well as a proportion of its requirements for the rates and the early benefits of working capital initiatives. following period. Group capital expenditure of £30.3m (2018: £36.6m) relates to the opening and The Group is also exposed to movements in foreign exchange rates on intercompany refurbishment of stores, concessions and outlets and the ongoing investment in business- balances denominated in a foreign currency. These are not hedged. wide IT systems and infrastructure to support our continued growth. The Group is exposed to movements in UK interest rates as both the revolving credit facility and term loan accrue interest based on LIBOR plus a fixed margin. The Group has partially mitigated this risk by entering into interest rate swap agreements, fixing £30.0m of the floating rate net debt. BO R ROWING FACILITIES The Group’s net borrowing position at the end of the period was £123.8m (2018: £111.8m). The Group manages its liquidity using a multi-currency revolving credit facility of £135.0m, expiring in September 2020. The facility provides the resources to fund the planned investment in capital expenditure and working capital required to support the Group’s long-term growth strategy. The facility contains covenants against which the Group monitors actual and prospective compliance. As at the period end, the Group had drawn £91.3m (2018: £72.9m) under this facility. In addition, the Group has a term loan that was used to support the purchase of The Ugly Brown Building and is secured upon the freehold property interest in that building. The loan was originally £60.0m and is being amortised over 15 years with refinancing required every five years from 2015. During the period, repayments totalling £5.5m (2018: £6.0m) were made. NOTES 1 Constant currency variances are calculated by applying the exchange rates for the 52 weeks ended 27 January 2018 to results financial results in overseas subsidiaries for the 52 weeks ended 26 January 2019 to remove the impact of exchange rate fluctuations. 2 For information about exceptional items please refer to Note 1(y) and Note 3 of the financial statements. 3 Profit before tax and exceptional items is a non-GAAP measure, adjusted for exceptional items. 4 Adjusted earnings per share is a non-GAAP measure, adjusted for exceptional items. 18 STRATEGIC REPORT P RIN CI PAL RISKS AND UNCE RTAIN TIES In addition, the Group has established a Risk Committee that includes the Finance Director and various members of the Executive Board and heads of department. The Risk The Board is ultimately responsible for the Group’s system of risk management and Committee helps the Executive Board review the risk management and control process internal control and for reviewing its effectiveness, and for determining the Group’s risk in each key business area on an ongoing basis and provides a platform for management to appetite. The Board confirms that there is an ongoing process for identifying, evaluating drive improvement across the business. The Risk Committee considers: and managing the significant risks faced by the Group, which has been in place for the period and up to the date of approval of these financial statements, and that this process • the authority, resources and co-ordination of those involved in the identification, is regularly reviewed by the Board. However, such systems are designed to manage rather assessment and management of significant risks faced by the Group; than eliminate the risk of failure to achieve business objectives and can provide only • the response to the significant risks which have been identified by management reasonable and not absolute assurance against material misstatement or loss. and others; • the maintenance of a controlled environment directed towards the proper management RIS K MANAGEMENT PROCESS In order to help manage the Group’s risks and uncertainties, the Board has delegated of risk; and • the annual reporting procedures. responsibility for monitoring the effectiveness of the Group’s systems of internal control and risk management to the Audit Committee. An overview of the Group’s risk management process is set out below: PLC BOARD Ultimately responsible for risk management AUDIT COMMITTEE Monitors the effectiveness of system of risk management and internal controls EXECUTIVE BOARD Oversees the Group’s risk management processes and monitors mitigating actions RISK COMMITTEE Reviews and challenges key risks, associated controls and management action plans RISK FRAMEWORK Ensures consistent approach across Group WIDER BUSINESS 20 I N T E R N A L A U D I T STRATEGIC REPORT Having considered the key risks inherent in the business and the system of control The Group has an independent internal audit function whose findings are regularly necessary to manage such risks, the Finance Director presents the Risk Committee’s reviewed by the Board and the Executive Committee. The Audit Committee monitors and findings to the Board on a regular basis. In addition, the Chief Executive Officer reports reviews the effectiveness of the internal audit activities. to the Board on changes in the business and the external environment which affect The acting Chief Executive Officer provides the Board with monthly financial significant risks. information which includes updates by reference to the Group’s key performance indicators. In turn, the Audit Committee assesses the findings and recommendations of the Risk The Board has carried out a robust assessment of the principal risks facing the Group, Committee and the Group’s external and internal audit processes and looks critically at including those that would threaten its business model, future performance, solvency how the business responds, as well as investigating material issues and what actions they or liquidity. The following list highlights the principal risks identified by the Group implement to prevent future issues. (which are not shown in order of importance). Additional risks and uncertainties not On behalf of the Board, the Audit Committee has reviewed the effectiveness of the presently known, or currently considered to be less material, may also have an adverse system of risk management and internal control during the period, covering all material effect on the Group. controls, including financial, operational and compliance controls. In particular, it has reviewed and updated the process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks are managed. Management is responsible for the identification and evaluation of significant risks applicable to their areas of the business together with the design and operation of suitable internal controls. These risks are assessed on a continual basis and may be associated with a variety of internal or external sources including control breakdowns, disruption in information systems, competition, natural catastrophes and regulatory requirements, and also with reference to the Group’s five year strategic and financial plan. During the period, the Board has continued to place significant focus on risk management. Following the Audit Committee’s engagement of PricewaterhouseCoopers LLP (PwC) to undertake a detailed review of the Group’s risk framework and internal audit function in the prior period, the Board has again retained PwC to assist the Risk Committee and Audit Committee in managing the Group’s risk profile and increasing engagement with stakeholders in the Group. 21 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT BR EX I T At the time of publication, the United Kingdom is due to leave the European Union on included a consideration of our strategy, regulatory compliance, trade and team members. We have developed a number of strategies and contingency plans which will assist 29 March 2019. The basis on which the United Kingdom’s withdrawal will take place in minimising any disruption caused by Brexit. Of course, there remain indirect risks is unclear. Undoubtedly, a so-called “no deal” withdrawal (under which there is no free which are beyond our control and the resulting risk that they pose is highly reliant on the trade agreement) is likely to have the greatest impact on the Group. In preparation for preparedness of the national authorities and other businesses. The key risks are included a no deal withdrawal, the Group appointed a Brexit working group to work with external in the analysis below. advisers to ascertain the likely impacts of such withdrawal on the business. This review PRINCIPAL RISKS AND UNCERTAINTIES ISSUE POTENTIAL IMPACT MITIGATION STRATEGIC RISKS Brand and reputational risk The strength and reputation of the Ted Baker brand is important to the business. There is a risk that our brand may be undermined or damaged by our actions or those of our partners or supply chain. We carefully consider each new partner with whom we do business. Such partners are subject to due diligence and are monitored on an ongoing basis to ensure they remain appropriate to the brand. Development of overseas markets Fashion and design There is an additional risk from the way reputational matters arise. Unmanaged exposure through user-generated content platforms may augment the impact of reputational matters. We have a dedicated team to focus on reputational matters relating to the Company composed of internal stakeholders and external consultants. Any reputational issues are dealt with in a considered and swift manner. Failure in growing the international business through franchise operations, licensees and e-commerce. Risk that the Group fails to prioritise the right territories or investment or fails to support these markets with systems and supply chain capability. We perform extensive due diligence on all potential partners and territories and to assess our appropriate routes to market. We operate in a range of international markets, which helps to mitigate over-reliance and exposure to any one territory. As with all fashion brands there is a risk that our offer will not satisfy the needs of our customers or we fail to correctly identify trends in an increasingly competitive market, resulting in lower sales and reduced market share. We maintain a high level of market awareness and an understanding of consumer trends and fashion to ensure that we remain able to respond to changes in consumer preference. We use customer data to develop targeted marketing and promotional activity. CHANGE IN LEVEL OF RISK Increased risk No material change No material change External events External events may occur which may affect the global, economic and financial environment in which we operate. These events can affect our suppliers, customers and partners, increasing our cost base and adversely affecting our revenue. OPERATIONAL RISKS Supply chain If garments do not reach us on time and to specification, there is a risk of a loss of revenue and customer confidence. Over-reliance on key suppliers could also have an impact on our business. We continue to focus on product design, quality and attention to detail. These risk factors are monitored closely on an ongoing basis ensuring that we are prepared for and can react to changes in the external environment, allowing us to reduce our exposure as early as possible. Increased risk The geographic spread of our business and supply chain also helps to mitigate these risks. Our supply chain is diversified across a number of suppliers in different regions, reducing reliance on a small number of key suppliers. Suppliers are treated as key business partners and we work closely with them to mitigate these risks. The Group continues to improve and evolve its supply chain. No material change Retail sector outlook Outlook in the retail sector remains uncertain, with increasing pressures on the Group’s customers. The Group’s Credit Committee closely monitors any outstanding debts and takes appropriate action where necessary. Increased risk The Group manages its credit risk through insurance, standby letters of credit or other supplier financing products wherever possible. Infrastructure Social responsibility Cybersecurity There is a risk of operational problems, including disruption to the infrastructure that supports our business, which may lead to a loss of revenue, data and inventory. The business continuity plan is constantly reviewed and updated by the Risk Committee. In addition, business disruption is covered by our insurance policies. We are committed to operating in a responsible and sustainable manner as regards our supply chain, environment and community. If we fail to operate in a manner that supports our philosophy, this could damage the trust and confidence of our stakeholders. A sub-committee of the Executive Committee has been tasked with overseeing specific areas of our social responsibility agenda. Ted’s Conscience Team is responsible for monitoring this agenda and ensure our practices fall in line with it. More information is set out on page 27 (Sustainability). No material change No material change The business is subject to threats from hacking or viruses or other unauthorised data breaches. This risk has become more prevalent with heightened frequency and sophistication of attacks. There is the possibility of unintentional loss of controlled data by authorised users. The Group has invested in additional specialist IT resources. Increased risk The continual upgrading of security equipment and software also mitigates these risks. Tightly controlled security controls, an extensive penetration testing programme, and data recovery and business continuity plans have been implemented with the support of specialist third parties. 22 STRATEGIC REPORT ISSUE POTENTIAL IMPACT MITIGATION OPERATIONAL RISKS CONTINUED IT infrastructure and implementation of ERP People The Group’s IT infrastructure is key to the operation of its business. We have now implemented the final phase of Microsoft Dynamics AX across the business. With any project of this scale, there is a risk of a poorly managed take-up of new systems, which could lead to business disruptions. This, and the implementation of other new business systems, has potential to impact interdependent systems and the business. Our performance is linked to the performance of our people and, in particular, to the leadership of key individuals. The loss of a key individual whether at management level or within a specialist skill set could have a detrimental effect on our operations and, in some cases, the creative vision for the brand. Regulatory and legal framework We operate in a range of international markets and must comply with various regulatory requirements. Failure to do so could lead to financial penalties and/or reputational damage. Infringement of the Group’s intellectual property Unauthorised use of the Group’s designs, trademarks and other intellectual property rights could damage the Ted Baker brand and the Group’s reputation. FINANCIAL RISKS Currency, interest, credit and counterparty credit risks, including financial covenants under the Group’s credit facilities Foreign exchange BREXIT RISKS Political uncertainty In the course of its operations, the Group is exposed to these financial risks which, if they were to arise, may have material financial impacts on the Group. The Group is exposed to fluctuations in the exchange rates of key currencies. The lack of clarity arising from the UK’s negotiations to leave the European Union has increased the levels of economic and consumer uncertainty. This uncertainty is increased if the UK’s withdrawal is on any basis that is not subject to a free trade agreement. Changes in VAT and customs duty regimes Following the UK’s withdrawal from the European Union, goods being imported to and exported from the Community may be subject to different VAT and customs duty regimes. This may lead to an increase in costs across the business. Trade arrangements with third countries The UK’s ability to trade with a number of nations is reliant on its membership with the European Union. There is a risk that the UK will not have trade agreements with countries that supply a large proportion of goods to the Group. HM Government has already announced that the trade agreement with Turkey, where a large proportion of our suppliers are domiciled, will not transition immediately following Brexit. 23 CHANGE IN LEVEL OF RISK No material change Increased risk No material change The Group’s IT Steering Committee meets on a two weekly basis to review the implementation and all other major IT projects. This Committee comprises members of the Executive Committee and is advised by external professional advisers. The IT Steering Committee has established a Design Authority charged with overseeing the scheduling of the implementation of any new system. Robust change management and professional project managers recruited to oversee the project team which includes key business stakeholders. Identification and retention of key talent is important and we take active steps to provide stability and security to the key team. We carry out an annual benchmarking review to ensure that we provide competitive remuneration and total reward packages. We also utilise long-term incentive schemes to retain key talent. Employee engagement through our culture and environment strengthen the commitment of team members and has a positive impact on our retention rate. Succession plans are in place and have been reviewed during the period. The Group has implemented policies and procedures to place to detect and deal with iHRl matters. This includes robust reporting channels through an independent helpline. The Group closely monitors changes in the legal and regulatory framework within the markets in which it operates. We work closely with specialist advisers in each market to ensure compliance with local laws and regulations. For example, the Group has established a cross-functional GDPR steering committee that has worked with external advisers to ensure the Group’s policies and procedures are GDPR compliant. The Group, with its external advisers, rigorously manages and defends its intellectual property. No material change The Group deals with counterfeit goods in accordance with its robust enforcement strategy. The Group’s policies for dealing with these risks are discussed in detail in Note 22 to the financial statements. No material change The Group’s Foreign Exchange strategy is closely managed by the Finance Director and the Group’s external advisers. The Group has adopted a hedging policy to mitigate short-term foreign exchange risk. The Group has established a Brexit working group which, together with its external advisers, continues to carefully monitor the potential impact of Brexit. In light of the uncertainty the Group has undertaken a business review to identify the likely impacts of a no-deal withdrawal. Scenario planning includes the additional customs duties, VAT and customs duty declarations and the restriction on the free movement of people. Increased risk Increased risk The Brexit working group has reviewed the supply chain and routes to market to identify where costs are likely to be incurred. Increased risk In the short term, the impact of increased customs duty has been stress tested and we have considered immediate steps that can be taken to alter the supply routes to goods. In the long term the business is considering alternative solutions, including implementing a customs warehouse in the UK and a supplementary warehouse facility in the EU 27. We continue to follow guidance provided by HM Government and consider alterations that can be made to the supply chain and the routes of transportation to mitigate additional costs arising from a no deal Brexit. Increased risk We also recognise that the UK will be able to negotiate trade agreements with third countries following the UK’s withdrawal from the European Union. We will continue to monitor the political developments to identify strategic opportunities to the business. Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT ISSUE POTENTIAL IMPACT MITIGATION BREXIT RISKS CONTINUED Supply chain delays Withdrawal from the European Union without a free trade agreement and the resulting additional customs requirements may delay the movement of goods between the EU27 and the UK affecting both suppliers and customers. This will impact our ability to supply our wholesale and licensee distributors as well as our own outlets. We have reviewed opportunities to expedite the delivery of stock from suppliers ahead of the UK’s withdrawal to reduce the volume of goods being delivered in the early weeks following Brexit. We have also contacted relevant distributors who may be impacted by any delay. In the long term we are considering logistics solutions as set out above that could mitigate the risk of delay. CHANGE IN LEVEL OF RISK Increased risk Employment of EU nationals in the UK EU nationals residing in the UK may no longer have automatic leave to remain. This reduces the potential talent pool the business is able to recruit from. This could restrict the Group’s access to key talent. Foreign exchange The Group’s exposure to fluctuations in the exchange rates of key currencies is exacerbated by market fluctuations as a result of Brexit. Regulatory and legal compliance There is a risk arising from the increased complexity in the regulatory framework surrounding the manufacture and sale of products should the UK deviate from existing regulations derived from EU legislation. Procurement and contractual arrangements Certain terms in contractual arrangements may have an adverse commercial effect following Brexit such as delivery terms or price clauses. Assistance has been provided to ensure all team members who are EU nationals and wish to remain in the UK can benefit from settled status and continue working in their current positions. Following analysis, we do not expect loss of any key talent. The Group continues to recruit from a number of sources and provide training to ensure there are the requisite skills in the Group. The Group’s strategy in relation to the general risk of Foreign Exchange forms part of our strategy to mitigate the potential risks posed by Brexit and has been factored into our hedging policy. The Group continues to take advice in this area from legal advisers and work with professional bodies for high-risk areas to establish robust procedures to ensure continued compliance with both UK and EU industry standards. Increased risk Increased risk Increased risk The Group has considered commercial tolerances so that it can continue to trade in a commercially viable manner. Increased risk EMERGING RISKS AND UNCERTAINTIES ISSUE POTENTIAL IMPACT MITIGATION OPERATIONAL RISKS Sustainability and climate change Our business depends on our suppliers being able to maintain continuity of service to provide a consistent supply of goods to customers. Natural events and increasing changes to governmental policy may impact our suppliers’ ability to do this. We have a diversified supply chain across the globe and continually assess our sourcing strategy, CHANGE IN LEVEL OF RISK No material change 24 STRATEGIC REPORT VI ABI LITY STATEM ENT In accordance with Provision C.2.2 of the UK Corporate Governance Code dated April Sensitivity analysis was also used to stress test the Group’s strategic plan and to confirm that sufficient headroom would remain available under the Group’s credit facilities. 2016 (the “Code”), the Directors have assessed the prospects and viability of the Group The resilience of the Group has also been tested within the context of the potential over a five year period, taking into account the Group’s current position and the potential adverse impacts of Brexit. For this purpose, the Group has worked on the assumption that impact of the principal risks documented above. there will be no negotiated free trade agreement, no roll-over of preferential trade deals Regardless of the outcome of the Brexit negotiations, the Group’s objective remains with third countries and no reduction to trade tariffs implemented by HM Government. the same: to continue to grow and develop the Ted Baker brand. Analysis was undertaken to interrogate the impact of Brexit as set out above as well The Group operates a five year plan, which is updated and reviewed regularly by the as a scenario where there is an independent decline in consumer demand. The Board is Board. Within the five year plan, detailed scenario planning and stress testing has been satisfied that the Group can maintain its profitability in each respective scenario as well as carried out over a five year period. The Directors therefore consider the five year period a combination of the scenarios. The Board also considers that, under each scenario tested, to 27 January 2024 to be the appropriate period to assess the viability and prospects of the mitigating actions would be effective and sufficient to ensure the continued viability of the Group with a high level of certainty. The key assumptions made in the formulation the Group and there would be no impact on any covenants. For the reasons stated above, of the five year plan are the increased exposure and promotion of the Ted Baker brand, based on the robust assessment undertaken, the Directors confirm they have a reasonable geographical diversification of sales and turnover projections. expectation that the Group will be able to continue in operation, and meet its liabilities as The Directors’ assessment has been further enhanced by analysing the current and they fall due, over the period of assessment. future risks, controls and assurances available, resulting in a clear picture of the risk profile across the whole business. The principal risks, including specific operational risks, that could affect the future viability of the Group over the next five years are identified on pages 20–24 in Principal Risks and Uncertainties. GOI N G CO NC ER N The Directors have reviewed the Group’s budgets and long-term projections. After making enquiries, the Directors have a reasonable expectation that the Company and the Group In making this assessment the Directors have considered the resilience of the Group have adequate resources to continue in operational existence for twelve months from the to the occurrence of these risks in severe but plausible scenarios, including by reference to approval of these accounts. For this reason, they continue to adopt the going concern basis certain principal risks, and taking into account the effectiveness of any mitigating actions. of accounting in preparing the financial statements. In addition, the Board has considered the impact on the Group’s cash flows, headroom, covenants and other key financial ratios, having stress tested the potential impact of these scenarios, both individually and in combination. 25 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT S USTAINABILI TY • We work with local schools and charities to recycle as much waste from head office as we can. At Ted Baker we believe in being open and honest in the way we do business. This includes • We have been working with the charity Newlife to ensure that all faulty garments doing the right thing by all of our stakeholders throughout our supply chain and operating returned to our UK stores do not end up in landfill. Since March 2014 we have been in a fair and sustainable manner. During the period we continued implementing our sustainability strategy, “Fashioning a Better Future”. sending these faulty garments to Newlife for resale as second-hand garments. • Through our relationships with Oxfam, Newlife and Age UK we have been able to We approach our social, environmental and ethical commitments (SEE) with the ensure that our end of line garments are utilised in the best way, raising over £330,000 same focus and attention to detail that permeates the rest of the business. To ensure that we continue to meet our responsibilities in these important areas Fashioning a Better Future focuses on Planet, People and Product. Our Global Sustainability Strategy has been developed and continues to be advanced and improved ensuring that every department is included. and diverting over 20 tonnes of waste from landfill in the last year. P EOP L E Our employees and the people who work in our supply chains are our greatest asset and it is very important to the Group that our products are produced in factories that are committed to providing a fair and safe environment for their workers. To enable this: HOW WE WORK The acting Chief Executive Officer is responsible for overseeing the formulation of the • We work with Segura, an online platform that helps us to map our supply chain. We have brought on board all our factories and their subcontractors. It is helping Group’s policies and procedures to manage risks arising from SEE. In addition, the Board us to reach beyond our direct suppliers and ensure we have more visibility of the has tasked five members of the Executive Committee to oversee specific areas of our supply chains that make Ted Baker products. SEE agenda for the Group. These Executive Committee members participate because of • Ted Baker Ethical, Production and Buying teams regularly visit our suppliers to build the relevance of their departments to our ongoing commitment in these areas – Brand and maintain relationships. These are key in ensuring open and honest communication. Communication, Product Design, Production, Commercial and Special Projects (Interior • All Ted Baker suppliers are governed by our Ethical Code of Conduct. We review and Design). Our full-time Ted’s Conscience team co-ordinates these areas and the Group’s revise our Code of Conduct regularly to ensure that it reflects legislative changes and cross-functional team which is responsible for addressing SEE concerns of the Group. make sure that our suppliers continue to make improvements. The Code is based on O UR SUSTAINABILITY FOCUS We believe in three very important areas of sustainability: 1. PLANET: the Group is committed to managing and reducing its impact on the environment; international conventions such as the Ethical Trade Initiative Base Code, the United Nations Universal Declaration of Human Rights and the Fundamental Conventions of the International Labour Organisation, and can be found at www.tedbakerplc.com/~/ media/Files/T/Ted-Baker/documents/ted-ethical-code-of-conduct-2016.pdf. • In December 2014, we started to collect donations of leftover restaurant food. Those 2. PEOPLE: the Group is committed to looking after those who create, make and wear proceeds are donated to Magic Breakfast, a charity that provides underprivileged our product; and school children in London with much needed breakfasts before school. During the 3. PRODUCT: the Group is committed to producing beautiful, more sustainable products. period, we raised enough money to help provide 5,326 Magic Breakfasts. PLA NE T The Group has engaged in a number of environmental projects during the course of • We keep two Buckfast bee colonies on the roof of our London head office from which we had a hugely successful honey harvest for the ninth year running. the period: • We continue to participate in the Carbon Disclosure Project to measure and disclose P ROD UCT As part of our commitment to product we place great emphasis on producing more our greenhouse gas emissions and climate change strategies. We maintained our sustainable products. disclosure score of B. • We are part of the Sustainable Clothing Action Plan (SCAP), a DEFRA sponsored • We continue to develop our Climate Strategy to encompass our whole business. We will look at our own operations and our supply chain in a holistic manner to ensure action plan organised to improve the sustainability of clothing throughout its lifecycle by bringing together industry, government and third parties. SCAP members we design an impactful programme. This will be rolled out to the whole business collaborate to develop sector-wide targets along with the tools and guidance in 2019/20. necessary to achieve them. As a SCAP 2020 signatory, we are challenged to reduce • We are constantly reviewing the waste our business generates in an effort to achieve carbon, water and the amount of waste generated or consumed by our products by our overall aim of sending no waste to landfill. We participate in the Wastepack 15% by 2020. Compliance Scheme as part of the Producer Responsibility Obligations (Packaging • We have introduced internal sustainable fibre targets to our collections to ensure Waste) Regulations 1997 and continue to reduce unnecessary packaging. that we are meeting our SCAP commitment and as part of SCAP, we participate in the Metrics group. This Group identifies the key industry metrics that businesses 27 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT should measure and is working on a tool to measure baseline carbon, water and waste footprints. It also identifies improvement actions that businesses could take GR EEN H OUSE GA S EM I S S ION S The Group has for a number of years participated in the Carbon Disclosure Project in this area. and is now required, in accordance with the Companies Act 2006 (Strategic Report and • We became a member of the Better Cotton Initiative (BCI) in 2016. The aim of the Directors’ Report) Regulations 2013 (the “Regulations”) to report its greenhouse gas BCI is to make global cotton production better for the people who produce it, better (GHG) emissions. for the environment it grows in and better for the cotton industry’s future. Through The Group has adopted a GHG reporting policy and a management system based on education and training the farmers learn more sustainable farming methods and pool the methodology established under the Greenhouse Gas Protocol, which has been used their resources with the aim of reducing environmental impacts, using less water and to calculate the Group’s Scope 1 and 2 emissions in the period for activities within the harmful pesticides, and increasing yields. In 2017 we made a public commitment to financial control of the Group. source 50% of our cotton as “more sustainable cotton” by 2020. More sustainable In measuring the Group’s GHG emissions, all of the Group’s stores, warehouses and cotton includes Better Cotton through BCI, Organic Cotton and Recycled Cotton. In head offices around the world were taken into account. The space occupied by the Group our 2018 collections 30% (2017: 17%) of our cotton is sourced as Better Cotton, well within concession stores is excluded from Scope 1 and 2 calculations because the Group on track to hit our target. The Group’s GHG emissions during the period are disclosed in the table below. has neither financial nor operational control over a concession area. Such emissions are included in the Group’s Scope 3 figures which are published in our annual Carbon Disclosure Project Report. Scope 1 – Direct CO2 emissions (tonnes CO2e) Scope 2 – Indirect CO2 emissions (tonnes CO2e) Total tonnes CO2e emissions tCO2e per square foot tCO2e per thousand GBP sales 2019 199 3,715 3,914 0.009 0.006 2018 175 4,389 4,564 0.012 0.008 GHG emissions for the period ended 26 January 2019 have been calculated using the appropriate 2018 UK Government Conversion Factors for Company Reporting and, for energy consumed overseas, the International Energy Agency Emission Factors. THE BRIBERY ACT 2010 The Group has an established anti-bribery policy in place designed to manage risks relating M ODER N SL AVERY AC T 2 015 The Group has issued its second statement in compliance with the Modern Slavery Act to bribery and corruption. Ted’s Handbook, which is provided to all Ted employees, which is available at www.tedbakerplc.com. The statement sets out the Group’s policies includes information and instructions on how to manage these risks and is supplemented for assessing the risk of modern slavery within its supply chain and the steps taken to by internal training. Ted also ensures that suppliers are made aware of Ted’s anti-bribery improve transparency. The Group’s cross-functional committee, the Modern Slavery Act policy and how to manage risks by including relevant provisions in Ted’s Supplier Manual Working Group (MSAWG), was established to critically assess and address Ted’s modern and other supply contracts. Both the handbook and the supplier manual are regularly kept slavery objectives. During the period, we have introduced a tailored training programme under review to ensure they are sufficiently robust to prevent bribery and corruption. to understand the warning signs of modern slavery and also understand how our practices can directly impact suppliers and their workforces. We are also working with Segura to develop an online platform to enhance our existing supply chain management systems. MSAWG will continue to develop the Group’s policies in line with the evolving business and landscape, with a focus on supply chain management and compliance. 28 STRATEGIC REPORT P EOP LE L EAR NI N G, D EVELO PM ENT A N D TAL ENT M ANAG EM ENT Employee performance is reviewed formally during the probationary period as the Talent, commitment and passion are three essential strands to the success of the Group. employee settles in to life at Ted and then bi-annually. This focuses on behaviours, The energy and inspired performance of our team are key factors in helping the Group to competence, talent and career development. Goals and objectives linked to business deliver growth and drive innovation. The Group places significant importance in creating development and contribution are a key focus to ensure performance is directly learning and development opportunities, nurturing individual employee growth and linked to Group delivery. Talent is mapped every quarter to identify high performers, recognising and rewarding contribution. areas for development and gap analysis. This supports the development of dynamic and diversified teams. REWA RD AND RECOGNITION The Group operates an annual pay for performance remuneration approach for employees We invest in employee development from specialist and technical skills to bespoke courses developed in-house. During the period we commenced apprenticeship schemes at our London head office (“Tedquarters”) and at our North American local offices. for two employees in the UK Tedquarters and continue to seek opportunities for externally Performance is measured against individual and business-led objectives that directly recognised education. support our culture and brand values. This approach enables the Group to measure and Continuing to bring in fresh and specialist talent as well as nurturing our existing evaluate individual success and achievement, and reward accordingly. All other employee employee population remains high on our business and people agenda. Inter-departmental groups’ remuneration is reviewed annually using a combination of informal and formal and international transfers play a large part in retaining and growing talent as well as benchmarking tools. ensuring the Ted story translates across the globe. In each territory we offer reward and recognition schemes in line with local legislative A year since launching the Development Board, this group of senior management and market requirements for employees but also seek to bring parity across the Group across the business has focused on key strategic objectives to support the Executive where appropriate. Our reward packages include bonus schemes linked to sales targets, Board. The Development Board has also embarked on a team development programme to individual performance and corporate performance. We encourage all UK employees to support leadership development and succession as future leaders for the Group. join our Save As You Earn share scheme. The Group also provides a Long-Term Incentive Following the success of Ted’s Extraordinary Diploma, our latest and fourth year Plan (LTIP) for key senior employees throughout the business. The LTIP is currently in its programme, “Ted’s Extras”, now helps to identify highly motivated and engaged talent sixth tranche of issue. As part of the process of developing a new Directors’ Remuneration with multi-faceted knowledge and develops their expertise across various departmental Policy for the AGM 2020, the Remuneration Committee will be reviewing the existing functions. LTIP to ensure that its operation continues to align with long-term shareholder interests. During the period we celebrated the eighth year of the Wisdom Awards, our Group scheme that recognises long serving members of the team and provides the opportunity D IV ERS ITY The Group believes in respecting individuals and their rights in the workplace and that for employees to share their unique Ted stories. The launch of “The Bank of Tedland”, diversity supports the dynamic of our teams to deliver success. With this in mind, people an “in the moment” recognition scheme with cash rewards for out of the ordinary policies are in place setting out our commitment to managing harassment and bullying in performance, has proven very successful and presents an opportunity to celebrate success the workplace, whistle blowing, equality and diversity. Our team represents a wide and within the wider business. diverse workforce from all backgrounds, sexual orientations, nationalities, ethnicities and The first Gender Pay Gap Report was published during the period and is available on religious groups. We support sponsorship of visa applications, where appropriate, to retain the Company’s website, www.tedbakerplc.com. We are confident that male and female specific talent within the business. We respect cultural difference and actively seek to learn employees in the same or similar roles or roles considered of equal value across the about each territory we operate within. business are paid within a fair range. Our commitment to diversity across the Group continues and consideration to diversity and gender is given with a view to appointing the best placed individual for each new role. The tables below demonstrate the gender split across the Board of Directors, the Group’s leadership and senior management teams and global employees as at 26 January 2019. 30 STRATEGIC REPORT Ted Baker Plc Board of Directors Executive Committee and other senior managers Global team members Male 5 59 1,081 2019 Female 2 78 2,491 Total 7 137 3,572 Male 5 60 1,141 2018 Female 2 88 2,441 2019 UK North America Europe Rest of World Ted Baker Plc Board of Directors Executive Committee and other senior managers Global team members Male 5 50 604 Female 2 54 1,290 Male - 6 290 Female - 14 539 Male - 1 136 Female Male Female - 4 534 - 2 51 - 6 128 Total 7 148 3,582 Total 7 137 3,572 HEA LTH, SAFETY AND WELFARE The Group employs a growing Health and Safety team to support the identification of risks C ULTURE Our brand values are important in everything we do and are instilled into the hearts and and prevention of accidents in the workplace. The team provides ongoing education and minds of all our employees from initial onboarding throughout their employment journey. training to strengthen employees’ knowledge and commitment in this area. This includes Employees are encouraged to always ask: “Would Ted do it that way?” and to apply that emergency and crisis event management and business continuity plans. thinking into everything they say or do. Our duty and commitment to the well-being of our team is supported by a programme of wellness that is relevant to each area of the Group. This includes private healthcare, occupational health, health seminars and funding for flu jabs. During the period, EM P LOY EE EN GAGEM EN T The Group places considerable value on the involvement of its employees and continues we conducted a Well-being Week including physical health and mental well-being seminars, to keep them informed on matters affecting them and the Group, communicating in a health assessments and healthy eating options. We offer health and fitness classes to our way that aligns with the brand tone of voice and actively encourages feedback. This is employees at Tedquarters. An Employee Assistance Programme further supports our achieved through formal and informal meetings, BroadcasTED communications, Talk to commitment to the well-being of our employees. To support work–life balance we offered Ted sessions, team member surveys and e-postcard messages. Employee representatives for the second year a “Buy Holiday” option for Tedquarters employees, and new to this are consulted regularly on a wide range of matters affecting employees’ current and future year we launched early finish Fridays during the summer for Tedquarters employees. interests. Employees are regularly informed of the Group’s performance and any factor EMPLOYEES WITH DISABILITIE S All applications for employment within the Group are considered based on merit alone. affecting its performance during the period, in addition to business development initiatives to maintain interest and encourage participation. Following the launch of our first engagement survey across the Group last period we acted upon the feedback received Should an applicant inform the Company that they have a disability their application will to drive continuous enhancement and improvement to the employee experience, for continue to be considered in exactly the same way, focusing on the aptitudes and abilities example the introduction of early finish Fridays during the summer for Tedquarters of the applicant concerned. Any reasonable adjustments that may be required to employ employees. The second engagement survey will be released in the following period. the applicant will be considered based on its practical application. In the event of an employee becoming disabled during their employment, every effort is made to ensure that their employment with the Group continues and that where practical reasonable adjustments are made and relevant training and education of the wider team is arranged. It is the policy of the Group that the training, career development and promotion of persons with disabilities should, as far as possible, be aligned with that of all employees. 31 Ted Baker Plc Annual Report and Accounts 2018/19 STRATEGIC REPORT INDEP ENDENT EXTERNAL IN VE ST IGAT ION During the period, allegations of misconduct arose in relation the Group’s former Chief Executive Officer. In response to these allegations, the Board established a Committee, which appointed HSF to investigate the allegations and wider HR policies and procedures. Following Ray Kelvin’s resignation, we remain committed to learn from this experience and will carefully consider all recommendations arising from HSF’s findings. It is of paramount importance that Ted Baker provides a working environment that is conducive with the Group’s core principles and a culture that enables our team members to achieve their best. As ever, feedback from our team members will be the foundation on which this environment can be established. As previously mentioned, more details of HSF’s findings are expected to be released early Q2 2019. SYSTE MS Our integrated HR and payroll system is established in UK Tedquarters, and an additional module for training was launched in the period. The roll-out continues with implementation across the UK Retail population of a roster tool. A resourcing module enabling applicant tracking from attraction of new talent to employment will also be launched for UK Tedquarters and Retail. The phased roll-out to the remainder of the Group will be planned for forthcoming periods. People analytics and reporting together with self-serve technology and automatic process will continue to support efficiencies across people processes. The Strategic Report was approved by the Board of Directors on 21 March 2019 and signed on its behalf by: Charles Anderson Company Secretary 21 March 2019 32 DIRECTORS’ REPORT BOAR D OF DIRECTORS CU R RENT DIRECTORS DAVI D ALAN BERNSTEIN CBE, FC A – EX EC UTIVE CHAIRM AN David was appointed as Executive Chairman on 4 March 2019, having previously served as AN DR EW J EN NI NG S – N ON-E XEC UTIVE DI REC TOR Andrew was appointed as a Non-Executive Director on 1 February 2014. His experience in the international retail industry for over 45 years at some of the world’s most respected high-end speciality and department stores offers a valuable resource to the Board. Previously he was chief executive officer of the Karstadt Group in Germany and prior to this has held a number of senior executive positions at leading UK and international Non-Executive Chairman since his appointment in January 2003. David’s appointment as retailers including Saks Fifth Avenue in the USA; Holt Renfrew in Canada; Harrods and Executive Chairman will continue to no later than 30 November 2020. David is chairman of House of Fraser in the UK; and Brown Thomas in Ireland. the British Red Cross and also chairman of Autorama UK Ltd. Previously he was chairman of Manchester City Plc, the Football Association and Blacks Leisure Plc. He was also joint managing director of Pentland Group Plc until his resignation in October 1993. Through Committee membership: With effect from 19 February 2018, Andrew is the Chair of the Remuneration Committee. Andrew is also a member of the Audit and Nomination his experience in these positions, David has gained valuable knowledge of the role of the Committees. Andrew is an Independent Director. Board and has experience of successful engagement with the wider business. In the New Year Honours List of 2014, David was appointed Commander of the Order of the British Empire (CBE) for services to football. Committee membership: not applicable. LI ND SAY DENNIS PAGE, MA, AC A – ACTI N G CHIEF EXECUTIVE OF FICER ( SI NCE 7 DECEMBER 2018) Lindsay joined Ted Baker as Finance Director in February 1997 following his career with Binder Hamlyn in 1981 where he became a founding member of the corporate finance department in 1986 and a partner in 1990. Binder Hamlyn subsequently merged with Arthur Andersen in 1994. This experience has been pivotal in his role since Lindsay’s appointment as the Group’s Chief Operating Officer in addition to his role as Group Finance Director on 8 July 2014. Lindsay was appointed acting Chief Executive Officer on 7 December 2018. Committee membership: not applicable. RON STEWART, FCIB – NO N- EXECUTIVE DIRECTOR Ron was appointed as a Non-Executive Director on 25 February 2009. Ron has J EN NI FER ROEB UCK – N ON-E XEC UTIVE DI REC TOR Jennifer was appointed as a Non-Executive Director on 29 September 2017. Jennifer is highly experienced as a digital and e-commerce executive with a background in digital transformation and brand marketing, particularly in the lifestyle and clothing sector. Jennifer has also gained valuable experience as the co-founder of REVL, the events app, and has wide experience working in the hospitality sector and also with technology led start-ups. Committee membership: Jennifer is a member of the Audit and Nomination Committees. Jennifer is an Independent Director. S H ARON BAYL AY – N ON-E XEC UTIVE DI REC TOR Sharon was appointed as a Non-Executive Director on 15 June 2018. Sharon has substantial experience in the digital industry. She is a highly experienced digital and marketing executive who spent 16 years at Microsoft, latterly as general manager of the advertising and online division for Microsoft UK. After Microsoft, Sharon became the director of marketing, communications and audiences at the BBC, where she also served as a member of the board and as a non-executive director of BBC Worldwide. comprehensive experience of corporate banking from his 39 year career at the Royal Bank of Scotland Plc, retiring in 2003 as deputy managing director of its corporate banking Committee membership: Sharon is the Chair of the Nomination Committee and a member of the Audit and Remuneration Committees. Sharon is an Independent Director. department in London. This experience has been complemented by his diverse roles as vice-chairman of the PCC at St Andrew’s Church in Oxshott, a trustee of several local charities, a governor of Reeds School and chairman of Reeds School Enterprises in Surrey. Committee membership: Ron is the Chair of the Audit Committee and a member of the Remuneration Committee. Ron is the Senior Independent Director. 34 DIRECTORS’ REPORT DIR E CTORS WHO RESIGNED AFT ER THE PE RI O D: RAY M OND STUART KELVIN CBE – CH IEF EXECUTI VE OFFICER (RESIGN ED) Ray was the founder of Ted Baker and resigned on 4 March 2019, having held the position throughout the business’ growth to the global lifestyle brand that it is today. Ray’s decision to resign was to ensure the Group could continue to succeed under new leadership. Committee membership: not applicable. DIR E CTORS WHO RESIGNED DU RIN G T HE PER I OD : ANI TA BALCHANDANI – NON- EXECUTIVE DIRECTOR (RESIGN ED ) Anita was appointed as a Non-Executive Director on 29 September 2017 and resigned on 19 February 2018 following her acceptance of a new full-time role which does not permit her to hold any non-executive positions. Committee membership: During her time on the Board, Anita was Chairman of the Remuneration Committee and a member of the Audit Committee. Anita was an Independent Director. 35 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT CORP ORATE GOVERN AN CE STATE M EN T STATEM ENT OF COM PL I AN CE W I TH THE COD E During the period, the Company was subject to the UK Corporate Governance Code Ted Baker’s culture and values are central to the success of the business. Following dated April 2016. The Code was issued by the Financial Reporting Council and is available completion of the investigation, the Board will further review how these values are upheld to view on the Financial Reporting Council’s website https://www.frc.org.uk/. The Board in the business throughout the next financial year and will consider all recommendations confirms that the Company has complied with the provisions set out in the Code from the investigation to support that review. The objective is to ensure there are robust throughout the year. processes and practices ingrained in the Group to promote our values and protect the interests of our team members and stakeholders. An explanation of how the Main Principles have been applied is set out below: LEADERSHIP EFFECTIVENESS ACCOUNTABILITY REMUNERATION RELATIONSHIPS WITH SHAREHOLDERS The Board has clear divisions of responsibility and is collectively responsible for the long-term success of Ted Baker. Our Non-Executive Directors constructively challenge and help develop proposals on strategy. See pages 36–38. We evaluate the balance of skills, experience, independence and knowledge of the Board and its committees to ensure we are effective. See page 37. We present a fair, balanced and understandable assessment of Ted’s position and prospects. The Board maintains sound risk management and internal control systems. See pages 20–25. Director remuneration is set to promote the long-term success of Ted. See the Directors’ Remuneration Report on pages 46–65. Strong relationships with our shareholders are key to fulfilling our objectives. The Board ensures that effective and frequent dialogue with our shareholders takes place. See page 38. BOAR D COMPOSITION The Board currently comprises the Executive Chairman, the acting Chief Executive B OAR D OP ERATI ON The Board meets regularly throughout the year. It considers, with the support of the Board Officer, a Senior Independent Director and three independent Non-Executive Directors. Committees and the Executive Committee, all issues relating to the strategy, direction Biographies of these Directors and resignations from the Board appear on pages 34–35. and future development of the Group. The Board has a schedule of matters reserved to The Board is of the view that its current membership provides an appropriate balance it for decision that is regularly updated. These include decisions on the Group’s strategy, of skills, experience, independence and knowledge, which enables it to discharge its financial budgets, major capital expenditure and transactions, appointment of territorial responsibilities effectively. BOARD INDEPENDEN CE The Board considers Non-Executive Directors Ron Stewart, Andrew Jennings, Jennifer and product licence partners, store openings, dividend policy, Group bonus and risk profile. The requirement for Board approval on these matters is understood and communicated widely throughout the Group. The Non-Executive Directors meet with the Chairman separately during the year. In addition, the Non-Executive Directors meet without the Roebuck and Sharon Baylay to be independent for the purposes of the Code. Chairman present to appraise the Chairman’s performance. Operational decision making, operational performance and the formulation of strategic proposals to the Board are controlled by the Group’s Executive Committee, which is comprised of the Board of Directors of No Ordinary Designer Label Limited (one of the Group’s operating subsidiaries) together with relevant heads of department as required. The Executive Committee meets regularly throughout the year. 36 DIRECTORS’ REPORT TED BAKER PLC BOARD OF DIRECTORS NOMINATION COMMITTEE REMUNERATION COMMITTEE AUDIT COMMITTEE EXECUTIVE COMMITTEE RISK COMMITTEE IT STEERING COMMITTEE SOCIAL RESPONSIBILITY COMMITTEE In addition to the Committees set out above, the Board has established two working groups in the period to act as sub-committees. One sub-committee was established B OAR D EVA LUATI ON Following amendments to the UK’s Corporate Governance Code, the Board assessed the to facilitate HSF’s investigation into the allegations against the Group’s former Chief length of tenure of the members of its committees. The Board took steps in relation to its Executive Officer, Ray Kelvin. The Risk Committee established a second sub-committee Nomination Committee to ensure its ongoing compliance with the Code. to act as a Brexit working group to review the impact of the UK’s withdrawal from the The most recent externally facilitated evaluation of the Board and Committees’ European Union on the business. effectiveness was undertaken by Sean O’Hare of Boardroom Dialogue Limited, an To enable the Board to function effectively and for the Directors to discharge independent external adviser with no other connection to the Company, in this their responsibilities, full and timely access is provided to all relevant information. financial period. A comprehensive board pack and formal agenda is prepared and circulated in advance That Board evaluation concluded that the Board was working well with an engaged of each Board meeting. Board members regularly input into the level and quality of management team and Non-Executive Directors who are regarded as being conscientious. information provided and request specific board papers on additional agenda items. Areas of focus for the Non-Executive Directors continue to be enhancing Board There is an agreed procedure for Directors to take independent professional advice, if engagement with the Executive Committee and building on steps taken within the current necessary, at the Company’s expense. This is in addition to the access each Director has period in relation to the existing long-term succession planning throughout the Group. to the Company Secretary. The Company maintains an appropriate level of Director and officer liability insurance cover and, through the Articles of Association and Directors’ terms of appointment, has agreed to indemnify the Directors against certain liabilities to third parties and costs and expenses incurred as a result of holding office as a Director. Save for such indemnity provisions in the Company’s Articles of Association and in the Directors’ terms of appointment (which were in force throughout the period and are in force as at the date of these financial statements), there are no qualifying third-party indemnity provisions in force. 37 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT BOAR D AND COMMITTEE ATTEN DAN C E The table below details the number of Board and Committee meetings held during the period and the attendance record of each Director. BOARD MEETINGS AUDIT COMMITTEE REMUNERATION COMMITTEE NOMINATION COMMITTEE NUMBER OF MEETINGS HELD Ray Kelvin CBE1 Lindsay Page David Bernstein CBE4 Ron Stewart Andrew Jennings Jennifer Roebuck Sharon Baylay2 Anita Balchandani3 10 9 10 10 10 10 10 8 N/A 3 N/A 1 3 3 3 N/A 1 N/A 3 N/A N/A 3 3 3 N/A 1 N/A 1 N/A N/A 1 N/A 1 1 N/A N/A 1 Ray Kelvin was on a leave of absence from 7 December 2018 and resigned from the Board on 4 March 2019. 2 Sharon Baylay was appointed to the Board on 15 June 2018. 3 Anita Balchandani resigned from the Board on 19 February 2018. 4 On 4 March 2019 David Bernstein was appointed as Executive Chairman and will therefore no longer serve on the Remuneration Committee. COM MUNICATION WITH SHARE HO LDE RS The Group attaches considerable importance to the effectiveness of its communication CON FL I CTS O F IN TER EST The Company’s Articles of Association take account of certain provisions of the with its shareholders. The full report and accounts are sent to all shareholders and further Companies Act 2006 relating to Directors’ conflicts of interest. These provisions permit copies are distributed to others with potential interest in the Group’s performance. the Board to consider, and if thought fit, to authorise situations where a Director has an Led by the acting Chief Executive Officer and the Finance Director, the Group seeks interest that conflicts, or may possibly conflict, with the interests of the Company. The to build on a mutual understanding of objectives between the Company and its institutional Board has adopted procedures for the approval of such conflicts. The Board’s powers to shareholders by making general presentations after the interim and preliminary results; authorise conflicts are operating effectively and the procedures are being followed. During meeting shareholders and potential investors to discuss long-term issues and gathering the period no situational conflicts of interest were disclosed by the Directors. feedback; and communicating regularly throughout the year via its investor relations programme. All shareholders have access to these presentations, as well as to the Annual Report and Accounts and to other information about the Company through the investor relations website at www.tedbakerplc.com. Shareholders may also attend the Company’s Annual General Meeting at which they have the opportunity to ask questions. Non-Executive Directors are kept informed of the views of shareholders by the Executive Directors and are provided with independent feedback from investor meetings. 38 DIRECTORS’ REPORT AU DI T COMMITTEE REPO RT DEAR SHAREHOLDER, The role of the Audit Committee is to monitor the integrity of the Group’s financial statements and reporting responsibilities and to maintain its internal control and compliance procedures. AU DI T COMMITTEE MEMB ERSHIP During the period, Ron Stewart was Chairman of the Audit Committee. The other members were Andrew Jennings, Jennifer Roebuck and Sharon Baylay. Anita Balchandani was a member of the Audit Committee until her resignation from the Board and associated committee positions on 19 February 2018. Having analysed and challenged the results of the internal audit at regular intervals, the Audit Committee is satisfied that the Group had suitable and effective internal controls in place during the period. 3. TAX The Audit Committee has considered a range of tax matters including: • • • the potential impact of any tax matters on the Group’s financial statements; the Group’s tax strategy; and the impact of Brexit on the Group’s tax strategy. 4. EXTERN AL R IS K FAC TORS As described in more detail in Principal Risks and Uncertainties set out on pages 20–25, The expertise of the Audit Committee members is considered as part of the annual the Audit Committee is responsible for reviewing the effectiveness of the Group’s system review of the Committee’s effectiveness. The Board is satisfied that the Committee of risk management and internal controls. During the period, the Audit Committee has possesses recent and relevant financial experience, sectoral competence and appropriate worked with the Risk Committee and external advisers to monitor the Group’s risk levels of independence, and that its members offer a depth of financial and commercial profile and to assess external risk factors. experience across various industries. The Audit Committee has considered the possible impacts of Brexit and it has The terms of reference for the Audit Committee are available on the Company’s evaluated the analysis of the potential risks by our Brexit working group. These are set out website, www.tedbakerplc.com. on pages 20–25 of this report. The impact of these risks has also been stress-tested and considered in the Viability Statement on page 25. AU DI T COMMITTEE AGEN DA This year, the Audit Committee met three times. In its meetings it focused on the Group’s Meetings with senior management, internal audit and the external auditors, together with the regular circulation and review of board papers and financial information, have risk management, internal controls, tax, and external risk factors. enabled the Audit Committee to discharge its duties and responsibilities effectively. 1.RI S K MANAGEMEN T The Audit Committee regularly reviews how the Board is managing the risks the Group is facing throughout the year. This year, the Board has specifically acted to: • review the robustness of the Group’s systems in response to the growing threat to its cyber security, including external penetration testing; More information in respect of the Audit Committee’s role in reviewing internal controls and risk management practices is set out on pages 20–21. KE Y M ATTERS A summary of the key matters considered by the Audit Committee during the period is set out below. The Audit Committee has considered matters according to the following • ensure that the Group was prepared for the introduction of the General Data broad themes: Protection Regulation; and • mitigate the foreign currency risks that the Group’s global business is exposed to, as a 1. Financial oversight; result of recent market volatility. 2. Conduct of the audit; 3. Statutory compliance; The Audit Committee is satisfied that the risk management process adopted by the 4. Risk management; Board has remained robust and effective during the period. 2.I NT ERNAL AUDIT The Audit Committee considered the Group’s range of internal control systems, including those in relation to: 5. Tax; 6. Internal policies; and 7. External risks. • inventory and supply chains; • digital branding and PR; and • the detection of fraud, bribery and corruption. 39 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT AGENDA ITEMS 1. Financial oversight Reviewing the progress of the Full Year Report/Interim Report Assessing the KPMG Audit Committee Paper summarising the results from the year-end external audit Assessing the KPMG Audit Committee Paper summarising the results from the interim review 2. Conduct of the audit Overseeing the KPMG Audit Strategy Receiving and reviewing the KPMG Management Letter on control observations Monitoring the effectiveness of external auditors Monitoring the independence of KPMG Review of FRC investigation 3. Statutory compliance Ensuring compliance with mandatory audit rotation and tendering Tracking and adopting updates to accounting standards 4. Risk management Monitoring the Board’s management of risk Receiving and reviewing the findings of the internal audit 5. Tax Identifying and responding to the key tax risks to the Group Overseeing the Group’s tax strategy 6. Internal policies Setting the terms of reference of the Audit Committee Adopting an appropriate whistle blowing policy Setting out the non-audit services provided by KPMG Setting out the non-audit spend Investigating whether the Group employs former KPMG staff 7. External risks Setting and agreeing the level of materiality Monitoring the Group’s Cyber Risk Review Appraising the investment in new stores Monitoring the foreign currency risk to the Group Monitoring the Group’s preparations for compliance with the General Data Protection Regulation The main areas of judgement and estimation are set out in the accounting policies on pages 85–90. MARCH 2018 JULY 2018 OCTOBER 2018 Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y 40 DIRECTORS’ REPORT S IGN IFICANT I SS UES The Audit Committee received and reviewed reports from management and the external the fashion industry and consumer demand for specific regions, including for example macro-economic conditions that may impact consumer spending patterns and tourism. auditors setting out the significant issues in relation to the financial statements for the The Directors use their knowledge of the fashion industry and experience built over many period which related to the carrying value of inventory and the carrying value of retail fixed years to set and monitor the assumptions included within the forecasts. assets (being leasehold improvements and fixtures and fittings). The external auditors explained to the Audit Committee the work they had These issues were discussed and challenged with management during the period. They conducted during the year. On the basis of their audit work, the external auditors were also discussed with the external auditors at the time the Audit Committee reviewed reported no inconsistencies or misstatements that were material in the context of the and agreed the external auditors’ Group audit plan, when the external auditors reviewed financial statements as a whole, and in the view of the Audit Committee this supports the the half year interim financial statements in October 2018, and also at the conclusion of appropriateness of the Group’s methodology. the audit of the financial statements for the period. 3) Misstatements 1) Carrying value of inventory Management confirmed to the Audit Committee that it was not aware of any material The Directors have used their knowledge and experience of the fashion industry in misstatements or immaterial misstatements made intentionally to achieve a particular determining the level and rates of provisioning required to calculate the appropriate presentation. The external auditors reported to the Audit Committee the misstatements inventory carrying values. Inventory is carried in the financial statements at the lower of that they had found in the course of their work and no material amounts remain unadjusted. cost and net realisable value. Sales in the fashion industry can be extremely volatile with The Audit Committee confirms that it is satisfied that the external auditors have fulfilled consumer demand changing significantly based on current trends. As a result there is a their responsibilities with diligence and professional scepticism. risk that the cost of inventory exceeds its net realisable value. Management calculates After reviewing and challenging the presentations and reports from management the inventory provision on the basis of the ageing profile of what is in stock. Provisions and consulting where necessary with the external auditors, the Audit Committee is are considered on a seasonal basis taking into consideration the various channels that satisfied that the financial statements appropriately address the critical judgements and are available to the Group to sell existing inventory and the estimated prices that can key estimates (both in respect to the amounts reported and the disclosures). The Audit be achieved. Any changes to the prices that can be achieved could impact the provisions Committee is also satisfied that the significant assumptions used for determining the that are required to cover the risks associated with holding older season inventory. value of assets and liabilities have been appropriately scrutinised, challenged and are Adjustments are made where appropriate based on Directors’ knowledge and experience sufficiently robust. to calculate the appropriate inventory carrying values. Management confirmed to the Audit Committee that there have been no significant changes to the approach used to estimate inventory provisions from the prior year. The TA X GOV ER NAN C E FR AMEWOR K The Finance Director is responsible for the Group’s tax policy which is implemented external auditors explained to the Audit Committee the work they had conducted during with the assistance of the senior finance and Group tax team. This is reviewed on an the year. On the basis of their audit work, the external auditors reported no inconsistencies ongoing basis as part of the regular financial planning cycle. In addition, the Group’s tax or misstatements that were material in the context of the financial statements as a whole, status is reported regularly to the Board and Audit Committee. The Audit Committee and in the view of the Audit Committee this supports the appropriateness of the Group’s is responsible for monitoring all significant tax matters including the Group’s tax policy. methodology. In accordance with the measures announced in Finance Act 2016, Ted Baker has published on its website details of the Group’s tax strategy as it relates to or affects UK 2) Carrying value of retail fixed assets (being leasehold improvements and fixtures and fittings) taxation. The Group’s tax strategy is available on the Company’s website at http://www. Leasehold improvements and fixtures and fittings for stores are identified for further tedbakerplc.com/investor-relations/tax-strategy. impairment testing primarily on the basis of current and projected performance, with growth assumptions based on Directors’ knowledge and experience. Given the relative immaturity of the brand outside the UK, the payback period is typically longer and it is not uncommon for new stores to make losses in their start-up phase. Judgement is therefore EXTER NAL AUDI T The Audit Committee oversees the Group’s relationship with the external auditors and makes recommendations to the Board in relation to their appointment, reappointment applied by the Directors in assessing the trigger point for impairment, recognising that and removal and approves their remuneration and terms of engagement. The Board and losses in the start-up phase are not always indicative of the future performance of Audit Committee also review the independence of the external auditors and consider the a particular store. The future forecasts are inherently judgemental and the key engagement of the external auditors to supply non-audit services. sensitivity includes achieving the growth rates for a particular store and relevant to the The Company has adopted a formal policy on the supply of non-audit services by specific market. A change in these assumptions will impact the future forecasts and the external auditors. They may only provide such services on condition that such advice management’s assessment of the profitability of each store. The assumptions are does not conflict with their statutory responsibilities and ethical guidance. The Audit continually reviewed against current trading performance and external factors that impact Committee Chairman’s pre-approval is required before the Company uses non-audit 41 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT services. Where fees are expected to be above £50,000, this requires approval from Consideration is also given by the Audit Committee to the need to include the risk of the Audit Committee Chairman and one other member of the Audit Committee. The the withdrawal of the external auditors from the market in its risk evaluation and planning. aggregate spend is also reviewed by the Audit Committee on an annual basis. Details of As reported by the Financial Reporting Council (FRC) on 20 August 2018, KPMG the auditors’ remuneration for audit and non-audit fees are disclosed in Note 3 to the reached a settlement agreement with the FRC’s Executive Counsel in relation to a matter financial statements for the period. concerning the provision of non-audit services by KPMG to Ted Baker. Alongside their The Audit Committee recognises that the independence of the external auditors is audit services in respect of the financial years ended 26 January 2013 and 25 January 2014, an essential part of the audit framework and the assurance that it provides. The Audit KPMG provided litigation support to the Group relating to a commercial dispute. The Committee monitors any non-audit work that is undertaken by the external auditors to Audit Committee notes the FRC’s clarification that this matter did not allege that KPMG ensure that their objectivity and independence is not compromised. The Audit Committee was without integrity and objectivity. As such, the Audit Committee took the view that regularly reviews the level of non-audit fees and as noted above pre-approval for any such KPMG could continue to act as an independent and effective auditor. services is required from the Audit Committee Chairman above set monetary thresholds. The Audit Committee considers the reappointment of the external auditors In approving any non-audit services the Audit Committee considers any threats, perceived each year and assesses their independence on an ongoing basis. KPMG have been the or actual, to the auditors’ independence taking regard of the guidance contained in the Company’s external auditors since 2001, with a competitive audit tender process last relevant ethical standards. carried out in 2012. The Audit Committee notes the final Order of the Competition and To assess the effectiveness of the external auditors, the Audit Committee reviewed: Markets Authority and the EU regulation on audit rotation and will ensure compliance with these requirements in considering when next to tender the external audit. It is • the external auditors’ fulfilment of the agreed audit plan and variations from it; considered advantageous to coincide the tender process with KPMG’s partner rotation • reports highlighting the major issues that arose during the course of the audit; and policy. The next rotation is due to take place for the financial year 2022/23. In any event, • feedback from the businesses evaluating the performance of each assigned audit team. this tender process must be completed by the year ending 25 January 2025 in accordance with the EU regulation. The requirements of the Code and the Order and EU regulation The Audit Committee held meetings with the external auditors before each notwithstanding, the Audit Committee will continue to monitor the effectiveness Audit Committee meeting to review key issues within their scope of interest and of the external auditors on an annual basis and will tender in accordance with the EU responsibility. To fulfil its responsibility for oversight of the external audit process, the regulations. Accordingly, the Company confirms that it complied with the provisions of Audit Committee reviewed: the Competition and Markets Authority’s Order for the financial year under review. KPMG have expressed their willingness to continue in office as external auditors. • the terms, areas of responsibility, associated duties and scope of the audit as set out in The Audit Committee has recommended to the Board that KPMG LLP be appointed as the external auditors’ engagement letter for the forthcoming year; the Group’s external auditors for the 2019/20 financial period and the Directors will be • • • the external auditors’ overall work plan for the forthcoming year; proposing the reappointment of KPMG at the Annual General Meeting in 2019. the external auditors’ fee proposal; the major issues that arose during the course of the audit and their resolution; • key accounting and audit judgements; • the level of errors identified during the audit; and • recommendations made by the external auditors in their management letters and the adequacy of management’s response. 42 DIRECTORS’ REPORT IN TERNAL AUDIT The Audit Committee also oversees the Group’s internal audit function, including its role, mandate and audit plan. Certain internal audit functions were outsourced to PwC. The Group has found that the effectiveness of the internal audit has been increased by engaging PwC, as it has allowed the Group’s management to access a wider range of expertise than it otherwise would have, and afforded management the opportunity to have its processes and findings challenged by an independent reviewer. The focus of the internal audit is influenced by the risks, controls and management action plans identified by the Risk Committee, which are presented to the Board by the Finance Director at regular intervals. The Audit Committee assesses the findings of the Risk Committee and tasks the internal audit with investigating how the Group has responded to them. The Audit Committee approves the scope of the internal audit function (permitting for this to change in order to remain abreast of any new developments encountered by the Group) and challenges its conclusions. When appointing the Internal Audit team, the Audit Committee satisfied itself that the people assigned to it have the necessary experience and expertise to effectively fulfil their role. The performance of internal audit is evaluated according not only to the risks it identifies but also to the proposals it offers to remedy those risks. WHI STLE BLOWIN G The Audit Committee is responsible for the review of the Company’s procedures for responding to the allegations of whistle blowers and the arrangements by which staff may, raise concerns in confidence. The whistle blowing provisions have been enhanced this year to support the independent investigation by allowing the Group’s team members and stakeholders such as suppliers or licence partners to report on any matter to an independent body. This is available in local languages in many jurisdictions with a local telephone number or reporting website. This service will continue following the conclusion of the investigation. Any reports made to this service can be anonymous, if the whistle blower so elects, and will be sent to the Group’s General Counsel and a member of the non-executive team. It is hoped that this service will encourage individuals to speak out without fear of reprisal. Ron Stewart Chairman of the Audit Committee 21 March 2019 43 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT NO MI NATION COMMITTEE REPO RT D EAR SHAREHOLDER, The role of the Nomination Committee is to establish a framework for appointment of new 201 9/ 20 – THE OB J EC TIV ES F OR TH E NEXT FI N ANC I AL Y EAR Sharon Baylay’s appointment as Chair of the Committee allows the Board to benefit from her considerable experience in industry and it presents an opportunity to bring a fresh Directors to the Board by considering the organisation and composition of the business perspective to fulfilling a number of key appointments in the coming financial year. as a whole. The Nomination Committee is also responsible for overseeing succession As the Board looks to make these appointments, the Nomination Committee planning requirements for the Board and senior management positions, including the will continue to cultivate the Group’s culture through the setting of strategic criteria identification and assessment of potential Board candidates, nurturing talent within the to identify suitable candidates. A core element to this program will be to develop the business and making recommendations to the Board for its approval. training and resources available to support internal progression to senior management All Non-Executive Directors are advised of the time commitment considered positions and the Board. This enhances our current efforts to produce a robust necessary to enable them to fulfil their responsibilities prior to appointment. talent pipeline that promotes continuity in the Group’s growth and progression in The terms of reference for the Nomination Committee are available on the Company’s the business’ culture. website, www.tedbakerplc.com. 20 18/19 – A YEAR IN REVIEW During the period the Nomination Committee was chaired by David Bernstein and its D IV ERS ITY Boardroom diversity is an important consideration when assessing a candidate’s ability to contribute to and complement the abilities of a balanced Board. As a global business, the other members were Ron Stewart and Andrew Jennings. Group recognises the importance of having team which represents our target audience Following the introduction of the 2018 UK Corporate Governance Code and a to deliver the Group’s success and to ensure the brand remains relevant. The Group review of the composition of the Nomination Committee with regards to tenure, Sharon continues to support the development and progression of all employees, with the aim of Baylay was appointed as Chair and Ron Stewart stood down from the Committee, being maintaining and achieving diversity throughout all levels of the organisation. succeeded by Jennifer Roebuck. Our Board appointments will always be made on merit against objective criteria, and this will continue to be the priority rather than aiming to achieve an externally prescribed APPO INTMENTS TO THE BOARD The Company’s Articles of Association require one third of the Directors for the time diversity target. The Board will consider how these criteria can be applied to provide equality of opportunity for candidates from minority groups in relation to appointments being to retire each year, and for each Director to retire from office at least once every made in the coming financial year. three years. However, in line with Provision B.7.1 of the Code, the Board has determined that all Directors must retire and stand for re-election by shareholders on an annual basis. During the period, Sharon Baylay was appointed to the Board on 15 June 2018. The Sharon Baylay Chair of the Nomination Committee Committee considered a shortlist of potential candidates in light of the balance of skills, 21 March 2019 experience, independence and knowledge on the Board, determining against objective criteria. As stated above, Sharon was subsequently appointed as Chair of the Nomination Committee on 18 February 2019. Sharon is a highly experienced digital and marketing executive who spent 16 years at Microsoft, latterly as general manager of the advertising and online division for Microsoft UK. After Microsoft, Sharon became the director of marketing, communications and audiences at the BBC, where she also served as a member of the board and as a non- executive director of BBC Worldwide. On 19 February 2018, Anita Balchandani resigned from the Board and associated committees following her acceptance of a new full-time role which does not permit her to hold any non-executive positions. 44 DIRECTORS’ REPORT D IR ECTORS’ REMUNERATION REPO RT PART A: ANNUAL STATEMENT the three years from 13 June 2017. In line with legal requirements, a new Directors’ Remuneration Policy will be put to a binding shareholder vote at our AGM in 2020 (“New Policy”). The New Policy will be developed over the coming months and we intend to consult with shareholders over key changes later in the year. D EAR SHAREHOLDER, I am pleased to present the Directors’ Remuneration Report, which has been prepared on behalf of the Board by the Remuneration Committee in accordance with the requirements of the Companies Act 2006 and Schedule 8 of the Large and Medium-sized Companies 201 8 UK CORP OR ATE GOVE RN A N C E COD E ( “2 018 CODE ”) The Remuneration Committee has reviewed the 2018 Code together with the FRC’s and Groups (Accounts and Reports) Regulations 2008, as amended, and meets the Guidance on Board Effectiveness and the New Policy will be developed in line with the relevant requirements of the Listing Rules of the Financial Conduct Authority and the UK 2018 Code. However, there are a number of changes that the Remuneration Committee Corporate Governance Code. The Remuneration Report is split into three parts: has already made to ensure that the Company complies with the 2018 Code: Senior management remuneration: For 2019/20 the Remuneration Committee will take on responsibility for determining senior management remuneration. It will continue to review workforce remuneration, policies and the alignment of incentives and rewards with • Part A: The Annual Statement. • Part B: The Directors’ Remuneration Policy which sets out the Company’s policy on Directors’ remuneration which was approved at the Annual General Meeting culture, and take these into account when setting the New Policy. Malus and clawback: In line with recommendations set out in the FRC’s Guidance on Board Effectiveness, the specified circumstances in which malus and clawback may (AGM) held on 13 June 2017, and the key factors that were taken into account in be applied in respect of future awards under the annual bonus and the LTIP have been setting the policy. You will not be asked to vote on the Directors’ Remuneration Policy extended to include corporate failure as an additional circumstance. The malus and this year, as it is only usually subject to a binding shareholder vote every third year clawback provisions for both bonus awards and awards made under the LTIP to Executive following its approval. • Part C: The Annual Report on Remuneration which sets out payments and awards made to Executive Directors and Non-Executive Directors during the 2018/19 financial Directors already applied to a wide range of specified circumstances, including misconduct, actions that have brought or are likely to bring any Group company into material disrepute or are materially adverse to the interests of any Group company, a material failure of risk year and details the synergy between Company performance and remuneration for management and a misstatement of financial information. that period. 20 18/19 – A YEAR IN REVIEW Our unique and talented teams continue to develop the brand and further the growth of the business. Their commitment to take on diverse and complex challenges with Post employment shareholding guidelines: We have revised the Directors’ shareholding guidelines so that Executive Directors are required to retain 50% of vested LTIP shares (whether such shares vest prior to or following cessation of employment) for the year following cessation of employment (to the extent that they are counted towards the shareholding requirement for current Executive Directors of 200% of base salary). Such passion and professionalism further strengthened the foundations of the Ted Baker LTIP shares may then be sold following the anniversary of the cessation of employment. brand. However, given the very difficult trading conditions the stretch profit target set at We intend to keep the terms of the Directors’ shareholding guidelines under review in the beginning of the year has not been exceeded. As a result, no annual bonus payment light of developing market practice in this area. to the Executive Directors or the wider employee population will be made. I am pleased to report that the third award made under the shareholder-approved Ted Ability to override formulaic outcomes: We have amended the rules of both the annual bonus and LTIP to ensure that in respect of all future awards the Remuneration Baker Plc Long-Term Incentive Plan 2013 (the “2013 LTIP”) vested in April 2018. The share Committee has discretion to override formulaic outcomes where the outcome would price performance condition was confidently achieved and the profit growth condition not otherwise be aligned to individual performance and results achieved or would not was achieved between the stretch and super stretch performance level resulting in 85% deliver the intention of the Remuneration Policy and/or where unforeseen or unexpected of awards vesting. Furthermore, a sixth award of options was made under the 2013 LTIP Scheme in April 2018. This award of options carries the equivalent share price and profit circumstances would result in unreasonable outcomes which do not reflect a Director’s individual contribution. The Remuneration Committee will take an active decision growth performance conditions as the five previous awards and will vest in April 2021. on whether or not to exercise this discretion as part of the annual process when we Our acting Chief Executive Officer since 7 December 2018, Lindsay Page will continue determine remuneration outcomes. in this role for the foreseeable future. Lindsay will receive a salary increase of £20,000 to The Remuneration Committee also considered the provisions in the 2018 Code £460,000 per annum for the period he is acting in this capacity, backdated to 7 December in respect of pensions for Executive Directors, noting that currently only basic salary is 2018. This has been included within his remuneration for the year ended 26 January 2019. pensionable and that this would remain the case. The Remuneration Committee agreed At the AGM held on 13 June 2017, the new Directors’ Remuneration Policy was that, when making any decision to increase basic salary or pension contribution rates approved by 95.2% of shareholders. As such, the Remuneration Policy will apply for for Executive Directors in the future, we would do so only after carefully considering 46 DIRECTORS’ REPORT the impact of this on executive pensions compared to workforce arrangements. Of the This Group methodology for rewarding individual performance ensures that each Executive Directors, only Lindsay Page is entitled to a pension contribution. He currently individual employee is challenged on achieving goals linked with their departmental and receives a contribution of 12.5% of his basic salary, as against a current pension contribution wider business objectives. While in its infancy, measures directly linked to strategic rate for the majority of the Company’s UK workforce of 2% increasing to 3% in April 2019. objectives are providing greater awareness, ownership and contribution. Exceptional This is a contractual commitment to Mr Page and is in line with the approved Directors’ increments above the pay for performance increment are reserved for significant change Remuneration Policy. In light of this, the Committee does not consider it appropriate to in role or responsibilities, market value at the median level, and relative value to Ted. alter his existing pension arrangements. However, when recruiting an Executive Director Awards will be made to Executive Directors (excluding the Executive Chairman) in the future, we will, where appropriate, more closely align the contribution rates for under the annual bonus scheme and the LTIP. These awards will be subject to share any future Director with those of the UK workforce generally, taking into account the price and profit growth performance conditions as set out in the Directors’ Remuneration need to offer a competitive recruitment package (within the terms of the Directors’ Policy. These performance conditions have enabled consistent incremental development Remuneration Policy). Given the short-term nature of David Bernstein’s appointment as of Ted’s business model, enhancing our position as a leading global lifestyle brand. Executive Chairman, he will receive no pension entitlement. As part of the process of developing the New Policy, the Remuneration Committee The Remuneration Committee considered whether or not it should set an overall will be reviewing the existing Long-Term Incentive Plan to ensure that its operation monetary limit for what it considers is a reasonable reward for individual Executive aligns with long-term shareholder interests. Our review will include the appropriate Directors. However, we believe that doing so may raise expectations in respect of the performance measures and targets and the length of the current vesting period and the amount an Executive Director may actually receive on an annual basis. Instead, as set imposition of an additional holding period. Awards granted in 2019 under the current LTIP out above, we have amended the rules of the LTIP and the annual bonus plan to ensure will continue to be subject to a three year vesting period. that, as a Committee, we have the discretion in respect of future awards to override The Gender Pay Gap Report will be published on the investor relations website formulaic outcomes. at www.tedbakerplc.com. The Remuneration Committee will review this report and is committed to ensuring equitable pay considerations across gender and relative CEO PAY RATIOS Having carefully considered the early adoption of the CEO pay ratio disclosures, we have scaled roles. concluded that, in line with the legislative requirement, we will disclose this for the first time in our Directors’ Remuneration Report for 2019/20. Given that we will be putting I N CON CLUSI ON Part B of this Report contains the Directors’ Remuneration Policy, as approved by our Directors’ Remuneration Policy to shareholders at that time, the Remuneration shareholders. Part C, the Annual Report on Remuneration, provides further details on Committee considers that such disclosure is best made in the context of the New Policy remuneration during the period. which it is intended will take the Company through to 2023. I would like to thank you for your ongoing support. 2019/20 – THE YEAR AHEAD On 4 March 2019, Ray Kelvin resigned as Chief Executive Officer. As explained above, Andrew Jennings Chairman of the Remuneration Committee since 7 December 2018, Lindsay Page has been performing the role of acting Chief 21 March 2019 Executive Officer and will continue in this role for the foreseeable future. Accordingly, Lindsay will receive a salary increase of £20,000 to £460,000 per annum for the period he is acting in this capacity. This increased salary will also be considered when calculating LTIP awards, bonus awards and pension entitlement. In addition, on 4 March 2019, our Non-Executive Chairman, David Bernstein, was appointed as Executive Chairman, until no later than November 2020, to provide additional support to Lindsay and will receive an annual salary of £200,000. David will not receive any of the other benefits usually provided to an Executive Director outlined in the Remuneration Policy below given the short-term nature of his appointment. Prior to the resignation of the Chief Executive Officer and the consequent change in role for the Executive Directors, the Remuneration Committee had approved that there would be no annual increase in the basic salaries of the Executive Directors for 2019/20. This would have been lower than the salary increases for employees across the Group where a 3% increase has been applied by reference to a pay for performance model with direct linkage to the successful achievement of key business objectives. 47 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT PART B: DIRECTORS’ REMUNE RAT IO N PO L IC Y REMU NERATION POLICY The policy described in this section was approved by shareholders on 13 June 2017 at the S H ORT A ND LO NG-TERM R EM UN E R ATI ON Group policy is to use fixed annual elements of remuneration such as salary, pension and benefits to recognise the status of our Executive Directors and to ensure current and future market competitiveness. Company’s Annual General Meeting and applies for three years commencing on that date. The use of short-term annual bonus incentives and Long-Term Incentive Plans (LTIPs) No changes have been made to the policy since it came into effect on that date. The policy provides a direct link between remuneration and KPIs. It also creates a synergy between can be found in the Group’s Annual Report and Accounts for the year ended 28 January the Executive Directors’ personal return and the return to investors. 2017 at www.tedbakerplc.com. Both the short and long-term incentives are used to motivate and reward them for The aim of the Group’s remuneration policy is to attract, motivate and retain high sustaining and growing the success of the Ted Baker Group. quality management. The policy is designed to incentivise senior executives according to the levels of value generated for shareholders, and to use performance metrics that create a strong linkage between senior management remuneration and business performance over the short and the longer term. The total breadth of the remuneration package is evaluated upon comparison with the individual components and total reward value of packages offered within similar companies, having regard to: • • • • the size of the Company, its turnover, profits and number of people employed; the diversity and complexity of the business; the geographical spread of the business; and the growth and expansion profile. We use target performance to estimate the total potential reward and benchmark it according to the criteria outlined above. External benchmarking analysis is commissioned as and when required to ensure that we remain competitive within the broader retail sector and with other companies of similar size. Remuneration packages for Executive Directors are structured to provide a balance between fixed basic salary and variable remuneration based on individual and Group performance. Non-Executive Directors are remunerated with fees in line with market rates. They do not receive any pension or other benefits, other than the reimbursement of reasonable expenses, and they do not participate in any bonus or share schemes. 50 DIRECTORS’ REPORT REMU NERATI ON POLICY TAB LE – EX E CU T IVE D I RE C TORS ELEMENT MAXIMUM POTENTIAL OPERATION AND LINK TO STRATEGY PERFORMANCE TARGETS AND TIME PERIOD BASE SALARY No maximum salary but annual increases will be broadly consistent with increase in base salary of wider employee population unless there is a change in role or responsibility, or where periodic benchmarking demonstrates that the overall remuneration package falls below the Group’s policy of the targeted median level. Salary reviewed annually and reflects the role and sustained value of the individual in terms of skills, experience and contribution. N/A Increases will be applied taking into account inflation and global economic conditions, and are in line with wider employee increases, unless the results of benchmarking reports demonstrate a further increase is necessary to achieve targeted median level for any Executive Director. ANNUAL BONUS1 Up to 100% of base salary. Drives and rewards annual performance. Profit targets are reviewed annually at the start of the financial period. Payment is determined by the Remuneration Committee following the end of the financial period. LTIPS2 Annual award of up to 150% of base salary. The Remuneration Committee has the right to award up to 200% of basic salary in exceptional circumstances. Annual award of options over shares which vest dependent on the achievement of profit targets with a share price underpin. Drives the overall business strategy and objectives and aligns the interests of shareholders and the executive team over the longer term. Achievement of profit before tax, annual bonus and exceptional/non- recurring items against targets* for the financial period. The Remuneration Committee reserves the right to make adjustments if the outcome does not reflect underlying performance. Threshold vesting is 0%. Malus and clawback provisions introduced for annual bonus payments made after 1 April 2018. Malus can be applied up to the date of payment. Clawback can be applied for a period of two years after the date of payment. 25% vesting if compound annual growth of profit before tax per share of 10% over the three year performance period beginning with the financial period in which the awards are made, rising to 100% vesting at 15% growth.** Share awards will only vest if the share price has risen by 10% over the three year period commencing on the date that the awards are made. Dividends are only paid on LTIP options which have vested and been exercised. Malus and clawback provisions introduced for awards made after 1 April 2018. Malus can be applied up to the date of vesting. Clawback can be applied for a period of two years after the date of vesting. Performance conditions for future awards may vary but the Remuneration Committee will consult with shareholders on any major changes proposed. THE TED BAKER SHARESAVE SCHEME All Executive Directors, excluding, until his resignation, Ray Kelvin, have the option to save up to the statutory limit towards options over shares in Ted Baker Plc over any three or five year period. To align the interests of Executive Directors with the long- term interests of the shareholders. N/A SHARE OWNERSHIP GUIDELINES N/A Increase alignment between the Executive Directors and shareholders. The guideline encourages existing Executive Directors to hold a minimum 200% of base salary in shares. Shows a clear commitment by Executive Directors to creating value in the long term. Any new Executive Director is encouraged to hold at least 100% of base salary in shares. Shareholding for new Executive Directors can be acquired over five years. RETIREMENT BENEFITS All Executive Directors excluding, until his resignation, Ray Kelvin are entitled to pension contributions to a money purchase scheme of up to 12.5% of base salary. Positioned to ensure broad competitiveness with market practice. OTHER BENEFITS Entitlements include car allowance and medical expense insurance. Maximum car allowance entitlements are based on the estimated costs of running a private car. N/A N/A NOTES TO THE EXECUTIVE DIRECTORS’ POLICY TABLE 1Annual bonus Profit targets are set by the Remuneration Committee at the start of the financial year by reference to internal budgets and taking account of consensus market expectations for profit before tax and exceptional/non-recurring items. Market expectations for profit are considered a key measure of business performance for our shareholders. This scheme was introduced in July 2013 for Executive Directors and other senior executives across the Group. The criteria used to measure performance are growth targets based on adjusted profit before tax per share over the performance period and share price growth over the award period. The profit per share growth targets were set following consideration of consensus market analyst expectations and the share price growth target was agreed in consultation between the Remuneration Committee and shareholders. The funds available for payment of the annual bonus are determined by the achievement of profit before tax, annual bonus and exceptional/non-recurring items in a financial period in excess of the target. The Remuneration Committee felt that these criteria were appropriate for the Group in view of its investment in expansion and should encourage management to focus on longer-term profitable growth. The maximum bonus payable to employees is capped as a percentage of base salary which varies according to individual contracts. The maximum annual bonus payable to an Executive Director is capped at 100% of base salary. 2LTIPs In arriving at the performance criteria for the 2013 LTIP, the comparator group used for benchmarking purposes consisted of listed companies in the retail sector and other companies with similar enterprise value to Ted Baker. The share price growth target has been favoured over a total shareholder return (TSR) based measure because the unique profile of the Group’s business means that a readily comparable TSR benchmark was not available. A commitment has, however, been made to apply the existing dividend policy consistently. Given the short-term nature of his appointment, David Bernstein will not receive any of the other benefits usually provided to an Executive Director outlined in the Remuneration Policy above. 51 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT REMU NERATION POLICY TAB LE – NO N- EXECUTIVE DIR ECTORS The Board aims to recruit high-calibre Non-Executive Directors (NEDs) with broad NEDs is set by the Board having taken account of the fees paid by other companies of a similar size and complexity. When recruiting NEDs, the remuneration arrangements offered will generally be in commercial, international or other relevant experience. The remuneration policy for line with those set out in the Non-Executive Directors’ Remuneration Policy Table below. APPROACH TO SETTING FEES BASIS OF FEES OTHER ITEMS Fees are reviewed at appropriate intervals taking into account the time commitment expected and practice in peer companies of a similar size, sector and complexity. Each NED is paid a basic fee for undertaking Non-Executive Director and Board duties. A higher fee is typically paid to the Chairman of the Board. The NEDs do not participate in the Group’s annual bonus scheme, long-term incentive plans, health care arrangements or employee share schemes and do not receive any retirement benefits. Non-Executive Director fees are not subject to clawback or withholding arrangements. The Group provides each NED with relevant liability insurance for the duration of their appointment. NEDs are reimbursed for reasonable expenses, none of which comprises taxable benefits. All NEDs stand for reappointment on an annual basis at every AGM. D IFF ER ENCES IN REMUN ERAT ION P OL ICY F OR ALL EMPLOYEES A consistent remuneration approach is applied at all levels throughout the Group, except STATEM ENT OF CONS I DE RATIO N OF EMP LOYM ENT CON D ITI ONS EL S EWH ER E I N TH E CO MPANY The Group Head of Human Resources presents to the Remuneration Committee as outlined below, to ensure that business strategy and performance are aligned and that at its General Meeting in February of each year on proposed pay for performance the total reward is sufficient to attract and retain high-performing and talented individuals. salary increment potential for the general employee population and on any changes to All employees of Ted Baker are entitled to a base salary, access to a discretionary remuneration policy within the Group. The Remuneration Committee limits any increases corporate and individual performance based annual or periodic bonus and a range of in base salary for Executive Directors so that they are broadly in line with the mechanics benefits dependent upon their role within the Group. The maximum potential annual applied across the general employee population for pay for performance and exceptional base salary increase in any one year is consistent across all employees via a pay for increases as detailed above. This includes the ability to make incremental changes if the performance scheme. Any exceptional increase to base salary is structured around salary and total reward falls below the targeted median range. specific criteria linked to significant change in role or level of responsibility, market Proposed remuneration arrangements are discussed with employee communication value at a median level, value to Ted and cross departmental equality for like roles. groups and senior management. The Remuneration Committee does not specifically The maximum opportunity for bonus and benefits is based on seniority, responsibility and invite employees to comment on the Executive Directors’ remuneration policy but any function of the role. comments made by employees are taken into account. Conditional long-term share awards are only available to Executive Directors and As well as benchmarking the remuneration packages of an Executive Director peer other members of senior management across the Group. Share option grants under the group as and when required, any benchmarking exercise undertaken which subsequently Ted Baker Sharesave scheme are available to all UK employees. underpins the Group’s remuneration policy for Executive Directors also considers the Malus and clawback provisions for Executive Director annual bonus payments and remuneration levels of other senior executives within the Group. awards made under the 2013 LTIP after 1 April 2018 are similarly applied to senior The Remuneration Committee continues to support its established commitment members of the Group management team. to the Group policy of targeting total remuneration levels for senior management and employees across the Group within the median range in order to retain and reward key individuals. 52 DIRECTORS’ REPORT S ERVI CE CONTRACTS AN D PO LIC Y O F PAYM E NTS F OR LOS S OF OF FI C E STANDARD PROVISION POLICY DETAILS Notice periods in Executive Director service contracts Twelve months’ notice from the Company. Twelve months’ notice from the Executive Director. Compensation for loss of office in service contracts No more than twelve months’ salary, pension and Treatment of annual bonus on termination benefits (excluding bonus). No payment unless employed on the date of payment of bonus except for “good leavers”. The Remuneration Committee retains discretion to determine whether an Executive Director is a “good leaver” taking account of circumstances including in particular death, disability and redundancy. Executive Directors may be required to work during their notice period, be placed on gardening leave for all or part of the notice period or be provided with pay in lieu of notice if not required to work the full period of notice. Payable monthly and adjusted if the Executive Director obtains alternative employment. “Good leavers” are entitled to a bonus pro-rated to the period of service during the period provided the financial targets have been achieved and all necessary conditions have been met. The Remuneration Committee has discretion to reduce the entitlement of a “good leaver” in line with performance and the circumstances of the termination. OTHER PROVISIONS IN SERVICE CONTRACTS Executive Directors’ service contracts include non- compete and non-poaching provisions. N/A N/A Treatment of unvested and deferred share awards on termination under plan rules All awards lapse except for “good leavers” (e.g. on death, disability, ill health, injury, retirement, redundancy). The Remuneration Committee retains discretion to treat an Executive Director as a “good leaver” in other circumstances. For “good leavers”, the extent of vesting is at the discretion of the Remuneration Committee taking account of performance to date of leaving and pro- rated for period of employment in the vesting period for the award. N/A Treatment of unvested and deferred share awards in the event of a change in control of the Group Outside appointments Non-Executive Directors In the event of a change in control of the Group prior to the end of the period set for achievement of performance targets the performance period will be shortened to the date of change of control and awards will vest on change of control based on the extent to which any performance conditions are satisfied by reference to that shortened performance period. Executive Directors may accept one board appointment in another listed company. NEDs have letters of appointment with the Company which provide: Three to six months’ notice from the Company. Three to six months’ notice from the NED. The Remuneration Committee’s discretion to treat an Executive Director as a “good leaver” will take into account the particular circumstances of the Executive Director’s departure. If the change of control occurs after the end of the performance period, awards will vest on change of control to the extent that the performance conditions have been satisfied. N/A The Remuneration Committee Chairman’s approval must be sought before accepting appointment. Fees may be retained by the Executive Director. NEDs may be required to work during the notice period, be placed on gardening leave for all or part of the notice period or be provided with pay in lieu of notice if not required to work the full period of notice. N/A N/A 53 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT CON TRACTS OF SERVICE AND L ETT ERS OF A PPOINTMENT Each Executive Director has a service contract. Service contracts and letters of appointment are available for inspection at the registered office. The Board sets NEDs’ fees. David Bernstein1 Ray Kelvin2 Lindsay Page Ron Stewart Andrew Jennings Anita Balchandani3 Jennifer Roebuck Sharon Baylay DATE OF SERVICE CONTRACT/LETTER OF APPOINTMENT 24/01/2003 17/07/1997 17/07/1997 01/04/2017 01/04/2017 29/09/2017 29/09/2017 15/05/2018 UNEXPIRED TERM N/A N/A N/A 1 year 2 months 1 year 2 months N/A 1 years 8 months 2 years 3 months NOTICE PERIOD PROVISION FOR COMPENSATION 6 months 12 months 12 months 3 months 3 months 3 months 3 months 3 months None None None None None None None None 1 David Bernstein was appointed Executive Chairman on 4 March 2019. 2 Ray Kelvin resigned as Chief Executive Officer on 4 March 2019. 3 Anita Balchandani resigned as Non-Executive Director on 19 February 2018. RECRUITMENT REMUNERATION The Group’s strong brand identity attracts talented candidates of a high calibre. If required, A relocation package within HMRC guidelines will be offered to Executive Directors who are required to relocate to take up their appointment within the Group. external recruitment agencies are engaged to support the search for specialist roles. The remuneration package for any new Executive Directors would be made up The Remuneration Committee’s approach to recruitment remuneration is to set of the same or broadly similar components to those used to reward existing pay levels at the comparable internal rate and no more than is necessary to attract Executive Directors of the Group. However, we will, where appropriate, more closely candidates with the appropriate level of skill and experience to the role. The Remuneration align the pension contribution rate with those of the UK workforce generally. Committee retains the principle of a median level total remuneration package when The remuneration package would comprise an appropriate mixture of fixed and benchmarking for new and senior roles. variable remuneration as may be required to attract a candidate of appropriate skill In order to attract key talent to Ted Baker, the Remuneration Committee will, in and level of qualification. Minimum shareholding requirements would be set at a lower certain circumstances, consider making a buy-out award to compensate a candidate for level for all new Executive Directors joining the Group. losses incurred by leaving a previous employer to join the Group. The specifics of any Consistent with the policy applied to existing Executive Directors, the maximum buy-out award would be dependent on the individual circumstances of recruitment and variable pay elements for any new recruit would comprise annual bonus of up to 100% would not be considered as regular practice and nor would the Remuneration Committee of base salary, and awards under the 2013 LTIP of up to 150% of base salary (200% in commit to matching any expected value of awards. If a buy-out award were made, the exceptional circumstances). Remuneration Committee would seek to make them on a like-for-like basis to ensure that the value awarded would be no greater than the value forfeited by the individual. The Committee may choose to apply performance conditions to these awards. 54 DIRECTORS’ REPORT TOTAL REMUNERATION OPP ORTU N IT Y The total remuneration for each of the Executive Directors that could result from the remuneration policy in 2019/20 under three different performance scenarios is shown below: LIND SAY PAGE (appointed as acting Chief Executive Officer on 7 December 2018) DAV ID B ER NSTEIN (formerly Non-Executive Chairman and appointed as Executive Chairman on 4 March 2019) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 LTIP Annual Bonus Fixed Pay 541 100% 1,691 41% 27% 32% 989 17% 28% 55% 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 FIXED TARGET MAXIMUM LTIP Annual Bonus Fixed Pay 189 100% FIXED 189 100% 189 100% TARGET MAXIMUM (Note: Figures are stated in £’000) (Note: Figures are stated in £’000) NOTES: Fixed pay is base salary plus pension and benefits for 2019/20. Target performance is the level of performance required to deliver 60% of the maximum bonus and 25% of the full LTIP award and the scenario assumes that the share price growth target of 10% is met at the vesting date. Maximum performance would result in a bonus payment of 100% of salary and 100% vesting of the LTIP award. Again, this assumes that the share price growth target is met. For the purpose of the scenarios illustrated above, the LTIP variable amount is calculated by reference to basic salary at the percentage of the award that would vest under each scenario. For Lindsay Page, the remuneration opportunity includes the salary increase of £20,000 to £460,000 per annum for acting as Chief Executive Officer for the full year. For David Bernstein, the remuneration opportunity includes the salary paid to David as Non-Executive Chairman to 3 March 2019 and the salary paid as Executive Chairman from 4 March 2019. As explained previously, Ray Kelvin resigned as Chief Executive Officer on 4 March 2019. Ray will not be entitled to any salary or benefits payment in connection with his resignation or in respect of any period after the date of his resignation. Furthermore, Ray’s 2016, 2017 and 2018 LTIP awards will lapse. 55 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT STATEMENT OF CONSIDERATIO N O F S HAR EHOLDER VIEWS The Remuneration Committee reviews annual shareholder feedback on the Directors’ Remuneration Report to ensure their views are given due consideration in forming the Company’s remuneration policy. Feedback is sought from key shareholders on any major changes to components of executive remuneration, including the level of awards to be made and the performance targets in respect of the Company’s long-term incentive schemes. During 2016/17 a review of the ongoing suitability of the design of the 2013 LTIP was undertaken. It was concluded that the design of the 2013 LTIP and its performance conditions remained appropriate for the Company and no significant changes were proposed. The only amendment to the 2013 LTIP in the Directors’ Remuneration Policy was the introduction of malus and clawback provisions to awards made after 1 April 2018. This was approved by shareholders in a binding shareholder vote at the 13 June 2017 Annual General Meeting. In accordance with the views shared by shareholders, malus and clawback provisions were also proposed and agreed by shareholders on 13 June 2017 for bonus payments made after 1 April 2017. These measures protect shareholder interests and, taken together with the introduction of minimum shareholding guidelines help align the interests of shareholders with the executive team. In line with legal requirements, a new Directors’ Remuneration Policy will be put to a binding shareholder vote at our AGM in 2020 (“New Policy”). The New Policy will be developed over the coming months and we intend to consult with shareholders over key changes later in the year. 56 DIRECTORS’ REPORT PART C: ANNUAL REPORT ON RE M UN E R ATION The tables below set out in a single figure the total amount of remuneration, including each element, received or receivable by each of the Executive and Non-Executive Directors for the periods ended 26 January 2019 and 27 January 2018. DI RECTORS’ SINGLE TOTAL FIG UR E OF R EM U N ER ATI ON ( AUD ITED ) PERIOD ENDED 26 JANUARY 2019 EXECUTIVE Ray Kelvin1 Lindsay Page2 NON-EXECUTIVE David Bernstein Ron Stewart Andrew Jennings Anita Balchandani3 Jennifer Roebuck Sharon Baylay SALARY TAXABLE BENEFITS4 PERFORMANCE RELATED BONUS LONG-TERM INCENTIVE PLANS5 PENSION TOTAL 2019 £’000 459 441 85 60 55 - 55 34 1,189 £’000 £’000 22 24 - - - - - - 46 - - - - - - - - - £’000 530 506 - - - - - - 1,036 £’000 - 55 - - - - - - 55 £’000 1,011 1,026 85 60 55 - 55 34 2,326 1 Ray Kelvin resigned as Chief Executive Officer on 4 March 2019. 2 Lindsay Page was appointed as acting Chief Executive Officer on 7 December 2018. Lindsay will receive a salary increase of £20,000 to £460,000 per annum for the period he is acting in this capacity, backdated to 7 December 2018. This has been included within his remuneration for the year ended 26 January 2019. 3 Anita Balchandani resigned as Non-Executive Director on 19 February 2018. 4 Benefits comprise private medical insurance and car benefits. 5 The value of LTIPs included in the Directors’ single total figure of remuneration table above relates to Award 3 of the 2013 LTIP which vested to 85% of maximum on 29 April 2018. The value included is calculated using the number of options that vested at the share price on the date the award vested (£26.70), less the cost of exercise (nominal cost of 5p per ordinary share). PERIOD ENDED 27 JANUARY 2018 EXECUTIVE Ray Kelvin Lindsay Page NON-EXECUTIVE David Bernstein Ron Stewart Anne Sheinfield Andrew Jennings Anita Balchandani Jennifer Roebuck SALARY TAXABLE BENEFITS1 PERFORMANCE RELATED BONUS LONG-TERM INCENTIVE PLANS2 PENSION TOTAL 2018 £’000 451 434 83 58 50 54 19 19 1,168 £’000 £’000 18 18 - - - - - - 36 - - - - - - - - - £’000 852 796 - - - - - - 1,648 £’000 - 54 - - - - - - 54 £’000 1,321 1,302 83 58 50 54 19 19 2,906 1 Benefits comprise private medical insurance, car benefits and the discount on any SAYE options granted during the period. 2 The value of LTIPs included in the Directors’ single total figure of remuneration table above relates to Award 2 of the 2013 LTIP which vested in full on 30 April 2017. The value included is calculated using the number of options that vested at the share price on the date the award vested (£28.07), less the cost of exercise (nominal cost of 5p per ordinary share). 57 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT ANNUAL RATES OF SALARY IN FORC E DU RIN G T H E P E RI OD Ray Kelvin 28 January 2018 – 31 March 2018 1 April 2018 – 26 January 2019 Lindsay Page 28 January 2018 – 31 March 2018 1 April 2018 – 6 December 2018 7 December 2018 – 26 January 2019 £’000 452 460 431 440 460 As explained previously, since 7 December 2018, Lindsay Page has been performing the role of acting Chief Executive Officer and will continue in this role for foreseeable future. Lindsay will receive a salary increase of £20,000 to £460,000 per annum for the period he is acting in this capacity backdated to 7 December 2018. ANNUAL BONUS ( AUDITED) For the financial period ended 26 January 2019, the financial targets set at the beginning of the period were not exceeded, and therefore no bonus was achieved. ACTUAL PERFORMANCE AGAIN ST PE RFOR M A N C E TARGE TS ( AUD I TED ) P ER FO RMANCE RELATED BO N U S The profit targets for the annual bonus and the extent of their achievement are summarised in the table below (straight-line interpolation between points in the range). Profit target1 Percentage of bonus payable to Ray Kelvin Percentage of bonus payable to Lindsay Page THRESHOLD BONUS 2019 £81.3m 0% 0% MAXIMUM BONUS 2019 £85.3m 100% 100% ACTUAL PERFORMANCE 2018 £63.0m 0% 0% 1 The profit target is arrived at after adjusting profit before tax for exceptional items and annual bonus, as explained earlier in the Directors’ Remuneration Policy. LONG-TERM INCENTIVE SCHEM E S (AU D ITED ) AWAR DS UNDER THE TED B AKER PLC LON G -TER M I N C EN TIV E P LAN 201 3 ( AUD ITED ) During the period, the third award granted under the 2013 LTIP vested in full on 29 April 2018. The table below summarises actual outcomes against the performance conditions set for that Award. Threshold performance target Maximum performance target Actual performance achieved Percentage of maximum achieved SHARE PRICE INCREASE UNDERPIN1 PROFIT PER SHARE GROWTH2 PERFORMANCE CONDITIONS 10.0% 10.0% 17.1% Share price underpin achieved 10.0% 15.0% 14.1% 85% 1 Based on base average six month share price at the award date of £23.85 and the six month average at the vesting date of £27.93. 2 Based on base profit per share in 2014/15 of 112.2p and final profit per share of 166.8p in 2017/18. 58 DIRECTORS’ REPORT Awards made under the 2013 LTIP are subject to performance conditions of compound annual growth in profit before tax and exceptional items per share over the three year performance period and share price growth over the three year award period as detailed below. PERFORMANCE CONDITIONS THRESHOLD TARGET STRETCH SUPER-STRETCH Adjusted profit before tax per share Share price growth1 10% 10% 12% 10% 13.5% 10% 15% 10% 1 Share awards will only vest if the share price has risen by at least 10% over the three year period commencing on the date that the awards are made. EX ECUTIVE DIRECTORS’ IN TERESTS IN THE COM PAN Y’ S S H AR E S C H EM E S ( AUD I TE D ) DATE OF GRANT MAXIMUM RECEIVABLE AT 27 JANUARY 2018 NUMBER OF OPTIONS AWARDED DURING THE YEAR EXERCISED DURING THE YEAR LAPSED DURING THE YEAR MAXIMUM RECEIVABLE AT 26 JANUARY 2019 OPTION PRICE (PENCE) SHARE PRICE ON DATE OF GRANT (PENCE) SHARE PRICE ON DATE OF EXERCISE (PENCE) EXERCISE PERIOD/ VESTING DATE FACE VALUE OF MAXIMUM RECEIVABLE AT 26 JANUARY 2019 (£’000) Ray Kelvin 2013 LTIP 30 April 2015 23,380 5 May 2016 28,236 6 April 2017 24,574 - - - 3 April 2018 TOTAL Lindsay Page - 76,190 27,600 27,600 2013 LTIP 30 April 2015 22,329 5 May 2016 26,967 6 April 2017 23,469 - - - 3 April 2018 - 26,400 SAYE 20 May 2014 TOTAL 1,875 74,640 - 26,400 (3,507) 19,873 - (3,507) (3,350) 18,979 28,236 24,574 27,600 100,283 26,967 23,469 26,400 - - - - - - - - - - - - - - - - 5 5 5 5 5 5 5 5 2,855 2,364 2,757 2,544 2,855 2,364 2,757 2,544 - (3,350) 97,690 1,875 1,600.0 2,000.0 - - - - - - - - - 29 April 2018 - 29 April 2025 4 May 2019 - 4 May 2026 5 April 2020 - 5 April 2027 2 April 2021 - 2 April 2028 29 April 2018 - 29 April 2025 4 May 2019 - 4 May 2026 5 April 2020 - 5 April 2027 2 April 2021 - 2 April 2028 1 July 2019 - 1 January 2020 567 667 678 702 2,615 542 637 647 672 38 2,536 LTIP awards granted in respect of Ray Kelvin and Lindsay Page represent 21% of the total number of LTIP awards granted during the period (2018: 22%). The balance included other senior executives across the Group. The LTIP award granted on 30 April 2015 vested as to 85% in April 2018. The lapsed award referred to in the above table represents 15% of that award which did not vest. Since the period end, and following his resignation, the LTIP awards granted to Ray Kelvin between 2016 and 2018 have lapsed. 59 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT D IR ECTORS’ SHAREHOLDING (AU D IT ED ) The Directors who held office during the period and at 26 January 2019 had the following interests, including family interests, in the shares of the Company. Director Ray Kelvin2 Lindsay Page David Bernstein Ron Stewart Andrew Jennings Jennifer Roebuck Sharon Baylay Shares beneficially owned as at 26 January 2019 15,540,280 81,532 6,000 334 5,005 - - UNVESTED VESTED BUT UNEXERCISED Share options granted under 2013 LTIP subject to performance conditions1 Share options granted under Ted Baker Sharesave Scheme without performance conditions1 LTIP 2013 share options Shareholding guideline met 80,410 76,836 - - - - - - 1,875 - - - - - 19,873 18,979 - - - - - Yes Yes N/A N/A N/A N/A N/A 1 These unvested share options do not count towards the share ownership guidelines. 2 Since the period end, and following his resignation, the unvested LTIP awards granted to Ray Kelvin have lapsed. No LTIP awards were exercised during the period. PAYMENTS FOR LOSS OF OFFICE (AU D IT ED) No payments were made in the period for loss of office (2018: £nil). PAYMENTS TO PAST DIRECTORS (AU D ITED ) No payments were made in the period to past Directors (2018: £nil). 60 DIRECTORS’ REPORT PERF ORMANCE GRAPH AN D TAB LE The following graph charts the total cumulative shareholder return of the Company from January 2009 to January 2019. 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 January ‘09 Ted Baker Plc FTSE All Share Personal Goods FTSE All Share January ‘10 January ‘11 January ‘12 January ‘13 January ‘14 January ‘15 January ‘16 January ‘17 January ‘18 January ‘19 The graph above shows the Company’s performance against the FTSE All Share Personal Goods index, the sector against which it is tracked by market analysts, and also against the FTSE All Share index to illustrate the Company’s performance in the general market. 61 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT CEO REMUNERATION For the financial periods ended: Total remuneration £’000 % of maximum performance related bonus paid % of maximum LTIP vesting 2010 493 Note 1 75% 0% 2011 527 Note 1 76% 0% 2012 569 Note 1 67% 0% 2013 4,126 Note 2 0% 100% 2014 701 90% 0% 2015 757 100% 0% 2016 665 50% 0% 2017 1,217 Note 3 0% 2018 1,321 Note 4 0% 100% 100% 2019 1,011 Note 5 0% 85% Note 1: The performance criteria in respect of LTIP schemes due to vest in these years were not met and therefore no value crystallised under these schemes. Note 2: The amount included in total remuneration in respect of variable LTIP awards in 2013 comprises the number of nil-cost option awards vesting under the Ted Baker 2009 Value Creation Plan in August 2012 at the share price on the date the awards first became exercisable. Under this scheme awards converted into a number of options which was dependent upon the satisfaction of various performance targets. These options were exercisable over two tranches, the first in October 2012 and the second in October 2013. Note 3: The first of the awards made under the Ted Baker PLC Long-Term Incentive Plan 2013 vested in full in July 2016. Note 4: The second of the awards made under the Ted Baker PLC Long-Term Incentive Plan 2013 vested in full in April 2017. Note 5: The third of the awards made under the Ted Baker PLC Long-Term Incentive Plan 2013 partially vested in April 2018. Subsequent awards will vest, dependent on performance conditions being met, annually in future years. PERC ENTAGE CHANGE IN CEO ’S REM U N E RATI ON The table below shows how the percentage change in the CEO’s total remuneration excluding share-based payments in 2018 and 2019 compares with the percentage change in the average remuneration for all employees within the Group over the same period. Chief Executive Officer All Employees *The percentage change is 0% as no bonus was paid in either year. SALARY AND BENEFITS CHANGE ANNUAL BONUS CHANGE 2.6% (3.0)% 0%* 0%* All eligible employees have received a pay increase in the year; however, the mix of employees has resulted in an apparent decrease in average employee remuneration. REL ATIVE IMPORTAN CE OF SPEN D The following table sets out the percentage change in dividends and employee remuneration for the period ended 26 January 2019, compared to the period ended 27 January 2018. Dividends* Employee Remuneration * The value of dividends disclosed is the total interim dividend paid during the period and the final dividend proposed for the respective period. 2019 £’000 26,110 96,282 2018 £’000 26,723 94,320 PERCENTAGE CHANGE (2.3)% 2.1% 63 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT STATEMENT OF IMPLEMENTAT ION O F REM U N E RATI O N P OL IC Y IN THE FOLLOWING FIN AN CIAL PE RI OD The Remuneration Policy in effect during the period was approved at the Annual General There is no increase in the fees payable to Non-Executive Directors in 2019/20. The target profit before tax, annual bonus and exceptional items, on which the 2019/20 annual bonus is based, is derived after considering consensus market analyst Meeting on 13 June 2017 and took effect for the three years commencing on that date. expectations and maximum bonus pool thresholds in line with the existing annual bonus On 4 March 2019, Ray Kelvin resigned as Chief Executive Officer. As explained policy. The target for the 52 weeks ending 25 January 2020 is not disclosed for reasons of above, since 7 December 2018, Lindsay Page has been performing the role of acting Chief commercial sensitivity but will be disclosed in the annual accounts for that period. Executive Officer and will continue in this role for the foreseeable future. Accordingly, A further award of options under the 2013 LTIP will be made during the current Lindsay will receive a salary increase of £20,000 to £460,000 per annum for the period financial year. Awards to Executive Directors (excluding the Executive Chairman) he is acting in this capacity. This increased salary will also be taken into account when under this scheme will likely be based on up to 150% of basic salary. However, the Board calculating LTIP awards, bonus awards and pension entitlement. has approval from shareholders to grant awards of up to 200% of basic salary under this In addition, on 4 March 2019, our Non-Executive Chairman, David Bernstein, scheme in exceptional circumstances. The performance criteria for the next round of was appointed as Executive Chairman, until no later than November 2020, to provide 2013 LTIP awards will be the same as those applied to the five awards previously made additional support to Lindsay and will receive an annual salary of £200,000. David will not under the 2013 LTIP scheme, that is, profit per share growth with a share price increase receive any of the other benefits usually provided to an Executive Director outlined in the underpin of 10%. Remuneration Policy above. UNVESTED AWARDS UNDER TH E T ED BA KER P LC LON G -TER M IN C ENTIV E P LAN 201 3 DATE OF AWARD VESTING DATE AVERAGE SIX MONTH SHARE PRICE AT AWARD DATE SHARE PRICE PERFORMANCE TARGET PROFIT PER SHARE AT AWARD DATE THRESHOLD PROFIT PER SHARE GROWTH TARGET MAXIMUM PROFIT PER SHARE GROWTH TARGET 5 May 2016 6 April 2017 3 April 2018 4 May 2019 5 April 2020 2 April 2021 £27.44 £27.12 £28.09 £30.18 £29.83 £30.90 133.0p 148.3p 164.7p 177.0p 197.4p 219.1p 202.3p 225.6p 250.4p REMU NERATION COMMITTEE AN D ADVISERS REMU NERATION COM MITTEE The Remuneration Committee is responsible for setting the remuneration packages of the Executive Directors of the Board and other senior executives who fall within the scope The Remuneration Committee is chaired by Andrew Jennings and its other members were David Bernstein, Ron Stewart and Sharon Baylay. Ron Stewart, Andrew Jennings and Sharon Baylay are independent NEDs as noted in the corporate governance statements. In line with Provision D.2.1 of the Code, David Bernstein, as Non-Executive Chairman, of the Remuneration Committee. It approves all service contracts and other contracts could be a member of, but not chair the Remuneration Committee, as he was considered between the Company and its Executive Directors and senior executives and, if thought to be independent on appointment. On 4 March 2019 David Bernstein was appointed as fit, approves any outside interests and other directorships of the Executive Directors. Executive Chairman and will therefore no longer serve on the Remuneration Committee. The Remuneration Committee also reviews and approves the design of the Company’s The terms of reference for the Remuneration Committee are available on the long-term incentive schemes and determines the level of awards to be made and approves Company’s website at www.tedbakerplc.com. the performance targets. 64 DIRECTORS’ REPORT ADV I SERS During the period, the Remuneration Committee was assisted in its work by PricewaterhouseCoopers LLP (“PwC”) who was appointed by the Company in consultation with the Remuneration Committee. PwC is retained by the Remuneration Committee as its independent executive remuneration adviser. The Remuneration Committee assesses advice provided by PwC from time to time to consider whether it is independent. Comfort is obtained from PwC’s adherence to the Remuneration Consultants Group Code of Conduct. The Remuneration Committee was also assisted in its work by the Group’s Finance Director and Ted’s Coach. ADVISER APPOINTED BY PricewaterhouseCoopers LLP Company SERVICE PROVIDED TO THE REMUNERATION COMMITTEE Review of the short and long-term incentive arrangements, design and performance conditions FEES BASED ON HOURLY RATES OTHER SERVICES PROVIDED TO THE COMPANY £56,640 Tax, legal, project management, accounting and internal audit services to the Group STAT EMENT OF VOTING AT GE NE RAL M EE TIN G At the last Annual General Meeting, votes on the Remuneration Report (excluding the Directors’ Remuneration Policy) were cast as follows. Approval of the 2018 Directors’ Remuneration Report FOR % NUMBER 93.93% 35,580,241 AGAINST % NUMBER 6.07% 2,299,395 WITHHELD NUMBER 1,425,900 REASONS FOR VOTES AGAINST, IF APPLICABLE ACTION TAKEN BY REMUNERATION COMMITTEE The number of votes against the Remuneration Report was not considered to be significant N/A The Directors’ Remuneration Policy is subject to a binding vote by shareholders every three years and was last approved at the Annual General Meeting held on 13 June 2017. Approval of Directors’ Remuneration Policy included within the 2017 Directors’ Remuneration Report FOR % NUMBER 95.23% 35,496,307 AGAINST % NUMBER 4.77% 1,777,901 WITHHELD NUMBER 1,492,305 REASONS FOR VOTES AGAINST, IF APPLICABLE ACTION TAKEN BY REMUNERATION COMMITTEE The number of votes against the updated policy was not considered to be significant N/A The Directors’ Remuneration Report was approved on behalf of the Board on 21 March 2019 and signed on its behalf by: Andrew Jennings Chairman of the Remuneration Committee 21 March 2019 65 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT OTH ER STATUTORY AN D REGU L ATO RY DISC LOS U RE S SU BS IDIARY UNDERTAKIN GS The subsidiary undertakings of the Group in the period are listed in Note 12 to the D IR EC TORS The Directors during the period were those listed on pages 34 – 35. Details of the Directors’ beneficial interests in the shares of the Company are shown on page 67. Details of their interests in share options are given in the Directors’ Remuneration Report on accounts. The Group also has branches operating in Eire and Portugal. page 59. Brief details of the career of each Director are set out on pages 34–35. RESU LTS AND DIVIDENDS The audited accounts for the 52 weeks ended 26 January 2019 are set out on pages S UBSTANTI AL S H AR EH OL DIN G S As at 26 January 2019, the Company had been notified, in accordance with the Disclosure 78–122. The Group profit for the 52 weeks, after taxation, was £40.7m (2018: £52.7m). Guidance and Transparency Rules (DTR5), of substantial interests in the ordinary share The Directors recommend a final dividend of 40.7p per ordinary share (2018: 43.5p) capital of the Company. For details see the table below: payable on 21 June 2019 to ordinary shareholders on the register on 17 May 2019 which, together with the interim dividend of 17.9p per share (2018: 16.6p per share) paid on 17 November 2018, makes a total of 58.6p per share for the period (2018: 60.1p per share). The Group maintains a dividend policy of broadly achieving a 2.1x dividend cover. NAME OF HOLDER Ray Kelvin Ameriprise Financial Massachusetts Mutual Life Insurance Company Baillie Gifford & Co Aviva plc Schroders T Rowe Price Associates Wasatch Advisors NUMBER 15,540,280 3,917,886 3,005,693 2,709,165 2,095,933 1,993,089 1,767,515 1,376,688 % HELD 34.94% 8.79% 6.74% 6.08% 4.70% 4.47% 3.97% 3.09% Pursuant to LR9.8.6(2) there has been no change in the interests disclosed to the Company between the end of the period and 15 April 2019. SH ARE CAPITAL AND CON TROL As at 26 January 2019, the Company’s authorised share capital was 80,000,000 ordinary shares of 5p each (in nominal value). Details of the Company’s share capital are shown non pre-emptive issues for cash up to an aggregate nominal amount of £111,186 (which, in line with the Pre-Emption Group Statement of Principles (the “Principles”), reflecting the customary disapplication power over 5% of the issued ordinary share capital as it stood in Note 19 to the consolidated financial statements on page 109. As at 26 January prior to the 2018 AGM), together with a further 5% of the issued ordinary share capital 2019 there were 44,563,346 ordinary shares in issue. The rights and obligations attaching provided that this additional element could only be used in connection with acquisitions to the Company’s shares, in addition to those conferred on their holders by law, are set and specified capital investments (as defined in the Principles). Both powers are due out in the Articles of Association. Subject to the Articles of Association, the holders of to lapse at the 2019 AGM at which shareholders will be asked to grant similar powers in ordinary shares are entitled to receive all shareholder documents, attend and speak at line with best practice and the Pre-Emption Group’s Principles. The Company did not seek general meetings of the Company, exercise all voting rights and to receive dividends and an authority at the 2018 AGM to buy back its own shares and there was no authority in participate in other distributions of assets. The Company may not exercise any rights place as at the end of the period. (such as voting rights) in respect of the treasury shares and the treasury shares carry no right to receive dividends or other distributions of assets. Other than as set out in the Articles of Association, the Company is not aware of any agreements between shareholders restricting the voting rights or the right to transfer shares in the Company. AP P OI N TM EN T AN D RE MOVAL OF D IRE CTORS A ND ARTI C L ES OF ASS OC I ATI ON The Articles of Association provide that the Company’s shareholders may appoint any The Directors were granted authority at the 2018 Annual General Meeting person to act as a Director or, on special notice, remove any Director from office by (the “2018 AGM”) to allot shares in the capital of the Company up to an aggregate nominal passing an ordinary resolution at a general meeting. The Articles also empower the amount of £741,241 (being approximately 33% of the total ordinary share capital in issue Board to appoint any person as a Director. The Articles set out when a Director must prior to the 2018 AGM). This authority is due to lapse at the Annual General Meeting in leave office. These include where a Director resigns, becomes bankrupt or is prohibited 2019 (the “2019 AGM”). At the 2019 AGM, shareholders will be asked to grant a similar from acting as a director for other reasons, is absent from the business for the long term allotment authority. The Directors were also empowered at the 2018 AGM to make or where a Director is required to resign by all the other Directors. 66 DIRECTORS’ REPORT The Articles provide that any Director who was appointed by the Board during the The Articles can only be amended, or new Articles adopted, by a special resolution period shall retire at the next Annual General Meeting following his or her appointment, passed by shareholders in general meeting by at least three quarters of the votes cast. but that Director may then stand for election by the Company’s shareholders. Additionally, at each Annual General Meeting one third of the Directors must retire from office and each Director must retire at least once every three years. Retiring C H AN GES OF CON TROL There are a number of agreements that take effect, alter or terminate upon a change of Directors may stand for re-election by the Company’s shareholders. Notwithstanding control of the Company following a takeover bid, such as commercial contracts, bank loan the provisions of the Articles, the Company’s current practice, in accordance with the agreements and employee share schemes. None of these is deemed to be significant in recommendations of the Code, is to require each Director to stand for election or terms of its potential impact on the business of the Company. re-election by the Company’s shareholders on an annual basis. Changes to the Articles of The Company does not have agreements with any Director or employee that would Association must be approved by the shareholders in accordance with the legislation in provide compensation for loss of office or employment resulting from a takeover, save force from time to time. The powers of the Directors are determined by legislation and that the Company’s share schemes contain provisions which may cause options and the Articles of Association of the Company in force from time to time. Powers relating to awards granted to employees to vest on a takeover. the issuing and buying back of shares are included in the Company’s Articles of Association and shareholder approval of such authorities may be sought, if considered appropriate by Directors, at the Annual General Meeting. D IR EC TORS’ I N TERESTS The Directors who held office at 26 January 2019 and their connected persons had interests in the shares of the Company as shown in the table below. NAME OF HOLDER % OF SHARE CAPITAL 26 JANUARY 2019 BENEFICIAL NUMBER 27 JANUARY 2018 BENEFICIAL NUMBER Ray Kelvin Lindsay Page David Bernstein Andrew Jennings Ron Stewart 34.87 0.18 - - - 15,540,280 81,532 6,000 5,005 334 15,540,280 81,229 6,000 5,005 334 Pursuant to LR9.8.6R(1) there has been no change in the beneficial interests of the Directors between the end of the period and 15 April 2019. CONTROLLING S HAREHOLDER Pursuant to LR 9.8.4R(14)(a), the Directors confirm that the Company entered into a S OC IA L R ES PO NS I BI L ITY Details of the Group’s social, ethical and environmental responsibility initiatives are set out written and legally binding relationship agreement with Ray Kelvin on 14 November 2014 in the Sustainability and the Environment Statement on page 27. which is intended to ensure that Ray Kelvin complies with the independence undertakings set out in LR 6.5.4R (the “Relationship Agreement”). Pursuant to LR 9.8.4R(14)(c)(i), the Directors confirm that the Company has complied P EOP L E Details of the Group’s policies with respect to people and employees are set out in the with the independence undertakings set out in the Relationship Agreement during the People Statement on page 30. period. In addition, pursuant to LR 9.8.4R(14)(c)(ii), the Directors confirm that, so far as the Company is aware, Ray Kelvin and his associates have complied with the independence undertakings set out in the Relationship Agreement during the period. This paragraph sets out all information required by LR9.8.4R that is applicable to the Company during the period. DO NATI ONS The value of charitable donations made during the period was £116,783 (2018: £23,010). There were no political donations made during the period (2018: £nil). H EALTH A ND SAFETY The Group remains committed to providing a safe place to work and shop for all employees and customers. Annual risk assessments are carried out at all locations and a committee, comprised of representatives within the business and an external adviser, reviews and resolves any health and safety issues. R IS K MAN AGEM ENT The Company’s policies on financial risk management are outlined in Note 22 of the financial statements. Such information is incorporated into this Directors’ Report by reference. 67 Ted Baker Plc Annual Report and Accounts 2018/19 DIRECTORS’ REPORT P OST BALANCE SHEET EVENTS On 4 March 2019, Ray Kelvin resigned from his position as Chief Executive Officer with immediate effect. Lindsay Page has been appointed as acting Chief Executive Officer and will continue in this role. David Bernstein, former Non-Executive Chairman,was appointed as Executive Chairman until no later than November 2020 to provide support to Lindsay. D IR ECTORS’ STATEMEN T REGARDIN G DISCLO S U RE O F INF OR MATION TO AUDITORS The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditors are unaware. Further, each Director has taken all the steps that they ought to have taken as a Director to ensure the Board is aware of any relevant audit information and to establish that the Company’s auditors are aware of any such information. The report was approved by the Board of Directors on 21 March 2019 and signed on its behalf by: Charles Anderson Company Secretary 21 March 2019 68 DIRECTORS’ REPORT STATEMENT OF DIRECTORS’ RE SPO N SIB ILITIE S IN RES PECT OF THE AN NUAL REPO RT AN D TH E FIN ANCIAL STATEMENTS R ESP ON S IB I LI TY STATEM EN T O F TH E DIREC TO RS IN R ESP E CT OF TH E A NN UAL FI N A N C I AL REP O RT We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with the applicable set of accounting The Directors are responsible for preparing the Annual Report and the Group and parent standards, give a true and fair view of the assets, liabilities, financial position and profit company financial statements in accordance with applicable law and regulations. or loss of the Company and the undertakings included in the consolidation taken as a Company law requires the Directors to prepare Group and parent company financial whole; and statements for each financial year. Under that law they are required to prepare the Group • the Management Report, which comprises the Strategic Report and the Directors’ financial statements in accordance with International Financial Reporting Standards as Report, includes a fair review of the development and performance of the business and adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have the position of the issuer and the undertakings included in the consolidation taken as a elected to prepare the parent company financial statements on the same basis. whole together with a description of the principal risks and uncertainties that they face. 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 We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and parent company and of their profit or loss for that period. In preparing each of the Group understandable and provides the information necessary for shareholders to assess the and parent company financial statements, the Directors are required to: Group’s position and performance, business model and strategy. • select suitable accounting policies and then apply them consistently; On behalf of the Board Lindsay Page Acting Chief Executive 21 March 2019 David Bernstein Executive Chairman 21 March 2019 • make judgements and estimates that are reasonable, relevant and reliable; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; • assess the Group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are 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, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a strategic report, directors’ report, directors’ remuneration report and corporate governance statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 70 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TED BAKER PLC IN DEPENDENT AUDITOR’S REPO RT TO THE M E M B ERS O F T ED BAKE R PLC on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently 1 OU R OPINION IS UNM ODIF IE D We have audited the financial statements of Ted Baker Plc (“the Company”) for the 52 • The Impact of Uncertainties Due to the UK Exiting the European Union on are incidental to that opinion, and we do not provide a separate opinion on these matters. week period ended 26 January 2019 which comprise the Group Income Statement, Group Our Audit Statement of Comprehensive Income, Group Statement of Changes in Equity, Company Statement of Changes in Equity, Group and Company Balance Sheet, Group and Company Refer to pages 20, 23 and 24 (principal risks), page 25 (viability statement), and page 39 Cash Flow Statement, and the related notes, including the accounting policies in Note 1. (Audit Committee Report). In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the The risk: Unprecedented levels of uncertainty. All audits assess and challenge the reasonableness of estimates, in particular as described in valuation of store assets parent company’s affairs as at 26 January 2019 and of the Group’s profit for the 52 (leasehold improvements, fixtures, fittings and office equipment) and valuation of weeks then ended; inventory, and related disclosures and the appropriateness of the going concern basis of • the Group financial statements have been properly prepared in accordance with preparation of the financial statements. All of these depend on assessments of the future International Financial Reporting Standards as adopted by the European Union (IFRSs economic environment and the Group’s future prospects and performance. In addition, we as adopted by the EU); are required to consider the other information presented in the Annual Report including • the parent company financial statements have been properly prepared in accordance the principal risks disclosure and the viability statement and to consider the directors’ with IFRSs as adopted by the EU and as applied in accordance with the provisions of statement that the annual report and financial statements taken as a whole is fair, balanced the Companies Act 2006; and and understandable and provides the information necessary for shareholders to assess • the financial statements have been prepared in accordance with the requirements of the Group’s position and performance, business model and strategy. Brexit is one of the the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the most significant economic events for the UK and at the date of this report its effects are IAS Regulation. subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. BAS I S FOR OPINI ON We conducted our audit in accordance with International Standards on Auditing (UK) Our response: We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that audits. Our procedures included: the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee. We were first appointed as auditor for the 52 week period ended 27 January 2001. The • Our Brexit knowledge – We considered the directors’ assessment of Brexit-related sources of risk for the Group’s business and financial resources compared with our period of total uninterrupted engagement is for the 19 financial years ended 26 January own understanding of the risks. We considered the directors’ plans to take action to 2019. We have fulfilled our ethical responsibilities under, and we remain independent of the mitigate the risks. Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard • Sensitivity analysis – When addressing valuation of store assets (leasehold improvements, fixtures, fittings and office equipment) and other areas that depend on were provided. 2 K EY AUDIT MATTERS: IN CLU D IN G O U R AS SE S SM E N T O F R IS KS OF M ATERIAL MISSTATEM E N T Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, forecasts, we compared the directors’ analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty. Our results: As reported under valuation of store assets (leasehold improvements, fixtures, fittings and office equipment) and valuation of inventory, we found the resulting including those which had the greatest effect on: the overall audit strategy; the allocation estimates and related disclosures including disclosures in relation to going concern to be of resources in the audit; and directing the efforts of the engagement team. We summarise acceptable. However, no audit should be expected to predict the unknowable factors or below the key audit matters, in arriving at our audit opinion above, together with our key all possible future implications for a company and this is particularly the case in relation audit procedures to address those matters and, as required for public interest entities, our to Brexit. results from those procedures. These matters were addressed, and our results are based 71 Ted Baker Plc Annual Report and Accounts 2018/19 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TED BAKER PLC • Valuation of store assets (leasehold improvements, fixtures, fittings and office • Valuation of Inventory £225.8m (2018: £187.2m) equipment) £72.0m (2018: £73.9m) Refer to page 39 (Audit Committee Report), page 89 (accounting policy) and page 108 (financial Refer to page 39 (Audit Committee Report), page 88 and 90 (accounting policy) and pages 101 disclosures). and 102 (financial disclosures). The risk: Forecast-based valuation. The Group has invested a significant amount of capital both within and outside the UK in its store portfolio. Given the relative immaturity of the brand outside the UK, the payback period is typically longer than for UK stores. The The risk: Subjective estimate. Inventory is carried in the Financial Statements at the lower of cost and net realisable value. Sales in the fashion industry can be extremely volatile with consumer demand changing significantly based on current trends. As a result, there is a risk that the carrying value of inventory exceeds its net realisable value. Group had 526 (2018: 503) stores and 34 (2018: 29) outlets as at 26 January 2019. There is a Our response: Our procedures were designed to challenge the adequacy of the risk that the carrying value of the retail store leasehold improvements, fixtures, fittings and Group’s provisions against inventory by seasonal collection. Our procedures included: office equipment may be overstated if the profitability expectations for the related stores are adversely impacted by trading and other conditions that were not anticipated in the • Control operation: testing on a sample basis the design and operation of controls initial business case. The effect of these matters is that, as part of our risk assessment, we related to inventory stock counts and purchases; determined that there is a high degree of estimation uncertainty, with a potential range of • Test of detail: testing on a sample basis that items on the stock ageing listing by season reasonable outcomes greater than our materiality for the financial statements as a whole. were classified in the appropriate ageing bracket by reference to season; The level of judgement involved in assessing if there are impairments in retail store assets is one of the key judgemental areas that our audit is concentrated on. The effect of these • Historical trends: evaluated the current year provision by assessing historical trends. We examined the Group’s historical trading patterns of inventory sold at full price and matters is that, as part of our risk assessment, we determined that there is a high degree inventory sold below full price through alternative clearance routes, together with the of estimation uncertainty, with a potential range of reasonable outcomes greater than our related margins achieved for each channel. We used the information on trading patterns materiality for the financial statements as a whole. to assess whether the provisions held have historically been set at an appropriate level; and Our response: Our procedures were designed to challenge whether there were any indicators of impairments and the need for any provisions against the asset carrying • Our business understanding: assessing, based on our knowledge of the Group and the market, the appropriateness of the provision percentages applied by challenging the value and include: assumptions made by the Directors on the extent to which older season inventory can be sold through various channels. • Test of detail: evaluating the methodology, completeness and accuracy of the Group’s impairment trigger assessment. This assessment is undertaken by the directors for all Our results: From the evidence obtained, we considered the level of provisioning to stores regardless of the period of time the store has been open. This analysis is used be acceptable (2018: acceptable). to identify those stores performing below expectations and accordingly with assets at a greater risk of impairment. For stores identified by this analysis, we considered • Recoverability of parent company’s investment in subsidiaries £25.0m whether there was an indicator of impairment based on the number of years the store (2018: £24.8m) and recoverability of parent’s debt due from group entities has been open, as well as store performance; £55.8m (2018: £55.2m) • Where there were indicators of impairment, our procedures over the directors’ calculation of recoverable amount included: Refer to page 89 (accounting policy) and page 103 to 104, and 108 (financial disclosures). - Our business understanding: assessing the key assumptions including growth rates in turnover and margin expectations by reference to historical rates achieved, and our understanding of the specific factors relevant to each store; - Sensitivity analysis: applying sensitivity analysis on the key assumptions used in the cash flow forecasts to assess the possible range of outcomes and the overall risk of any material impairment. The risk: Low risk, high value. The carrying amount of the parent company’s investments in subsidiaries represents 31% (2018: 31%) of the parent company’s total assets. The carrying amount of the intra-group debtor balance represents 69% (2018: 68%) of the parent company’s total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent company financial statements, this is considered to be the area that Our results: The results of our testing were satisfactory and we found the carrying had the greatest effect on our overall parent company audit. value of retail store assets to be acceptable (2018: acceptable). 72 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TED BAKER PLC Our response: Our procedures included: • Tests of detail: comparing the carrying amount of 100% of investments with the relevant subsidiaries’ trial balance to identify whether their net assets, being an 3 OUR AP P L IC ATION OF M ATE RI AL ITY AND AN OV ERV IEW OF TH E S CO PE OF OUR AU DIT The materiality for the Group financial statements as a whole was set at £2.5m (2018: approximation of their minimum recoverable amount, were in excess of their carrying £3.4m), determined with reference to a benchmark of Group profit before tax (of which amount and assessing whether those subsidiaries have historically been sufficiently it represents 4.9% (2018: 4.9%)). profit-making. • Tests of detail: assessing 100% of the parent’s debt due from group entities to identify, with reference to the relevant debtors’ trial balance, whether they have a positive net Materiality for the parent company financial statements as a whole was set at £0.6m (2018: £0.8m), determined with reference to a benchmark of company total assets (of which it represents 0.7% (2018: 1.0%)). asset value and therefore coverage of the debt owed, as well as assessing whether We agreed to report to the Audit Committee any corrected or uncorrected identified those debtor companies have historically been sufficiently profit-making. misstatements exceeding £170,000 (2018 £175,000) in addition to other identified • Assessing subsidiary audits: assessing the work performed by the subsidiary audit team, and considering the results of that work, on those net assets, including assessing misstatements that warranted reporting on qualitative grounds. Of the Group’s 26 reporting components (2018: 24 reporting components), we the ability of the subsidiary to obtain liquid funds and therefore the ability of the subjected 4 components to an audit for Group reporting purposes (3 UK components and subsidiary to fund the repayment of the receivable. Our results: We found the parent company’s assessment of the recoverability of the investment in subsidiaries and the parent’s debt due from group entities to be acceptable 1 US component) and 1 component (Canada) to specified risk focused audit procedures over revenue, cash and inventory. The latter was not individually financially significant enough to require a full scope audit for group purposes, but did present specific individual (2018: acceptable). risks that needed to be addressed. The components within the scope of our work accounted for the following percentages of the Group’s results: NUMBER OF COMPONENTS TOTAL GROUP REVENUE TOTAL PROFITS AND LOSSES THAT MADE UP GROUP PROFIT BEFORE TAX TOTAL GROUP ASSETS 2019 Audits for Group reporting purposes Specified risk focused audit procedures TOTAL 2018 Audits for Group reporting purposes Specified risk focused audit procedures TOTAL 4 1 5 4 1 5 83% 4% 87% 83% 4% 87% 83% 1% 84% 88% 2% 90% 89% 2% 91% 88% 2% 90% For the remaining components, we performed analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these. 4 WE H AVE N OTH IN G TO RE P O RT ON GOI N G CO NC ER N The Directors have prepared the financial statements on the going concern basis as they The Group audit team instructed component auditors in the US as to the significant do not intend to liquidate the Company or the Group or to cease their operations, and as areas to be covered, including where relevant the risks detailed above and the information they have concluded that the Company’s and the Group’s financial position means that this to be reported back. The UK components audits were covered by the Group team. The is realistic. They have also concluded that there are no material uncertainties that could Group audit team approved the components’ materiality’s which ranged from £0.6m - have cast significant doubt over their ability to continue as a going concern for at least a £2.3m (2018: £0.6m – £2.3m), having regard to the mix of size and risk profile of the Group across the components. The work on 2 components (2018: 2 components) was year from the date of approval of the financial statements (“the going concern period”). Our responsibility is to conclude on the appropriateness of the Directors’ conclusions performed by component auditors and the rest, including the audit of the parent company, and, had there been a material uncertainty related to going concern, to make reference was performed by the Group team. to that in this audit report. However, as we cannot predict all future events or conditions The Group team visited the component auditor in the US (in 2018) and telephone and as subsequent events may result in outcomes that are inconsistent with judgements conference meetings were held with the US component auditor (in 2018 and 2019). At that were reasonable at the time they were made, the absence of reference to a material these meetings the Group team discussed the audit strategy and the findings reported to uncertainty in this auditor’s report is not a guarantee that the Group and the Company the Group audit team were discussed in more detail, and any further work required by the will continue in operation. Group audit team was then performed by the US component auditor. In our evaluation of the Directors’ conclusions, we considered the inherent risks to 73 Ted Baker Plc Annual Report and Accounts 2018/19 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TED BAKER PLC the Group’s and Company’s business model and analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over D irec tor s’ rem unera tio n re por t In our opinion the part of the Directors’ Remuneration Report to be audited has been the going concern period. The risks that we considered most likely to adversely affect the properly prepared in accordance with the Companies Act 2006. Group’s and Company’s available financial resources over this period were the continued challenges faced by high street retail sector and the impact from a sustained broad-based economic downturn, as well as the uncertainty around the impact of Brexit. D isc losures of principa l risk s and lo n ge r-te r m vi a bi l i ty Based on the knowledge we acquired during our financial statements audit, we have As these were risks that could potentially cast significant doubt on the Group’s and nothing material to add or draw attention to in relation to: the Company’s ability to continue as a going concern, we considered sensitivities over • the directors’ confirmation within the viability statement on page 25 that they have the level of available financial resources indicated by the Group’s financial forecasts taking carried out a robust assessment of the principal risks facing the Group, including those account of reasonably possible (but not unrealistic) adverse effects that could arise from that would threaten its business model, future performance, solvency and liquidity; these risks individually and collectively and evaluated the achievability of the actions the • the Principal Risks and Uncertainties disclosures describing these risks and explaining Directors consider they would take to improve the position should the risks materialise. how they are being managed and mitigated; and We also considered less predictable but realistic second order impacts, such as the impact • the directors’ explanation in the Viability Statement of how they have assessed the of Brexit and the erosion of customer or supplier confidence, which could result in a rapid prospects of the Group, over what period they have done so and why they considered reduction of available financial resources. 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 Based on this work, we are required to report to you if: as they fall due over the period of their assessment, including any related disclosures • we have anything material to add or draw attention to in relation to the directors’ drawing attention to any necessary qualifications or assumptions. statement in Note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Under the Listing Rules we are required to review the viability statement. We have Group and Company’s use of that basis for a period of at least twelve months from the nothing to report in this respect. date of approval of the financial statements; or Our work is limited to assessing these matters in the context of only the knowledge • the related statement under the Listing Rules set out on page 25 is materially acquired during our financial statements audit. As we cannot predict all future events or inconsistent with our audit knowledge. conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to We have nothing to report in these respects, and we did not identify going concern report on these statements is not a guarantee as to the Group’s and Company’s longer- as a key audit matter. term viability. 5 W E HAVE NOTHING TO REPO RT ON THE OT H E R INF OR MATION IN THE ANNUAL RE PORT The directors are responsible for the other information presented in the Annual Report C o rpo ra te go ver na nce disclos ures We are required to report to you if: • we have identified material inconsistencies between the knowledge we acquired together with the financial statements. Our opinion on the financial statements does not during our financial statements audit and the directors’ statement that they consider cover the other information and, accordingly, we do not express an audit opinion or, except that the annual report and financial statements taken as a whole is fair, balanced and as explicitly stated below, any form of assurance conclusion thereon. understandable and provides the information necessary for shareholders to assess the Our responsibility is to read the other information and, in doing so, consider whether, Group’s position and performance, business model and strategy; or based on our financial statements audit work, the information therein is materially • the section of the annual report describing the work of the Audit Committee does not misstated or inconsistent with the financial statements or our audit knowledge. Based appropriately address matters communicated by us to the Audit Committee. solely on that work we have not identified material misstatements in the other information. St rat eg ic repo rt a nd d irectors’ re p ort Based solely on our work on the other information: We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. • we have not identified material misstatements in the strategic report and the We have nothing to report in these respects. directors’ report; • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and • in our opinion those reports have been prepared in accordance with the Companies Act 2006. 74 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TED BAKER PLC 6 WE HAVE NOTHI NG TO REPO RT ON THE OT H ER MAT TERS ON WHI CH WE ARE RE QU IRE D TO R EP O RT BY EXCEPTION Under the Companies Act 2006, we are required to report to you if, in our opinion: The potential effect of these laws and regulations on the financial statements varies considerably. Firstly, the group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies • adequate accounting records have not been kept by the parent Company, or returns legislation), distributable profits legislation, and taxation legislation and we assessed the adequate for our audit have not been received from branches not visited by us; or extent of compliance with these laws and regulations as part of our procedures on the • the parent Company financial statements and the part of the Directors’ Remuneration related financial statement items. Report to be audited are not in agreement with the accounting records and returns; or Secondly, the group is subject to many other laws and regulations where the • certain disclosures of directors’ remuneration specified by law are not made; or consequences of non-compliance could have a material effect on amounts or disclosures • we have not received all the information and explanations we require for our audit. in the financial statements, for instance through the imposition of fines or litigation or the loss of the group’s licence to operate. We identified the following areas as those most We have nothing to report in these respects. likely to have such an effect: health and safety, anti-bribery, employment law, and certain 7 RESPECTIVE RESPONSIB ILITIES Dire ct ors’ resp onsibilities As explained more fully in their statement set out on page 70, the directors are responsible aspects of company legislation recognising the financial nature of the group’s activities and its legal form. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. These limited for: the preparation of the financial statements including being satisfied that they give a procedures did not identify actual or suspected non-compliance. true and fair view; such internal control as they determine is necessary to enable the Owing to the inherent limitations of an audit, there is an unavoidable risk that we may preparation of financial statements that are free from material misstatement, whether due not have detected some material misstatements in the financial statements, even though we to fraud or error; assessing the Group and parent Company’s ability to continue as a going have properly planned and performed our audit in accordance with auditing standards. For concern, disclosing, as applicable, matters related to going concern; and using the going example, the further removed non-compliance with laws and regulations (irregularities) concern basis of accounting unless they either intend to liquidate the Group or the parent is from the events and transactions reflected in the financial statements, the less likely the Company or to cease operations, or have no realistic alternative but to do so. inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these Au di t or’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot as a whole are free from material misstatement, whether due to fraud or other irregularities be expected to detect non-compliance with all laws and regulations. (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually 8 TH E PUR P OSE OF OUR AUD I T WO RK A ND TO WHO M WE OWE OUR R ES PO NS I B IL I TIE S This report is made solely to the Company’s members, as a body, in accordance with or in aggregate, they could reasonably be expected to influence the economic decisions of Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so users taken on the basis of the financial statements. that we might state to the Company’s members those matters we are required to state A fuller description of our responsibilities is provided on the FRC’s website at www. to them in an auditor’s report and for no other purpose. To the fullest extent permitted frc.org.uk/auditorsresponsibilities. by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions Ir reg ularities – a bility to detec t We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector we have formed. Lourens de Villiers experience, and through discussion with the directors and other management (as required (Senior Statutory Auditor) by auditing standards), and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants identified laws and regulations throughout our team and remained alert to any indications 15 Canada Square of non-compliance throughout the audit. This included communication from the group to London component audit teams of relevant laws and regulations identified at group level. E14 5GL 21 March 2019 75 Ted Baker Plc Annual Report and Accounts 2018/19 FINANCIAL STATEMENTS GRO UP AND COMPANY PRIM ARY FIN AN C IA L STATE M EN TS GRO UP INCOME STATEM ENT FOR THE 52 WEEKS ENDED 26 JANUARY 2019 Revenue Cost of sales GROSS PROFIT Distribution costs Distribution costs before exceptional items Exceptional items Administrative expenses Administrative expenses before exceptional items Exceptional items Licence income Other operating income OPERATING PROFIT Finance income Finance expense Share of profit of jointly controlled entity, net of tax PROFIT BEFORE TAX PROFIT BEFORE TAX AND EXCEPTIONAL ITEMS Exceptional items Income tax expense Income tax expense before exceptional items Income tax relating to exceptional items PROFIT FOR THE PERIOD EARNINGS PER SHARE Basic Diluted NOTE 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 2 3 3 4 4 12 3 3 6 9 9 £’000 617,442 (257,347) 360,095 (249,760) (240,479) (9,281) (79,753) (76,926) (2,827) 22,112 1,808 54,502 280 (4,463) 538 50,857 62,965 (12,108) (10,129) (12,089) 1,960 40,728 91.5p 91.3p £’000 591,670 (230,865) 360,805 (236,529) (231,996) (4,533) (75,627) (75,484) (143) 21,443 635 70,727 802 (3,314) 574 68,789 73,465 (4,676) (16,045) (16,868) 823 52,744 119.0p 118.3p NOTES: For the year ended 27 January 2018, exceptional items relating to impairment of retail assets of £4,533,000 have been reclassified from administrative expenses to distribution costs. 78 FOR THE 52 WEEKS ENDED 26 JANUARY 2019 NOTE SHARE CAPITAL SHARE PREMIUM CASH FLOW HEDGING RESERVE TRANSLATION RESERVE RETAINED EARNINGS £’000 2,224 £’000 10,487 £’000 (3,002) FINANCIAL STATEMENTS G RO UP STATEME NT OF COM PREH EN SIVE IN COM E FOR THE 52 WEEKS ENDED 26 JANUARY 2019 PROFIT FOR THE PERIOD OTHER COMPREHENSIVE INCOME/(EXPENSE) ITEMS THAT MAY BE RECLASSIFIED TO THE INCOME STATEMENT Net effective portion of changes in fair value of cash flow hedges Exchange differences on translation of foreign operations net of tax OTHER COMPREHENSIVE INCOME/(EXPENSE) FOR THE PERIOD TOTAL COMPREHENSIVE INCOME FOR THE PERIOD G RO UP STATEME NT OF CHAN GE S IN E QU ITY BALANCE AT 27 JANUARY 2018 COMPREHENSIVE INCOME FOR THE PERIOD Profit for the period Exchange differences on translation of foreign operations Current tax on foreign currency translation Effective portion of changes in fair value of cash flow hedges Deferred tax associated with movement in hedging reserve TOTAL COMPREHENSIVE INCOME FOR THE PERIOD TRANSACTIONS WITH OWNERS RECORDED DIRECTLY IN EQUITY Net change in fair value of cash flow hedges transferred to cost of inventory Increase in issued share capital Share-based payment charges Movement on current and deferred tax on share-based payments Dividends paid TOTAL TRANSACTIONS WITH OWNERS 19 20 6 8 BALANCE AT 26 JANUARY 2019 2,228 - - - - - - - 4 - - 4 - - - - - - - 68 - - 68 10,555 79 £‘000 52,744 (5,139) (7,926) (13,065) 39,679 TOTAL EQUITY ATTRIBUTABLE TO EQUITY SHAREHOLDERS OF THE PARENT £’000 224,050 40,728 6,323 (1,432) 3,335 (670) 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 £‘000 40,728 2,665 4,891 7,556 48,284 £’000 (35) - 6,323 (1,432) - - £’000 214,376 40,728 - - - - - - - 3,335 (670) 2,665 4,891 40,728 48,284 154 - - - 154 (183) - - - - - 4,856 - - 145 (637) (27,350) (27,842) 227,262 154 72 145 (637) (27,350) (27,616) 244,718 Ted Baker Plc Annual Report and Accounts 2018/19 FINANCIAL STATEMENTS GRO UP STATEMENT OF CHAN GE S IN E QU IT Y FOR THE 52 WEEKS ENDED 27 JANUARY 2018 NOTE SHARE CAPITAL SHARE PREMIUM CASH FLOW HEDGING RESERVE TRANSLATION RESERVE RETAINED EARNINGS £’000 6,736 - - - (7,423) 2,284 £’000 7,891 - (9,889) 1,963 - - £’000 183,774 52,744 - - - - TOTAL EQUITY ATTRIBUTABLE TO EQUITY SHAREHOLDERS OF THE PARENT £’000 210,544 52,744 (9,889) 1,963 (7,423) 2,284 (5,139) (7,926) 52,744 39,679 (4,599) - - - - - - - - (35) - - 1,876 535 (24,553) (22,142) 214,376 (4,599) 568 1,876 535 (24,553) (26,173) 224,050 BALANCE AT 28 JANUARY 2017 COMPREHENSIVE INCOME FOR THE PERIOD Profit for the period Exchange differences on translation of foreign operations Current tax on foreign currency translation Effective portion of changes in fair value of cash flow hedges Deferred tax associated with movement in hedging reserve TOTAL COMPREHENSIVE INCOME FOR THE PERIOD TRANSACTIONS WITH OWNERS RECORDED DIRECTLY IN EQUITY Net change in fair value of cash flow hedges transferred to cost of inventory Increase in issued share capital Share-based payment charges Movement on current and deferred tax on share-based payments Dividends paid 19 20 6 8 £’000 2,208 £’000 9,935 - - - - - - - 16 - - - - - - - - - 552 - - TOTAL TRANSACTIONS WITH OWNERS BALANCE AT 27 JANUARY 2018 16 2,224 552 10,487 (4,599) (3,002) 80 FINANCIAL STATEMENTS CO MPANY STATEMENT O F C HAN GES IN EQ UI TY FOR THE 52 WEEKS ENDED 26 JANUARY 2019 NOTES SHARE CAPITAL SHARE PREMIUM OTHER RESERVES RETAINED EARNINGS TOTAL EQUITY BALANCE AT 27 JANUARY 2018 Profit for the period TRANSACTIONS WITH OWNERS RECORDED DIRECTLY IN EQUITY Increase in issued share capital Share-based payment credit Share-based payment charges for awards granted to subsidiary employees Dividends paid TOTAL TRANSACTIONS WITH OWNERS 7 19 20 20 8 £’000 2,224 £’000 10,487 £’000 22,371 - 4 - - - 4 - 68 - - - 68 - - - 185 - 185 BALANCE AT 26 JANUARY 2019 2,228 10,555 22,556 £’000 45,883 26,298 - (40) - (27,350) (27,390) 44,791 £’000 80,965 26,298 72 (40) 185 (27,350) (27,133) 80,130 CO MPANY STATEMENT O F CHA N GE S IN E QU I TY FOR THE 52 WEEKS ENDED 27 JANUARY 2018 NOTES SHARE CAPITAL SHARE PREMIUM OTHER RESERVES RETAINED EARNINGS TOTAL EQUITY BALANCE AT 28 JANUARY 2017 Profit for the period TRANSACTIONS WITH OWNERS RECORDED DIRECTLY IN EQUITY Increase in issued share capital Share-based payment charge Share-based payment charges for awards granted to subsidiary employees Dividends paid TOTAL TRANSACTIONS WITH OWNERS BALANCE AT 27 JANUARY 2018 £’000 2,208 - 16 - - - 16 2,224 £’000 9,935 - 552 - - - 552 10,487 £’000 20,680 - - - 1,691 - 1,691 22,371 £’000 44,426 25,825 - 185 - (24,553) (24,368) 45,883 £’000 77,249 25,825 568 185 1,691 (24,553) (22,109) 80,965 19 20 20 8 81 Ted Baker Plc Annual Report and Accounts 2018/19 FINANCIAL STATEMENTS GRO UP AND COMPANY BALAN CE SHEET AT 26 JANUARY 2019 NOTE GROUP 26 JANUARY 2019 GROUP 27 JANUARY 2018 COMPANY 26 JANUARY 2019 COMPANY 27 JANUARY 2018 Intangible assets Property, plant and equipment Investment in subsidiary Investment in equity accounted investee Deferred tax assets Prepayments NON-CURRENT ASSETS Inventories Trade and other receivables Amount due from equity accounted investee Derivative financial assets Cash and cash equivalents CURRENT ASSETS TOTAL ASSETS Trade and other payables Bank overdraft Term loan Income tax payable Derivative financial liabilities CURRENT LIABILITIES Deferred tax liabilities Term loan NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Share capital Share premium Other reserves Translation reserve Retained earnings 10 11 12 12 13 14 15 12 16 17 18 17 22 16 13 22 19 19 19 19 19 TOTAL EQUITY ATTRIBUTABLE TO EQUITY SHAREHOLDERS OF THE PARENT COMPANY TOTAL EQUITY £’000 43,673 131,865 - 1,874 6,719 773 184,904 225,849 78,604 263 316 14,654 319,686 504,590 (108,628) (91,496) (4,000) (7,141) (689) £’000 34,373 139,075 - 1,893 4,114 353 179,808 187,227 64,273 666 478 16,712 269,356 449,164 (82,858) (76,043) (5,500) (8,522) (3,918) - - - 24,978 - 55,824 - - 99 55,923 80,900 (771) - - - - (211,954) (176,841) (771) (4,918) (43,000) (1,273) (47,000) (47,918) (48,273) (259,872) (225,114) 244,718 224,050 2,228 10,555 (183) 4,856 227,262 244,718 244,718 2,224 10,487 (3,002) (35) 214,376 224,050 224,050 - - - (771) 80,130 2,228 10,555 22,556 - 44,791 80,130 80,130 These financial statements were approved by the Board of Directors on 21 March 2019 and were signed on its behalf by: Lindsay Page Director Company number: 03393836 82 £’000 £’000 - - - - 24,978 24,793 - - - 24,793 - 55,232 - - 940 56,172 80,965 - - - - - - - - - - 80,965 2,224 10,487 22,371 - 45,883 80,965 80,965 FINANCIAL STATEMENTS G RO UP AND COMPAN Y CASH FLOW STATE ME N T FOR THE 52 WEEKS ENDED 26 JANUARY 2019 CASH GENERATED FROM OPERATIONS Profit for the period Adjusted for: Income tax expense Depreciation and amortisation Impairments Loss on disposal of property, plant and equipment Share-based payments charge/(credit) Net finance expense Net change in derivative financial assets and liabilities carried at fair value through profit or loss Share of profit in joint venture (Increase)/decrease in non-current prepayments Increase in inventory Decrease/(increase) in trade and other receivables Increase/(decrease) in trade and other payables Decrease in provisions for liabilities and charges Interest paid Income taxes paid NET CASH GENERATED FROM OPERATING ACTIVITIES CASH FLOW FROM INVESTING ACTIVITIES Purchases of property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment Business acquisition (net of cash acquired) Dividends received from joint venture Interest received NET CASH FROM INVESTING ACTIVITIES CASH FLOW FINANCING ACTIVITIES Repayment of term loan Dividends paid Proceeds from issue of shares NET CASH FROM FINANCING ACTIVITIES NET DECREASE IN CASH AND CASH EQUIVALENTS Net cash and cash equivalents at the beginning of the period Exchange rate movement NET CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD Cash and cash equivalents at the end of the period Bank overdraft at the end of the period NET CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD GROUP 52 WEEKS ENDED 26 JANUARY 2019 GROUP 52 WEEKS ENDED 27 JANUARY 2018 COMPANY 52 WEEKS ENDED 26 JANUARY 2019 COMPANY 52 WEEKS ENDED 27 JANUARY 2018 £’000 40,728 10,129 25,266 8,717 53 145 4,183 (142) (538) (436) (24,503) 1,122 16,262 - (3,791) (13,963) 63,232 (30,262) - (18,695) 557 133 £’000 52,744 16,045 23,238 4,533 166 1,876 2,512 1,517 (574) 63 (34,067) (6,779) 2,845 (2,917) (3,341) (13,975) 43,886 (36,562) 115 - 578 61 (48,267) (35,808) (5,500) (27,350) 72 (32,778) (17,813) (59,331) 302 (76,842) 14,654 (91,496) (76,842) (6,000) (24,553) 568 (29,985) (21,907) (36,673) (751) (59,331) 16,712 (76,043) (59,331) 83 £’000 26,298 - - - - (40) - - - - - (592) 771 - - - £’000 25,825 - - - - 185 - - - - - (3,299) (24) - - - 26,437 22,687 - - - - - - - (27,350) 72 (27,278) (841) 940 - 99 99 - 99 - - - - - - - (24,553) 568 (23,985) (1,298) 2,238 - 940 940 - 940 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 1) SU MMARY OF S IGNIFICANT AC CO U N TIN G P OL I C I E S The principal accounting policies applied in the preparation of these consolidated and The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the Company financial statements are set out below. These policies have been consistently revision affects only that period, or in the period of the revision and future periods if the applied to all the periods presented, unless otherwise stated. revision affects both current and future periods. The Group’s significant estimates relate to inventory valuation, impairment of assets and accounting for business combinations. A) BASIS OF PREPARATION Both the consolidated and Company financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”). On publishing the parent company financial R EVI S ED AND AM EN DED S TAN DA RD S AND I NTER P RETA TI ON S No new standards, amendments or interpretations, effective for the first time for statements here together with the consolidated financial statements, the Company the period beginning on or after 27 January 2018 have had a material impact on the Group is taking advantage of the exemption in Section 408 of the Companies Act 2006 not or Company. to present its income statement and related notes that form a part of these approved IFRS 9, Financial Instruments, on classification and measurement (effective 28 January financial statements. 2018) addresses the classification, measurement and recognition of financial assets and The Group’s business activities, together with the factors likely to affect its future financial liabilities. It replaces the guidance in IAS 39 that relates to the classification and development, performance and position are set out on pages 4–15. The financial position measurement of financial instruments. This has not had a material impact on the Group of the Group, its cash flows, liquidity position and borrowing facilities are described in or Company. the Chairman’s Statement on pages 4–6. In addition, Note 22 to the financial statements IFRS 15, Revenue from Contracts with Customers (effective 28 January 2018), deals includes the Group’s objectives, policies and processes for managing its capital; its financial with revenue recognition and establishes principles for reporting useful information to risk management objectives; details of its financial instruments and hedging activities; and users of financial statements about the nature, amount, timing and uncertainty of revenue its exposures to credit risk and liquidity risk. and cash flows arising from an entity’s contracts with customers. Revenue is recognised As highlighted in Note 22 to the financial statements, the Group meets its day-to- when a customer obtains control of a good or service and thus has the ability to direct the use day working capital requirements through a committed overdraft facility expiring in and obtain the benefits from the good or service. This has not had a material impact on the September 2020 which is a multi-currency revolving credit facility with the Royal Bank Group or Company. As explained in e) on the next page, retail revenue is recognised when of Scotland, Barclays and HSBC. The facility will be used to the extent necessary to fund a Group entity sells a product to a customer. Wholesale revenue is recognised when title working capital and capital expenditure to support the Group’s growth strategy. has passed in accordance with the individual terms of trade. Licence income receivable The Group’s forecasts and projections, taking into account reasonably possible from licensees is accrued as earned on the basis of the terms of the relevant licence changes in trading performance, show that the Group has sufficient financial resources. agreement, which is typically on the basis of a minimum payment spread over the licence As a consequence the Directors have a reasonable expectation that the Company and period and a variable amount based on turnover. Accrued income is from licence the Group are well placed to manage their business risks and to continue in operational income earned but not billed in the period. This new standard has not had a material existence for the twelve months from the date of signing these financial statements, despite impact on the Group or Company. the current uncertain global economic outlook. Accordingly, the Directors continue to At the balance sheet date there are a number of new standards and amendments adopt the going concern basis in preparing the consolidated financial statements. to existing standards in issue but not yet effective. None of these is expected to have The consolidated and parent financial statements have been prepared under the a significant effect on the financial statements of the Group or Company, except the historical cost convention, except for certain financial assets and financial liabilities following, set out below: (including derivative instruments), which are held at fair value and for certain other assets IFRS 16, Leases, addresses the definition of a lease, recognition and measurement and liabilities recognised at fair value on business combinations. The consolidated and of leases and establishes principles for reporting useful information to users of financial parent financial statements have been prepared in Pounds Sterling, which is the Company’s statements about the leasing activities of both lessees and lessors. A key change arising presentation currency and are rounded to the nearest thousand Pounds Sterling. The preparation of financial statements in conformity with Adopted IFRSs requires from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17, Leases, and related interpretations. The standard management to make judgements, estimates and assumptions that affect the application of is effective for annual periods beginning on or after 1 January 2019 and therefore will policies and reported amounts of assets and liabilities, income and expenses. The estimates be adopted by the Group in the year ending 25 January 2020. See Note 26 for further and associated assumptions are based on historical experience and various other factors information on the future impact of the adoption of this standard. that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. B ) BA SI S OF C ONS OL I DATI ON The consolidated accounts include the accounts of the Company and its subsidiary undertakings made up to 26 January 2019. Unless otherwise stated, the acquisition method 85 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS of accounting has been adopted. Under this method, the results of subsidiary undertakings currencies of Group entities at the foreign exchange rate ruling at the date of the acquired or disposed of in the period are included in the consolidated financial statements transaction. Monetary assets and liabilities denominated in foreign currencies at the from the date of acquisition or up to the date of disposal. balance sheet date are translated to functional currency at the foreign exchange rate Inter-company transactions, balances and unrealised gains on transactions between ruling at that date. Foreign exchange differences arising on translation are recognised in Group companies are eliminated. Unrealised losses are also eliminated unless the the income statement. Non-monetary assets and liabilities denominated in foreign transaction provides evidence of an impairment of the asset transferred. Accounting currencies that are stated at fair value are translated to functional currency at foreign policies of subsidiaries have been changed where necessary to ensure consistency with exchange rates ruling at the dates the values were determined. the policies adopted by the Group. Exchange differences arising from a monetary item receivable from or payable to Subsidiaries are entities controlled by the Group. The Group controls an entity when a foreign entity, the settlement of which is neither planned nor likely in the foreseeable it is exposed to, or has rights to, variable returns from its involvement with the entity and future, are considered to form part of a net investment in a foreign operation and are has the ability to affect those returns through its power over the entity. In assessing control, recognised directly in equity in the translation reserve. the Group takes into consideration potential voting rights that are currently exercisable. The assets and liabilities of foreign operations, including goodwill and fair value The acquisition date is the date on which control is transferred to the acquirer. The adjustments arising on consolidation, are translated to Sterling at foreign exchange financial statements of subsidiaries are included in the consolidated financial statements rates ruling at the balance sheet date. The revenues and expenses of foreign operations from the date that control commences until the date that control ceases. Losses applicable are translated to Sterling at average foreign exchange rates ruling at the dates of the to the non-controlling interests in a subsidiary are allocated to the non-controlling transactions. Foreign exchange differences arising on retranslation since the transition interests even if doing so causes the non-controlling interests to have a deficit balance. date are recognised directly in a separate component of equity. When a foreign Jointly controlled entities are those entities over whose activities the Group has joint operation is disposed of, in part or in full, the relevant amount in the foreign currency control, established by contractual agreement and requiring the venturers’ unanimous translation reserve is transferred to profit or loss. consent for strategic financial and operating decisions. Jointly controlled entities are accounted for using the equity method (equity accounted investees) and are initially recognised at cost. E) R EV ENUE REC OGN ITI ON Revenue represents amounts receivable for goods provided in the normal course The consolidated financial statements include the Group’s share of the total of business, net of trade discounts, VAT and other sales related taxes. Retail revenue recognised income and expense and equity movements of equity accounted investees, is recognised when a Group entity sells a product to a customer. Wholesale revenue from the date that significant influence or joint control commences until the date that is recognised when title has passed in accordance with the individual terms of trade. significant influence or control ceases. When the Group’s share of losses exceeds its Licence income receivable from licensees is accrued as earned on the basis of the terms interest in an equity accounted investee, the Group’s carrying amount is reduced to £nil of the relevant licence agreement, which is typically on the basis of a minimum payment and recognition of further losses is discounted except to the extent that the Group has spread over the licence period and a variable amount based on turnover. Accrued incurred legal or constructive obligations or made payments on behalf of an investee. income is from licence income earned but not billed in the period. The Group sells retail products with the right of return and experience is used to C) BU S INESS COMBINATION S Acquisitions are accounted for using the acquisition method of accounting. The cost of an estimate and provide for the value of such returns at the time of sale when considered significant. Credit notes or exchanges are available to customers returning unwanted acquisition is the aggregate of the fair values of the assets transferred, liabilities incurred products with proof of purchase within 28 days of the date of purchase. Cash refunds are or assumed, and equity instruments issued at the date of acquisition. The consideration available to customers returning unwanted products with proof of purchase within 14 transferred includes the fair value of the asset or liability resulting from a deferred or days of the date of purchase. contingent consideration arrangement, unless that arrangement is dependent on Sales of gift vouchers are treated as future liabilities, and revenue is recognised when continued employment of the beneficiaries. Costs directly relating to an acquisition are the gift vouchers are redeemed against a later transaction. expensed to the income statement. The identified assets and liabilities and contingent liabilities are measured at their fair value at the date of acquisition. The excess of cost of acquisition over the aggregate fair value of the Group’s share of the net identified assets F) L EA SES Rentals under operating leases are charged as incurred, unless there are pre-determined plus identified intangible assets is recorded as goodwill. rental increases in the lease, in which case they are recognised on a straight-line basis over D ) FO REIGN CURRENCY The consolidated financial statements are presented in Pounds Sterling, which is the Company’s presentation currency. the lease term. Leasehold incentives received are recognised as an integral part of total lease expense, over the term of the lease. Certain rental expenses are determined on the basis of revenue achieved in specific retail locations and are accrued for on that basis. The Group engages in lease Transactions in foreign currencies are translated to the respective functional and concession arrangements that include fixed and variable elements, depending on the 86 NOTES TO THE FINANCIAL STATEMENTS terms of the underlying agreement. The Group has disclosed in Note 3 the amounts not meet the criteria for hedge accounting are recognised in the income statement. charged in the period, and in Note 21 sets out the firm commitments for future periods. The Group does not hold any fair value hedging instruments. G ) PENSION COSTS Contributions payable to defined contribution schemes in respect of pension costs J ) TAXATI ON Corporation tax payable is recognised on taxable profits using tax rates enacted or and other post retirement benefits are charged to the consolidated income statement substantively enacted at the balance sheet date. Deferred tax is recognised in full, using in the period to which they relate. Differences between contributions payable in the the balance sheet liability method, on temporary differences arising between the tax bases period and contributions actually paid are shown as either accruals or prepayments in the of assets and liabilities and their carrying amounts in the consolidated financial statements. balance sheet. H) S HARE-BAS ED PAYMEN TS The Group operates an equity-settled share-based compensation plan. S HA RE OPTIONS AND CON D IT ION AL SHARE AW AR DS Share options granted under the Sharesave scheme and the Ted Baker PLC Long-Term However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax is not recognised for temporary differences relating to investments in Incentive Plan are measured at fair value at the date of grant using the Black-Scholes and subsidiaries to the extent they will not reverse in the foreseeable future. Monte-Carlo pricing models respectively. The pricing models take into account the terms Deferred tax assets are recognised to the extent that it is probable that future taxable and conditions of the options/awards vesting. The grant date fair value is expensed on a profit will be available against which the temporary differences can be utilised. straight-line basis over the vesting period (i.e. the period in which the employees become Income tax is recognised in the income statement except to the extent that it relates unconditionally entitled to share options/awards) based on an estimate of shares that will to items recognised directly in equity, in which case it is recognised in equity. Income tax eventually vest. comprises current and deferred tax. Where the Company grants options over its own shares to the employees of its subsidiaries, it recognises, in its individual financial statements, an increase in the cost of investment in its subsidiaries equivalent to the equity-settled share-based payment charge K) D I VI DEN D D IS TR IB UTI ON Dividend distribution to the Company’s shareholders is recognised as a liability in the recognised in its consolidated financial statements with the corresponding credit being Group and Company financial statements in the period in which it is declared. recognised directly in equity. I) DERIVATIVES The Group holds derivative financial instruments to hedge its foreign currency and interest L ) I NTAN GI BL E AS SETS Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Assets acquired as part of a business combination rate exposures. Derivatives are recognised initially at fair value. Subsequent to initial are recognised at fair value. recognition, derivatives are measured at fair value, and changes therein are accounted for Expenditure on development activities is capitalised if the product is technically and as described below. CA S H FLOW HEDGES Changes in the fair value of foreign currency and interest rate derivatives which are commercially feasible and the Group intends and has the technical ability and sufficient resources to complete development, future economic benefits are probable and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. Development activities involve a plan or design for the production of new or designated as effective hedges of future cash flows are recognised in equity in the cash substantially improved products or processes. The expenditure capitalised includes direct flow hedging reserve and remain there until the forecast transaction occurs. When the labour and an appropriate proportion of overheads. Capitalised development expenditure hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised is stated at cost less accumulated amortisation and less accumulated impairment losses. Amortisation is charged to the income statement on a straight-line basis over the in other comprehensive income is transferred to the income statement in the same period estimated useful lives of intangible assets. Key money is not amortised but systematically that the hedged item affects the income statement. tested for impairment at each balance sheet date as the Directors are of the opinion If the hedging instrument no longer meets the criteria for hedge accounting, expires the residual value of the asset is in excess of the carrying value. Other intangible assets or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. are amortised from the date they are available for use. The useful life over which the The cumulative gain or loss previously recognised in other comprehensive income reacquired right is amortised in the post combination period is based on the remaining remains there until the forecast transaction occurs. contractual term of two years, without considering any contractual renewals. Changes in the fair value of foreign currency derivatives which are ineffective or do 87 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS The estimated useful lives are as follows: Key money: Computer software: No amortisation charged. Three to ten years. Computer software under development: Assets under development are stated at cost less transfers to completed assets when substantially all of the activities necessary for the asset to be ready for use have occurred. Reacquired right: Two years. M) PROPERTY, PLANT AND EQ U IP M EN T Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on property, plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset on the following bases: Freehold land: Freehold buildings: Not depreciated. Straight line over 50 years. Leasehold improvements: Straight line over the shorter of the period of the unexpired term of the lease or the useful economic life of the improvement. Fixtures, fittings and office equipment: 20% to 25% per annum on a straight-line basis apart from computer equipment, which is 33% per annum on a straight-line basis or over the expected useful economic life of the asset. Motor vehicles: 25% per annum on a straight-line basis over the expected useful economic life of the asset. Assets under construction: Assets in the course of construction are stated at cost less transfers to completed assets when substantially all of the activities necessary for the asset to be ready for use have occurred. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the income statement. N) I MPAIRMENT OF PROPERTY, PLAN T AN D EQ UI PMENT AND INTANGIBLE ASSET S Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its estimated recoverable amount. The recoverable amount is O) I NV ES TM EN TS Investments in subsidiaries by the Company are shown at cost less accumulated impairment losses which are recognised in the income statement. P ) I NV ENTOR IE S Inventories and work in progress are stated at the lower of cost and net realisable value the higher of an asset’s fair value less costs to sell and value in use. Recoverable amounts or fair value if acquired as part of a business combination. Cost includes materials, direct for cash-generating units are based on value in use, which is calculated from cash flow labour and inward transportation costs. Net realisable value is based on estimated selling projections using data from the Group’s latest internal forecasts, the results of which are price, less further costs expected to be incurred to completion and disposal. Provision is reviewed by the Board. made for obsolete, slow moving or defective items where appropriate. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management use a pre-tax discount rate derived from the Group’s adjusted weighted average cost of capital. Internal forecasts Q) C AS H AND CA SH EQUIV AL EN TS Cash and cash equivalents comprises cash balances and money market deposits. Bank reflect the current market assessment and risks specific to the cash-generating units. overdrafts that are repayable on demand and form an integral part of the Group’s cash Changes in selling prices and direct costs are based on past experience and expectations of future changes in the market. management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Impairment losses are recognised in the income statement. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Where an impairment loss subsequently R ) IN TERE ST-B EARI N G BOR ROWI N GS Interest-bearing borrowings are recognised initially at fair value less attributable reverses, the carrying amount of the asset is increased to the revised estimate of the transaction costs. Subsequent to initial recognition, interest-bearing borrowings are recoverable amount, but so that the increased carrying value does not exceed the carrying stated at amortised cost with any difference between cost and redemption value being value that would have been determined if no impairment loss had been recognised for the recognised in the income statement over the period of the borrowings on an effective asset in prior years. A reversal of an impairment loss is recognised in income immediately. interest basis. 88 NOTES TO THE FINANCIAL STATEMENTS S ) FI NANCE INCOME AND EX PE NSES Net financing costs comprise interest payable on borrowings calculated using the effective on the Group’s internal plans. The forecasts are extrapolated beyond these plans based on management’s expectations and long-term growth rates. Such estimates are subject interest rate method, interest receivable on funds invested, dividend income, foreign to change as a result of changing economic conditions and actual cash flows may differ exchange gains and losses, and gains and losses on hedging instruments that are recognised from forecasts. in the income statement. Interest income is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the I NV EN TOR I ES The Directors have used their knowledge and experience of the fashion industry in entity’s right to receive payments is established which in the case of quoted securities is determining the level and rates of provisioning required to calculate the appropriate usually the ex-dividend date. T) S EGMENT REPORTING A segment is a component of the Group that engages in business activities from which inventory carrying values. Inventory is carried in the financial statements at the lower of cost and net realisable value. Sales in the fashion industry can be extremely volatile with consumer demand changing significantly based on current trends. As a result there is a risk that the cost of inventory exceeds its net realisable value. Management calculates the it may earn revenues and incur expenses, including revenues and expenses that relate inventory provision on the basis of the ageing profile of what is in stock. Adjustments are to transactions with any of the Group’s other components. All operating segments’ made where appropriate based on Directors’ knowledge and experience to calculate the operating results are reviewed regularly by the Group’s Board to make decisions about appropriate inventory carrying values. resources to be allocated to a segment and assess its performance, and for which discrete financial information is available (see Note 2). B USI N ESS C OM BI NA TION S The recognition of business combinations requires the excess of the purchase price of U ) F INANCIAL GUARANTEE CO N TRAC TS Where the Company enters into financial guarantee contracts to guarantee the acquisitions over the net book value of assets acquired to be allocated to the assets and liabilities of the acquired entity. The Group has made estimates in relation to the fair value indebtedness of other companies within its group, the Company considers these to be allocation of the purchase price and consulted professional advisers to support these insurance arrangements, and accounts for them as such. In this respect, the Company estimates where relevant. treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. V) S HARE CAPI TAL Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. J UDG EME NTS M ADE IN A PP L Y I N G AC C OUN TIN G P OL I CI ES EXC EP TI ONA L ITE MS The Group separately reports exceptional items within their relevant income statement line as it believes this helps provide a better indication of the underlying performance of W) ACCOUNTI NG ESTIMATES AN D JU DG EM EN T S The preparation of the consolidated Group and Company financial statements requires the Group. Judgement is required in determining whether an item should be classified as an exceptional item or included within underlying results. This assessment covers the Group to make estimates and assumptions that affect the application of policies and the nature of the item, cause of occurrence and the scale of the impact of that item on reported amounts. Estimates and judgements are continually evaluated and are based reported performance. Reversals of previous exceptional items are assessed based on the on historical experience and other factors, including expectations of future events that same criteria. Further detail is provided below. are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The significant judgements applied in the preparation of the consolidated financial statements, along with estimates and assumptions that have a significant risk of Y) N ON- GAAP P ER FORM AN C E ME ASU RE S Exceptional items are added back/deducted to derive certain non-GAAP measures causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. as follows: • profit attributable to the owners of the Company, to arrive at adjusted earnings per S OU RCES OF ESTI MATION U N CE RTAIN TY • profit before tax, to arrive at profit before tax and exceptional items. share (after the tax effect of exceptional items); and IMP AI RMENT Where there are indicators of impairment, management performs an impairment test. Exceptional items are those items which, in the opinion of the Directors, should be excluded in order to provide a consistent and comparable view of the underlying Recoverable amounts for cash-generating units are the higher of fair value less costs of performance of the Group’s ongoing business. Generally, exceptional items include those disposal, and value in use. Value in use is calculated from cash flow projections based items that do not occur often and are material. 89 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS We believe the non-GAAP performance measures presented along with comparable The Directors judge that the profit before tax and exceptional items and adjusted GAAP measurements is useful to provide information with which to measure our earnings per share measures provide useful information for shareholders on the underlying performance, and our ability to invest in new opportunities. Management uses these performance of the business. These measures are also consistent with how underlying measures with the most directly comparable GAAP financial measures in evaluating our business performance is measured internally. operating performance and value creation. Non-GAAP financial measures should not The profit before tax and exceptional items and adjusted earnings per share are not be considered in isolation from, or as a substitute for, financial information presented recognised measures under IFRS and may not be directly comparable with adjusted profit in compliance with GAAP. The requirements for identifying exceptional items are on and earnings per share measures used by other companies. a consistent basis each period and presented consistently, and a reconciliation of Constant currency comparatives are obtained by applying the exchange rates that profit before tax and exceptional items to profit before tax is included in Note 3 to the were applicable for the 52 weeks ended 27 January 2018 to the financial results in overseas financial statements. subsidiaries for the 52 weeks ended 26 January 2019 to remove the impact of exchange Exceptional items in the period included: rate fluctuations. • provision for debtor balances owed by House of Fraser which are not expected to be recovered following its entry into administration. The Directors judge this to be 2. S EGM EN T I N FORM A TI ON The Group has three reportable segments: retail, wholesale and licensing. For each of exceptional as the Group does not frequently experience bad debts of this quantum; the three segments, the Executive Committee reviews internal management reports on • costs incurred directly in relation to business combinations including advisory costs a four weekly basis. and one-off integration costs. The Directors judge this to be exceptional due to the The accounting policies of the reportable segments are the same as described in infrequent occurrence of such business combinations; Note 1 on pages 85–90. Information regarding the results of each reportable segment • costs incurred in relation to the investigation into the allegations of misconduct of the is included below. Performance for the retail segment is measured based on operating former Chief Executive Officer and the Group’s policies, procedures and handling of contribution, whereas performance of the wholesale segment is measured based on gross HR-related complaints. The Directors judge this to be exceptional due to the quantum profit and performance of the licensing segment is measured based on royalty income, as and nature of the costs; and included in the internal management reports that are reviewed by the Board. • the impairment of assets in retail stores in various territories across the Group. The Segment results before exceptional items are used to measure performance as Directors judge this to be exceptional as the Group does not frequently impair assets management believes that such information is the most relevant in evaluating the of this quantum. performance of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm’s length basis. Exceptional items in the prior period included: • the impairment of assets in retail stores in various territories across the Group. The Directors judge this to be exceptional as the Group does not frequently impair assets of this quantum; • restructuring costs incurred in aligning internal structures to the Group’s strategic aims. The Directors judge this to be exceptional due to the infrequent occurrence of such costs; and • the release of the provision for the Group’s legacy warehouses following assignment of the leases. The Directors judge this to be exceptional as the initial recognition of the cost of provision was treated as exceptional. 90 NOTES TO THE FINANCIAL STATEMENTS 2. SEG MENT INFORMATION CO N TIN U ED A) S EGMENT REVENUE AND SEGM E N T RESU LT 52 WEEKS ENDED 26 JANUARY 2019 Revenue Cost of sales GROSS PROFIT Operating costs OPERATING CONTRIBUTION Licence income SEGMENT RESULT RECONCILIATION OF SEGMENT RESULT TO PROFIT BEFORE TAX Segment result Other operating costs Exceptional items Other operating income OPERATING PROFIT Finance income Finance expense Share of profit of jointly controlled entity, net of tax PROFIT BEFORE TAX Capital expenditure Unallocated capital expenditure Reacquired right (see Note 24) TOTAL CAPITAL EXPENDITURE Depreciation and amortisation Unallocated depreciation and amortisation TOTAL DEPRECIATION AND AMORTISATION Segment assets Deferred tax assets Derivative financial assets Intangible assets – head office Property, plant and equipment – head office Other assets TOTAL ASSETS Segment liabilities Income tax payable Term loan Other liabilities TOTAL LIABILITIES NET ASSETS WHOLESALE LICENSING RETAIL £’000 460,990 (169,924) 291,066 (231,885) 59,181 - 59,181 59,181 - - - - - - - - 16,799 - - - 16,565 - - 270,375 - - - - - - £’000 156,452 (87,423) 69,029 - 69,029 - 69,029 69,029 - - - - - - - - 351 - - - 494 - - 108,169 - - - - - - (149,414) (50,710) - - - - - - £’000 - - - - 22,112 22,112 22,112 - - - - - - - - - - - - - - - - - - - - - - - - - - TOTAL £’000 617,442 (257,347) 360,095 (231,885) 128,210 22,112 150,322 150,322 (85,520) (12,108) 1,808 54,502 280 (4,463) 538 50,857 17,150 13,333 3,781 34,264 17,059 8,207 25,266 378,544 6,719 316 39,037 77,064 2,910 504,590 (200,124) (7,141) (47,000) (5,607) (259,872) 244,718 Wholesale sales are shown after the elimination of inter-company sales of £86,331,786 (2018: £113,081,488). 92 NOTES TO THE FINANCIAL STATEMENTS 2. S EGMENT INF ORMATION CO N TIN U ED A) SEGMENT REVE NUE AND SEGM E N T RESU LT CO NT I N UE D WHOLESALE LICENSING 52 WEEKS ENDED 27 JANUARY 2018 Revenue Cost of sales GROSS PROFIT Operating costs OPERATING CONTRIBUTION Licence income SEGMENT RESULT RECONCILIATION OF SEGMENT RESULT TO PROFIT BEFORE TAX Segment result Other operating costs Exceptional items Other operating income OPERATING PROFIT Finance income Finance expense Share of profit of jointly controlled entity, net of tax PROFIT BEFORE TAX Capital expenditure Unallocated capital expenditure TOTAL CAPITAL EXPENDITURE Depreciation and amortisation Unallocated depreciation and amortisation TOTAL DEPRECIATION AND AMORTISATION Segment assets Deferred tax assets Derivative financial assets Intangible assets – head office Property, plant and equipment – head office Other assets TOTAL ASSETS Segment liabilities Income tax payable Provisions for liabilities and charges Term loan Other liabilities TOTAL LIABILITIES NET ASSETS RETAIL £’000 442,451 (146,230) 296,221 (225,224) 70,997 - 70,997 70,997 - - - - - - - - 21,621 - - 16,386 - - 241,427 - - - - - - £’000 149,219 (84,635) 64,584 - 64,584 - 64,584 64,584 - - - - - - - - 396 - - 455 - - 92,343 - - - - - - (117,940) (40,961) - - - - - - - - - - 93 £’000 - - - - 21,443 21,443 21,443 - - - - - - - - - - - - - - - - - - - - - - - - - - - TOTAL £’000 591,670 (230,865) 360,805 (225,224) 135,581 21,443 157,024 157,024 (82,256) (4,676) 635 70,727 802 (3,314) 574 68,789 22,017 14,821 36,838 16,841 6,397 23,238 333,770 4,114 478 28,611 79,279 2,912 449,164 (158,901) (8,522) - (52,500) (5,191) (225,114) 224,050 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 2. SEG MENT INFORMATION CO N TIN U ED B) G EOGRAPHICAL INFORM ATION 52 WEEKS ENDED 26 JANUARY 2019 Revenue Non-current assets* 52 WEEKS ENDED 27 JANUARY 2018 Revenue Non-current assets* *Non-current assets exclude deferred tax assets. C) REV ENUE BY COLLECTION Menswear Womenswear 3. PRO FIT BEFORE TAX Profit before tax is stated after charging: Depreciation and amortisation Exceptional items LEASEHOLD PROPERTIES: Fixed lease payments* Variable rental payments* CONCESSIONS: Fixed lease payments* Variable rental and commission payments* Loss on sale of property, plant and equipment and intangibles AUDITORS’ REMUNERATION: Audit of these financial statements Amounts receivable by the Company’s auditors and their associates in respect of: Audit of financial statements of subsidiaries of the Company Interim financial statements review Other assurance services UK £’000 350,620 130,031 336,056 127,429 USA £’000 182,434 32,150 153,603 26,795 REST OF WORLD £’000 84,388 16,004 102,011 21,470 TOTAL £’000 617,442 178,185 591,670 175,694 52 WEEKS ENDED 26 JANUARY 2019 £’000 52 WEEKS ENDED 27 JANUARY 2018 £’000 235,245 382,197 617,442 249,685 341,985 591,670 52 WEEKS ENDED 26 JANUARY 2019 £’000 52 WEEKS ENDED 27 JANUARY 2018 £’000 25,266 12,108 41,590 2,626 11,791 40,164 53 12 396 17 20 23,238 4,676 41,238 3,725 18,177 34,866 166 12 348 17 20 * Disclosed above are the costs charged in the period relating to leasehold properties and concession arrangements. These are either fixed in nature or variable based on revenue levels for a particular store or concession, where relevant, including e-commerce sales with concession partners. 94 NOTES TO THE FINANCIAL STATEMENTS RECONCILIATIO N OF PROFIT B E FO RE TAX TO P ROFI T BE FORE TAX AND E XC EP TI ON AL ITEM S PROFIT BEFORE TAX Distribution costs: Provision for specific trade and other receivables Impairment of retail assets Administrative expenses: Acquisition costs External investigation costs Restructuring costs Movement in provisions related to the Group’s legacy warehouses EXCEPTIONAL ITEMS PROFIT BEFORE TAX AND EXCEPTIONAL ITEMS 52 WEEKS ENDED 26 JANUARY 2019 £’000 52 WEEKS ENDED 27 JANUARY 2018 £’000 50,857 557 8,717 1,740 1,094 - - 12,108 62,965 68,789 - 4,533 - - 1,251 (1,108) 4,676 12,108 For the year ended 27 January 2018, exceptional items relating to impairment of retail assets of £4,533,000 have been reclassified from administrative expenses to distribution costs. 4. F I NANCE INCOME AND EX PEN SE S FINANCE INCOME - Interest receivable - Foreign exchange gains FINANCE EXPENSES - Interest payable - Foreign exchange losses 52 WEEKS ENDED 26 JANUARY 2019 £’000 52 WEEKS ENDED 27 JANUARY 2018 £’000 133 147 280 (3,777) (686) (4,463) 61 741 802 (3,301) (13) (3,314) 95 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 5. STAFF NUMBERS AND COSTS The average number of employees (including Executive Directors) was: Sales Design Administration Their aggregate remuneration comprised: Wages and salaries Share-based payment charges Social security costs Pension costs 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 No. 2,894 79 743 3,716 £’000 85,103 145 9,237 1,798 No. 2,677 92 693 3,462 £’000 82,217 1,876 8,579 1,648 96,283 94,320 The figures stated above are Group staff costs and as such include the costs for Ray Kelvin, who was the only salaried employee of the parent company for both periods. Further details of his remuneration may be found in the Directors’ Remuneration Report on pages 46–65. D IR ECTORS’ REMUNERATION Executive Directors’ remuneration Non-Executive Directors’ remuneration Amounts received by Executive Directors under long-term incentive schemes Company contributions to Executive Directors’ money purchase pension plans 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 £’000 946 289 - 55 £’000 921 281 2,587 54 The aggregate of remuneration and amounts receivable under long-term incentive No amounts in relation to pension contributions to a money purchase scheme were schemes of the highest paid Director was £481,000 (2018: £2,191,000). In the period made on behalf of Ray Kelvin during the 52 weeks ended 26 January 2019 or the 52 ended 26 January 2019, no amounts are disclosed as received under long-term weeks ended 27 January 2018. Amounts in relation to pension contributions to a money incentive schemes as no options were exercised by Ray Kelvin or Lindsay Page under purchase scheme were made on behalf of Lindsay Page during the period totalling £55,000 the 2013 LTIP. In the period ended 27 January 2018, amounts received under long-term (2018: £53,922). incentive schemes related to the exercise of options due to Ray Kelvin under Award 1 of the 2013 LTIP and Ray Kelvin and Lindsay Page under Award 2 of the 2013 LTIP. Further details can be found in the Directors’ Remuneration Report. Retirement benefits are accruing to the following number of Directors under money purchase schemes 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 1 1 96 NOTES TO THE FINANCIAL STATEMENTS 6. I NCOME TAX E XPEN SE A) TH E TAX CHARGE COM PRISES: Current tax Current tax United Kingdom corporation tax United Kingdom corporation tax Overseas tax Overseas tax Deferred tax Deferred tax United Kingdom corporation tax United Kingdom corporation tax Overseas tax Overseas tax PRIOR PERIOD (OVER)/UNDER PROVISION PRIOR PERIOD (OVER)/UNDER PROVISION Current tax Current tax Deferred tax Deferred tax 52 WEEKS ENDED 52 WEEKS ENDED 26 JANUARY 26 JANUARY 2019 2019 52 WEEKS ENDED 52 WEEKS ENDED 27 JANUARY 27 JANUARY 2018 2018 11,571 11,571 4,361 4,361 175 175 (3,065) (3,065) (4,378) (4,378) 1,465 1,465 10,129 10,129 12,190 12,190 5,499 5,499 827 827 (1,833) (1,833) (2,403) (2,403) 1,765 1,765 16,045 16,045 The movements in prior year current and deferred tax provisions are largely due to the filing of amended tax returns in the US and the release of prior year over provisions in both the UK and the US (2018: movements largely due as a result of claiming interest deductions in US tax returns previously not taken). B) CU RRENT DEFE RRED TAX M OVEM EN T BY TYP E Property, plant and equipment Share-based payments Overseas losses Inventory Other Total deferred tax credit 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 £’000 1,693 (389) 114 469 1,003 2,890 £’000 (388) (174) 757 475 336 1,006 97 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 6. INCOME TAX EXPENSE CON T INU ED C) FAC TORS AFFECTIN G THE TAX C HARGE FOR T H E PE RIO D The tax assessed for the period is higher than the tax calculated at domestic rates applicable to profits in the respective countries. The differences are explained below. Profit multiplied by the standard rate in the UK of 19.00% (2018: standard rate in the UK of 19.16%) Income not taxable/expenses not deductible for tax purposes Overseas losses not recognised Movement in current and deferred tax on share awards and options Prior period over provision Effect of rate change on corporation tax Difference due to overseas tax rates TOTAL INCOME TAX EXPENSE D ) DEF ERRED AND CURRENT TAX RECOG N ISE D D I RE C TLY IN EQUI TY Current tax credit on share awards and options Deferred tax charge on share awards and options Deferred tax charge/(credit) associated with movement in hedging reserve Current tax charge/(credit) associated with foreign exchange movements in reserves 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 £’000 9,663 648 2,932 178 (2,913) (350) (29) 10,129 £’000 13,180 771 1,334 103 (638) - 1,295 16,045 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 £’000 (176) 813 670 1,432 2,739 £’000 (1,058) 523 (2,284) (1,963) (4,782) There was a reduction in the UK corporation tax rate to 19% from 1 April 2017 and there will be a further reduction to 17% from 1 April 2020. There was a reduction in the US federal corporate income tax rate to 21% from 1 January 2018. As the deferred tax assets and liabilities should be recognised based on the corporation tax rate at which they are anticipated to unwind, the assets and liabilities on UK operations have been largely recognised at a rate of 17% (2018:19%). Assets and liabilities arising on foreign operations have been recognised at the applicable overseas tax rates. 7. PRO FIT ATTRIBUTABLE TO TE D BA KE R P LC The profit after tax for the 52 weeks ended 26 January 2019 of Ted Baker Plc, the parent company, was £26,298,000 (2018: £25,825,000). This included exceptional costs of £1,094,000 (2018: £nil) relating to the ongoing external investigation into the allegations of misconduct of the former Chief Executive Officer and the Group’s policies, procedures and handling of HR-related complaints. The profit after tax before exceptional items for the 52 weeks ended 26 January 2019 was £27,392,000 (2018: £25,825,000). The Directors have approved the income statement for the parent company. 8. DIV I DENDS PER SHARE Final dividend paid for prior period of 43.5p per ordinary share (2018: 38.8p) Interim dividend paid of 17.9p per ordinary share (2018: 16.6p) 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 £’000 19,377 7,973 27,350 £’000 17,176 7,377 24,553 A final dividend in respect of 2019 of 40.7p per share, amounting to a dividend payable of £18,141,121, is to be proposed at the Annual General Meeting on 11 June 2019. 98 NOTES TO THE FINANCIAL STATEMENTS 9. EARNINGS PER SHARE Number of shares: Weighted number of ordinary shares outstanding Effect of dilutive options 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 No. 44,532,779 59,849 No. 44,306,134 289,241 WEIGHTED NUMBER OF ORDINARY SHARES OUTSTANDING – DILUTED 44,592,628 44,595,375 EARNINGS: Profit for the period basic and diluted Profit for the period adjusted* Basic earnings per share Adjusted earnings per share* Diluted earnings per share Adjusted diluted earnings per share* £’000 40,728 50,876 91.5p 114.2p 91.3p 114.1p £’000 52,744 56,597 119.0p 127.7p 118.3p 126.9p Diluted earnings per share and adjusted diluted earnings per share have been calculated using additional ordinary shares of 5p each available under the Ted Baker Sharesave Scheme and the Ted Baker PLC Long-Term Incentive Plan 2013. There were no share related events after the balance sheet date that may affect earnings per share. * Adjusted profit for the period and adjusted earnings per share are shown before exceptional items (net of tax) of £10.1m (2018: £3.9m). 10. I NTANGIBLE ASSETS REACQUIRED RIGHT KEY MONEY COMPUTER SOFTWARE COMPUTER SOFTWARE UNDER DEVELOPMENT TOTAL COST At 27 January 2018 Additions/transfers Disposals Exchange rate movement AT 26 JANUARY 2019 AMORTISATION At 27 January 2018 Charge for the period Disposals Exchange rate movement AT 26 JANUARY 2019 NET BOOK VALUE AT 27 JANUARY 2018 AT 26 JANUARY 2019 £’000 - 3,781 - - 3,781 - 145 - - 145 - 3,636 99 £’000 1,381 - (744) (4) 633 - - - - - 1,381 633 £’000 £’000 £’000 27,800 20,087 - 70 47,957 7,923 4,712 - 65 12,700 19,877 35,257 13,115 (8,968) - - 4,147 - - - - - 13,115 4,147 42,296 14,900 (744) 66 56,518 7,923 4,857 - 65 12,845 34,373 43,673 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 10 . I NTANGIBLE ASSETS CON TIN U ED COST At 28 January 2017 Additions/transfers Disposals Exchange rate movement AT 27 JANUARY 2018 AMORTISATION At 28 January 2017 Charge for the period Disposals Exchange rate movement AT 27 JANUARY 2018 NET BOOK VALUE AT 28 JANUARY 2017 AT 27 JANUARY 2018 REACQUIRED RIGHT KEY MONEY COMPUTER SOFTWARE COMPUTER SOFTWARE UNDER DEVELOPMENT TOTAL £’000 £’000 £’000 £’000 £’000 - - - - - - - - - - - - 624 738 - 19 1,381 - - - - - 624 1,381 13,619 14,300 - (119) 27,800 4,652 3,377 - (106) 7,923 8,967 19,877 14,854 (1,739) - - 13,115 - - - - - 14,854 13,115 29,097 13,299 - (100) 42,296 4,652 3,377 - (106) 7,923 24,445 34,373 Additions included within computer software relate to the Microsoft Dynamics AX Additions included within the reacquired right relate to the acquisition of the footwear system and further development of our e-commerce platforms and other business business (see Note 24). systems. Additions included within the computer software under development category relate to the Microsoft Dynamics AX system and are stated net of transfers to computer software. Transfers from the computer software under development category in the period amounted to £20,087,000 (2018: £14,300,000) while additions into this category were £11,119,000 (2018: £12,561,000). 100 NOTES TO THE FINANCIAL STATEMENTS 11. P ROPERTY, PLANT AN D EQU IPM E N T COST At 27 January 2018 Additions/transfers Disposals Exchange rate movement AT 26 JANUARY 2019 DEPRECIATION At 27 January 2018 Charge for the period Disposals Impairment Exchange rate movement AT 26 JANUARY 2019 NET BOOK VALUE AT 27 JANUARY 2018 AT 26 JANUARY 2019 FREEHOLD LAND AND BUILDINGS LEASEHOLD IMPROVEMENTS FIXTURES, FITTINGS AND OFFICE EQUIPMENT £’000 57,973 - - - £’000 117,750 9,899 (1,126) 2,828 £’000 86,162 15,221 (536) 896 57,973 129,351 101,743 931 448 - - - 1,379 57,042 56,594 65,846 10,247 (1,120) 6,237 1,370 82,580 51,904 46,771 64,150 9,714 (489) 2,480 639 76,494 22,012 25,249 MOTOR VEHICLES ASSETS UNDER CONSTRUCTION TOTAL £’000 £’000 £’000 111 - - - 111 108 - - - - 108 3 3 8,114 (5,012) - 146 270,110 20,108 (1,662) 3,870 3,248 292,426 - - - - - - 131,035 20,409 (1,609) 8,717 2,009 160,561 8,114 3,248 139,075 131,865 101 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 11 . PROPERTY, PLANT AN D EQU IPM E N T CO N TI N UE D FREEHOLD LAND AND BUILDINGS LEASEHOLD IMPROVEMENTS FIXTURES, FITTINGS AND OFFICE EQUIPMENT MOTOR VEHICLES ASSETS UNDER CONSTRUCTION TOTAL £’000 £’000 £’000 £’000 £’000 COST At 28 January 2017 Additions/transfers Disposals Exchange rate movement AT 27 JANUARY 2018 DEPRECIATION At 28 January 2017 Charge for the period Disposals Impairment Exchange rate movement AT 28 JANUARY 2017 NET BOOK VALUE AT 28 JANUARY 2017 AT 27 JANUARY 2018 £’000 57,973 - - - 116,013 10,570 (3,608) (5,225) 57,973 117,750 483 448 - - - 931 57,490 57,042 56,654 10,573 (3,435) 4,072 (2,018) 65,846 59,359 51,904 80,163 10,789 (2,799) (1,991) 86,162 58,866 8,839 (2,690) 461 (1,326) 64,150 21,297 22,012 111 - - - 111 107 1 - - - 108 4 3 6,204 2,180 - (270) 8,114 - - - - - - 260,464 23,539 (6,407) (7,486) 270,110 116,110 19,861 (6,125) 4,533 (3,344) 131,035 6,204 8,114 144,354 139,075 Additions included within the assets under construction category are stated net of in margins. Management estimates discount rates using pre-tax rates that reflect the transfers to other property, plant and equipment categories. Transfers from the assets current market assessment of the time value of money and the risks specific to the cash- under construction category in the period amounted to £25,120,000 (2018: £21,359,000) generating units. Changes in selling prices and direct costs are based on past experience while additions into this category were £20,108,000 (2018: £23,539,000). and expectations of future changes in the market. IMPAI RMENT OF LEASEHOLD IM PROVEM EN TS The Group has determined that for the purposes of impairment testing, each store adjusted weighted average cost of capital. The impairment losses relate to stores whose recoverable amounts (value in use) did and outlet is tested for impairment if there are indications of impairment at the balance not exceed the asset carrying values. In all cases, impairment losses arose due to stores sheet date. performing below projected trading levels. Recoverable amounts for cash-generating units are based on value in use, which is The impairment charge of £8.7m (2018: £4.5m) for the 52 weeks ended 26 January calculated from cash flow projections using data from the Group’s latest internal forecasts, 2019 is in respect stores across the Group and is due to stores not meeting their potential, the results of which are reviewed by the Board. The key assumptions for the value in the current economic conditions and changing customer behaviour. The pre-tax discount rate used to calculate value in use is derived from the Group’s use calculations are those regarding discount rates, growth rates and expected changes 102 NOTES TO THE FINANCIAL STATEMENTS 12. I N VESTMEN TS (COMPANY) A) SU BSIDIARY UN DERTAKIN GS The Company and Group have shares in the following subsidiary undertakings. All of the subsidiaries have been included in the consolidated accounts COUNTRY OF INCORPORATION AND OPERATION ADDRESS PRINCIPAL ACTIVITY SUBSIDIARY UNDERTAKING No Ordinary Designer Label Ltd (formerly Ted Baker Limited)* Ted Baker Limited Ted Baker Canada Inc. Ted Baker (France) SARL Ted Baker Spain S. L. UK US Canada France Spain The Ugly Brown Building 6a St Pancras Way London NW1 0TB United Kingdom 1072 North State Street Ukiah, California 95482 USA 1959 Upper Water Street Halifax, Nova Scotia Canada B3J 3E5 c/o Regus 9 Rue du 4 Septembre 75002 Paris, France c/Arturo Soria 263B 28033 Madrid, Spain Leidsestraat 64 Amsterdam 1017PD The Netherlands Ted Baker Netherlands B. V. The Netherlands Ted Baker Germany GmbH Germany c/o Regus, Maximilianstraße 35 Ted Baker Belgium N.V. Ted Baker Italy S.r.l. Belgium Italy Ted Baker Hong Kong Limited Hong Kong Ted Baker Japan KK Ted Baker Korea Yuhan Hoesa Japan Korea Ted Baker (Beijing) Commercial Company The People’s Republic of China Eingang A 80539 Munich,Germany De Keyserlei 5 Box 58 2018 Antwerp Belgium Via Felice Casati 20 20124 Milan Italy Room 3001-2 Tower 2 The Gateway 25–27 Canton Road Tsim Sha Tsui Hong Kong 4-25-14, Jingumae, Shibuya-Ku Tokyo, Japan Seoul Finance Center Level 21 136 Sejong-daero Jung-gu Seoul, Korea Unit LG1-08 and 09 Floor LG1 Parkview Green FangCaoDi No. 9 Dongdaqiao Rd Chaoyang District Beijing, PRC 103 Design, wholesale and retail of designer clothing and accessories Retail and wholesale of designer clothing and accessories Retail and wholesale of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories Retail of designer clothing and accessories HOLDING ORDINARY SHARES 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 12 . I NV ESTMENTS (COMPAN Y) CON TIN U E D A) S UB SIDIARY UNDERTAKIN GS SUBSIDIARY UNDERTAKING Ted Baker SA (Pty) Ltd COUNTRY OF INCORPORATION AND OPERATION South Africa Big Lobster Limited Little Lobster Limited No Ordinary Shoes Limited No Ordinary Shoes USA LLC * Held directly by Ted Baker Plc. UK UK UK US Building 5 Inanda Greens Business Park, 54 Wierda Rd Westwierda Valley Sandton 2146 South Africa The Ugly Brown Building 6a St Pancras Way London NW1 0TB United Kingdom The Ugly Brown Building 6a St Pancras Way London NW1 0TB United Kingdom The Ugly Brown Building 6a St Pancras Way London NW1 0TB United Kingdom 1072 North State Street Ukiah, California 95482 USA B) S UB SIDIARY UNDERTAKING S – CO ST AN D N E T B O OK VALUE At 27 January 2018 Increase in cost of investment for share options/awards granted to subsidiary employees AT 26 JANUARY 2019 At 28 January 2017 Increase in cost of investment for share options/awards granted to subsidiary employees AT 27 JANUARY 2018 104 ADDRESS PRINCIPAL ACTIVITY HOLDING ORDINARY SHARES 100% Retail of designer clothing and accessories Property 100% Dormant 100% Design, wholesale and retail of designer footwear Wholesale of designer footwear 100% 100% COMPANY £’000 24,793 185 24,978 COMPANY £’000 23,102 1,691 24,793 NOTES TO THE FINANCIAL STATEMENTS C) IN TEREST IN J OINT VENTU RE The Group has a 50% interest in the ordinary share capital of No Ordinary Retail Company Pty, a company incorporated in Australia through its wholly owned subsidiary, No Ordinary Designer Label Limited. The joint venture is represented by eight stores in Australia and one store in New Zealand (2018: eight stores in Australia and one store in New Zealand). Opening investment in joint venture Share of profit of joint venture Dividend received CLOSING INVESTMENT IN JOINT VENTURE 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 £’000 1,893 538 (557) 1,874 £’000 1,897 574 (578) 1,893 The above carrying value represents the initial cost of the investment undertaken, as well as any subsequent change in net assets of the venture, as at 26 January 2019. AMOUNTS DUE FROM EQUITY ACCOUNTED INVESTEE 26 JANUARY 2019 27 JANUARY 2018 £’000 263 £’000 666 There are no contingent liabilities relating to the Group’s interest in the joint venture, and no contingent liabilities of the venture itself. The joint venture’s profit for the period ended 26 January 2019 and its assets and liabilities are as follows: Non-current assets Current assets Non-current liabilities Current liabilities NET ASSETS Share capital Retained earnings Current period profit, net of tax Exchange rate movement TOTAL EQUITY 26 JANUARY 2019 27 JANUARY 2018 £’000 2,627 3,079 - (2,609) 3,097 28 2,009 1,076 (16) 3,097 £’000 3,272 3,276 - (3,318) 3,230 29 2,135 1,148 (82) 3,230 105 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 13. D EFERRED TAX ASSETS AN D LIAB ILITIE S AS AT 26 JANUARY 2019 ASSET/ (LIABILITY) BROUGHT FORWARD £’000 RECLASSIFICATION OF OPENING BALANCE AMOUNTS ARISING ON ACQUISITION (CHARGE)/ CREDIT TO INCOME STATEMENT (CHARGE)/ CREDIT TO EQUITY FOREIGN EXCHANGE ON RETRANSLATION ASSET / (LIABILITY) CARRIED FORWARD £’000 £’000 £’000 £’000 £’000 £’000 DEFERRED TAX ASSET/ (LIABILITY) ON UK OPERATIONS ARISING FROM: ASSETS Share-based payments Other Derivative financial instruments LIABILITIES Property, plant and equipment NET DEFERRED TAX ASSET/ (LIABILITY) ON UK OPERATIONS DEFERRED TAX (LIABILITY)/ ASSET ARISING ON ACQUISITION (SEE NOTE 24) 1,353 20 705 (3,351) (1,273) - TOTAL DEFERRED TAX LIABILITY (1,273) DEFERRED TAX ASSETS NO ORDINARY SHOES LIMITED – DEFERRED TAX ASSET DEFERRED TAX ASSET ON FOREIGN OPERATIONS ARISING FROM: Foreign trading losses Inventory Other Property, plant and equipment State taxes TOTAL DEFERRED TAX ASSET TOTAL - 1,716 1,291 1,683 (576) - 4,114 2,841 - - - - - - - - (424) (30) - (58) 512 - - - - - - - (1,292) (1,292) (389) 158 - (667) (898) - (870) 126 - - - - - - 126 (1,166) (1,005) 469 449 1,647 735 2,295 1,425 (813) - (670) - (1,483) - (1,483) - - - - - - - (1,483) - - - - - - - - 65 82 41 (47) 43 184 184 151 178 35 (4,018) (3,654) (1,264) (4,918) 126 352 1,812 2,173 966 1,290 6,719 1,801 Recognition of deferred tax assets is based on the generation of future taxable profits that will allow utilisation of losses. Deferred tax assets are only recognized on the foreign trading losses when these businesses pass their development phase and when management considers it probable that future taxable profits will be available against which they can be utilised. The tax effect of the unused cumulative tax losses for which no deferred tax asset has been recognised in the balance sheet is £9,097,000 (2018: £7,085,000). Of these losses, £3,893,000 will expire in zero to five years. A further £2,830,000 will expire in six to ten years and £2,374,000 has no time expiry. 107 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 14 . I NV ENTORIES Raw materials and packaging Work in progress Finished goods and goods for resale Cost of inventories recognised as an expense within cost of sales during the period Inventories written down and recognised as an expense in the period GROUP 26 JANUARY 2019 GROUP 27 JANUARY 2018 £’000 8,978 1,055 215,816 225,849 256,595 11,809 £’000 8,220 1,208 177,799 187,227 226,933 8,468 There were no reversals of write downs during the period (2018: £nil). Inventories written down and recognised as an expense in the period relates to inventory written down to the net realisable value and the net movement in inventory provisions during the period. The write down and any reversal are included in cost of sales. 15 . T RADE AND OTHER RECEIVA BL ES Trade receivables Amounts owed by Group undertakings Prepayments and accrued income Other taxes and social security 16 . D ERIVATIVE FINANCIAL IN STRU M EN TS DERIVATIVES THAT ARE DESIGNED AND EFFECTIVE AS HEDGING INSTRUMENTS AND CARRIED AT FAIR VALUE: Forward foreign exchange contracts Interest rate swap DERIVATIVES THAT ARE CARRIED AT FAIR VALUE THROUGH PROFIT OR LOSS: Foreign currency options GROUP 26 JANUARY 2019 COMPANY 26 JANUARY 2019 GROUP 27 JANUARY 2018 COMPANY 27 JANUARY 2018 £’000 54,750 - 22,272 1,582 78,604 £’000 - 55,824 - - 55,824 £’000 42,658 - 19,628 1,987 64,273 £’000 - 55,232 - - 55,232 NOTE ASSETS 26 JANUARY 2019 £’000 LIABILITIES 26 JANUARY 2019 £’000 ASSETS 27 JANUARY 2018 £’000 LIABILITIES 27 JANUARY 2018 £’000 159 118 39 316 (451) - (238) (689) 128 144 206 478 (3,918) - - (3,918) 22 22 22 108 NOTES TO THE FINANCIAL STATEMENTS 16. D ERIVATIVE FIN AN CIAL IN STRU M EN TS CON TI N U ED Forward foreign exchange contracts are used to hedge exposure to fluctuations in foreign item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in other exchange rates that arise in the normal course of the Group’s business. comprehensive income is transferred to the income statement in the same period that the Interest rate swaps are used to hedge exposures to fluctuations in the interest rate hedged item affects the income statement. payable on the Group’s term loan. The charge to the income statement in respect of changes in the fair value of foreign The Group did not have any ineffective cash flow hedges in the period (2018: £nil). currency derivatives that do not meet the criteria for hedge accounting was £521,000 Gains and losses in equity relating to derivatives in effective hedging relationships at (2018: charge of £767,000). 26 January 2019 will remain there until the forecast transaction occurs. When the hedged 17. R E CONCILIATION OF CASH AN D CASH E QU I VAL E N TS P E R B AL ANC E SH EET TO C AS H FLOW STATEM ENT Cash and cash equivalents per balance sheet Bank overdraft per balance sheet NET CASH AND CASH EQUIVALENTS PER CASH FLOW STATEMENT 18. TR ADE AND OTHER PAYAB LE S Trade payables Accruals and deferred income Other taxes and social security 19. C APITAL AN D RESERVES Authorised – 80,000,000 ordinary shares of 5p each (2018: 80,000,000) Allotted, called up and fully paid – 44,563,346 ordinary shares of 5p each (2018: 44,474,208) GROUP 26 JANUARY 2019 £’000 14,654 (91,496) (76,842) COMPANY 26 JANUARY 2019 £’000 99 - 99 £’000 16,712 (76,043) (59,331) GROUP 27 JANUARY 2018 COMPANY 27 JANUARY 2018 GROUP 26 JANUARY 2019 COMPANY 26 JANUARY 2019 GROUP 27 JANUARY 2018 £’000 53,450 43,389 11,789 108,628 £’000 - 771 - 771 £’000 36,257 37,807 8,794 82,858 £’000 940 - 940 COMPANY 27 JANUARY 2018 £’000 - - - - 26 JANUARY 2019 27 JANUARY 2018 £’000 4,000 2,228 £’000 4,000 2,224 The increase in issued share capital in the period of 89,138 shares (2018: 305,552 shares) relates to the exercise of share options, including LTIPs. 109 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 19 . C APITAL AND RESERVES CON T IN U ED OTH ER RESERVES AND RETAIN ED E ARN IN GS Other reserves and retained earnings include the following reserve accounts: TRA NS L ATION R ES ERVE The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. CAS H FLOW HEDGING RESERVE The effective portion of financial instruments that are designated as hedging instruments OTH ER R ESERVES – CO MPAN Y This reserve relates to the premium on equity consideration used in the acquisition of a and are documented as part of an effective hedge of future cash flows are recognised subsidiary, No Ordinary Designer Label Limited, by Ted Baker Plc in 1997, which is classified directly in equity and recycled to the income statement when the underlying cash flows within other reserves under the Companies Act. This reserve also includes the cost of occur or are no longer expected to occur. share options and awards granted to employees of the Group. This reduction in other reserves is reflected in retained earnings in the Group Statement of Changes in Equity. 20 . SH ARE-BASED PAYMENTS LO NG -TERM INCENTIVE PLAN Share awards are made in the form of nil-cost options over ordinary shares in Ted Baker Plc under the Long-Term Incentive Plan 2013 (LTIP 2013), which was approved by the shareholders at the general meeting held on 20 June 2013. The options are exercisable three years after the date of grant subject to the satisfaction of profit before tax per share and share price performance targets, each measured over a three year period. The profit before tax per share target is calibrated so that the percentage of awards that vests is linked to the level of profit growth achieved. Share options and awards granted under the LTIP 2013 and outstanding at the end of the period were as follows: GRANT DATE EXPIRY DATE NUMBER OF OPTIONS GRANTED FAIR VALUE AT GRANT DATE 1 May 2014 30 April 2015 5 May 2016 6 April 2017 3 April 2018 30 April 2024 29 April 2025 4 May 2026 5 April 2027 2 April 2028 254,141 192,860 234,159 221,234 251,786 1,154,180 695.0p 1,785.0p 875.0p 1,355.0p 1,071.0p NUMBER OF AWARDS OUTSTANDING AT 26 JANUARY 2019 NUMBER OF AWARDS OUTSTANDING AT 27 JANUARY 2018 670 51,064 174,160 162,169 227,947 5,604 153,118 187,829 185,148 - 616,010 531,699 The terms and conditions of the awards granted during the period ended 26 January 2019 were the same as those for the awards made under the LTIP 2013 in previous periods and are as follows: GRANT DATE 3 April 2018 TYPE OF AWARD NUMBER OF OPTIONS VESTING CONDITIONS VESTING PERIOD LTIP 2013 251,786 Adjusted profit before tax per share growth of 10–15% per annum and 10% share price growth over the vesting period Up to 100% after three years The credit to the income statement for the period in respect of options issued under the LTIP 2013 amounted to £229,000 (2018: charge of £1,494,000). In respect of Ray Kelvin, who was employed by the Company, there is a credit of £40,000 in the period (2018: charge of £185,000). 110 NOTES TO THE FINANCIAL STATEMENTS 20. S HARE-BASE D PAYMENTS CON T IN U ED The Monte-Carlo valuation methodology has been used as the basis of measuring the fair value of awards made under the LTIP 2013. The range of inputs into the Monte-Carlo model for awards made was as follows: Share price at grant Share price at grant (based on six month average) for share price performance condition Risk free interest rate Expected life of options Share price volatility Dividend yield 2,364.0p–2,855.0p 2,385.0p–2,809.0p 0.18%–0.87% 3 years 29.0%–33.18% 1.41%–2.27% The share price volatility was determined by calculating the historic volatility of the Group’s share price over a time period matching the expected life of the option. 21. F I NANCIAL COMMITM ENTS A) CAPITAL COMMITMEN TS The Group has capital commitments of £14,977,155 at 26 January 2019 (2018: £17,703,635) which were not provided in the financial statements. B) O PERATING LEASES Total of future lease payments under non-cancellable operating leases are as follows: Leasehold properties: Within one year Between one and five years Later than five years Concessions: Within one year Between one and five years Later than five years AS AT 26 JANUARY 2019 £’000 AS AT 27 JANUARY 2018 £’000 47,282 140,298 66,781 5,258 84 99 259,802 42,855 131,705 79,689 11,983 459 - 266,691 The above table includes the minimum future commitments assuming no lease terminations. Under certain arrangements if a lease is terminated the quantum of any future minimum lease payments is subject to the terms of the contract which may result in final payments lower than those disclosed above. Our operating leases for retail stores often contain rental expenses based on revenue (“revenue leases”). Under the terms of certain revenue leases there are minimum payments due, together with variable amounts in excess of those minimums which are based on the store’s future revenue levels. For certain other revenue leases there are no minimum payment conditions within the terms of the lease such that rental charges are contingent wholly on future store revenue levels. The table above includes only committed minimum payments and excludes the variable or contingent elements of future rental payments. As a result, the amounts charged to the Income Statement may be materially higher than the financial commitment at the prior period end. C) PENSI ON ARRANGEMENTS The Group operates a number of defined contribution schemes for senior management and a stakeholder pension scheme for employees, for which the pension cost charge for the period amounted to £1,798,000 (2018: £1,648,000). Contributions totalling £161,236 are included in other payables at the period end (2018: £186,328). 111 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 22 . FI N ANCIAL INSTRUM ENTS AN D RISK M AN AGE M E N T A) CA RRYING AMOUN T AND FAIR VA LU E S OF F I N A NC I AL AS S ETS AN D L IAB I LITIE S FIN ANCIAL ASSETS AND LIAB ILITIE S – G RO U P The fair values of financial assets and liabilities of the Group, together with the carrying amounts shown in the balance sheet, are as follows: FINANCIAL ASSETS Trade receivables Accrued income Amount due from equity accounted investee Derivative financial assets Cash and cash equivalents TOTAL FINANCIAL ASSETS FINANCIAL LIABILITIES Trade and other payables Derivative financial liabilities Bank overdraft Term loan TOTAL FINANCIAL LIABILITIES NET FINANCIAL LIABILITIES CARRYING AMOUNT 26 JANUARY 2019 FAIR VALUE 26 JANUARY 2019 CARRYING AMOUNT 27 JANUARY 2018 FAIR VALUE 27 JANUARY 2018 £’000 £’000 £’000 £’000 54,750 5,431 263 316 14,654 75,414 (96,839) (689) (91,496) (47,000) 54,750 5,431 263 316 14,654 75,414 (96,839) (689) (91,496) (47,000) 42,658 1,819 666 478 16,712 62,333 (74,064) (3,918) (76,043) (52,500) 42,658 1,819 666 478 16,712 62,333 (74,064) (3,918) (76,043) (52,500) (236,024) (160,610) (236,024) (160,610) (206,525) (144,192) (206,525) (144,192) There are no significant trade debtor balances overdue and no significant amounts impaired at the end of the period. FIN ANCIAL ASSETS AND LIAB ILITIE S – CO M PA N Y The fair values of financial assets and liabilities of the Company, together with the carrying amounts shown in the balance sheet, are as follows: CARRYING AMOUNT 26 JANUARY 2019 FAIR VALUE 26 JANUARY 2019 CARRYING AMOUNT 27 JANUARY 2018 FAIR VALUE 27 JANUARY 2018 FINANCIAL ASSETS Amounts owed by Group undertakings Cash and cash equivalents TOTAL FINANCIAL ASSETS FINANCIAL LIABILITIES Trade and other payables TOTAL FINANCIAL LIABILITIES NET FINANCIAL ASSETS £’000 55,824 99 55,923 (771) (771) 55,152 £’000 55,232 940 56,172 - - £’000 55,232 940 56,172 - - 56,172 56,172 £’000 55,824 99 55,923 (771) (771) 55,152 112 NOTES TO THE FINANCIAL STATEMENTS The methods and assumptions used to estimate fair values of financial assets and liabilities Valuation of all financial assets and liabilities carried at fair value by the Group is based are as follows: on hierarchy Level 2. Fair value hierarchy levels are defined as follows: 1. Cash and cash equivalents have been stated at their book values due to their short maturities or immediate or short-term access. 2. The fair values of trade receivables, amount due from equity accounted investee and amounts owed by Group undertakings have been stated at their book value due to their short maturities. Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). 3. The fair value of derivatives is determined by reference to third-party valuations (usually from a bank) or by reference to readily observable market prices. 4. The fair values of trade and other payables have been stated at their book values due to their short maturities. 5. The fair value of the term loan considers the present value of expected payment discounted using a risk-adjusted discount rate. B) DERIVATIVE FIN ANCIAL INSTRU M E N TS CONTRACTUAL/ NOTIONAL AMOUNTS 26 JANUARY 2019 ASSETS 26 JANUARY 2019 LIABILITIES 26 JANUARY 2019 Currency derivatives Interest rate swap £’000 50,891 30,000 80,891 £’000 198 118 316 £’000 (689) - (689) The following table indicates the timing of the notional amount of the currency derivative hedging instruments. CONTRACTUAL/ NOTIONAL AMOUNTS 27 JANUARY 2018 £’000 59,900 30,000 89,900 ASSETS 27 JANUARY 2018 LIABILITIES 27 JANUARY 2018 £’000 334 144 478 £’000 (3,918) - (3,918) Within six months Between six months and one year Between one and two years UNRECOGNISED GAIN CONTRACTUAL/ NOTIONAL AMOUNTS 26 JANUARY 2019 CONTRACTUAL/ NOTIONAL AMOUNTS 27 JANUARY 2018 £’000 21,392 21,557 7,942 50,891 £’000 28,190 23,932 7,778 59,900 The £30,000,000 notional amount of the interest rate swap is due to expire in December 2020. 113 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 22 . FI N ANCIAL INSTRUM ENTS AN D RISK M AN AGE M E N T CONTIN UED C) CAS H FLOW HEDGIN G RESERVE M OVE M EN TS The following table indicates the cash flow hedging reserve balance at 26 January 2019 and the periods in which the cash flows are expected to occur. The periods in which the cash flows are expected to impact the income statement are materially the same. Within six months Between six months and one year Between one and two years UNRECOGNISED (LOSS)/GAIN CURRENCY DERIVATIVES 26 JANUARY 2019 CURRENCY DERIVATIVES 27 JANUARY 2018 £’000 57 (209) (121) (273) £’000 (1,203) (1,555) (388) (3,146) The cash flow hedging reserve relating to interest rate swaps at 26 January 2019 is a gain of £90,000 (2018: £144,000). The cash flows are expected to occur over the period to maturity of the term loan. D ) FIN ANCIAL RISK IDEN TIFICATIO N AN D MA NAGEMENT The Group’s multinational operations and debt financing requirements expose it to a The vast majority of projected purchases in each major currency qualifies as “highly probable” forecast transactions for hedge accounting purposes. The Group also publishes its financial statements in Sterling and is therefore exposed variety of financial risks. In the course of its business the Group is exposed to: to foreign currency translation risks due to movements in foreign exchange rates on the • market risk; • credit risk; and • liquidity risks have been established and are reviewed regularly to reflect changes in translation of the results and underlying net assets of its foreign operations into Sterling. FOR EI GN CUR RE NC Y S ENS I T IV IT Y AN ALYSIS The Group has used a sensitivity analysis technique that measures the estimated change to the market conditions and the Group’s activities. The Group, through its standards the income statement and equity of a 10% strengthening or weakening in Sterling against and procedures, aims to develop a disciplined and constructive control environment all other currencies, using the rates applicable at 26 January 2019. The analysis assumes that in which all employees understand their roles and obligations. all other variables, in particular, interest rates, remain constant. I) MAR KET RISK Market risk is the risk that changes in market prices, such as foreign exchange rates, the Group’s reporting currency against local functional currencies would have had on profit before tax and non-controlling interest and equity. The analysis covers currency interest rates and equity prices, will affect the Group’s income or the value of its holdings translation exposures at the period end on the Group’s financial assets and liabilities that of financial instruments. At the balance sheet date, the only significant market risk to the are not denominated in the functional currencies of those businesses. The following sensitivity analysis illustrates the impact that a 10% strengthening of Group arises from foreign currency and interest rate risk. FO REI GN CURRENCY RISK The Group operates internationally and is therefore exposed to foreign currency risk primarily on purchases of inventory denominated in US Dollars and Euros. The Board reviews and agrees policies for managing exchange rate risks on a regular basis. Where appropriate, the Group uses financial instruments to mitigate these risks. All transactions in derivatives, principally forward exchange contracts, are taken solely to manage these risks. No transactions of a speculative nature are entered into. The Group’s policy is to hedge substantially all the risks of such currency fluctuations by using forward contracts taking into account forecast foreign currency cash inflows and outflows. The policy allows for these risks to be hedged for up to 24 months ahead in order to fix the cost in Sterling. 114 NOTES TO THE FINANCIAL STATEMENTS 22 . FI N ANCIAL INSTRUM ENTS AN D RISK M AN AGE M E N T CONTIN UED A 10% (2018: 10%) strengthening or weakening of the Sterling against the following currencies at 26 January 2019 would have increased/(decreased) equity and profit by the amounts shown in the following table: IMPACT ON PROFIT 26 JANUARY 2019 IMPACT ON EQUITY 26 JANUARY 2019 IMPACT ON PROFIT 27 JANUARY 2018 IMPACT ON EQUITY 27 JANUARY 2018 TEST OF 10% (2018: 10%) STRENGTHENING IN STERLING AGAINST OTHER CURRENCIES US Dollar Euro TEST OF 10% (2018: 10%) WEAKENING IN STERLING AGAINST OTHER CURRENCIES US Dollar Euro £’000 2,019 48 2,067 (2,468) (59) (2,527) £’000 2,019 48 2,067 (2,468) (59) (2,527) £’000 1,445 89 1,534 (1,766) (108) (1,874) £’000 1,445 89 1,534 (1,766) (108) (1,874) INT EREST RATE RIS K The Group’s exposure to interest rate risk is limited to floating rate financial assets and liabilities. The Group’s policy is to minimise the impact of adverse interest rate movements through the use of interest rate management tools. Any interest rate management tools are to be aligned with timescales of current and forecast net debt for which underlying projections can be made with an appropriate degree of accuracy. The Group’s interest rate derivatives comprise interest rate swap agreements, fixing a portion of the floating rate net debt. The interest rate profile of the financial assets and liabilities of the Group is as follows: FINANCIAL ASSETS AND LIABILITIES SUBJECT TO INTEREST RATE RISK GROUP 26 JANUARY 2019 COMPANY 26 JANUARY 2019 GROUP 27 JANUARY 2018 COMPANY 27 JANUARY 2018 Sterling US Dollar Euro Other £’000 (107,238) 4,612 2,502 6,138 (93,986) £’000 99 - - - 99 £’000 (95,229) 4,668 3,526 5,040 (81,995) £’000 940 - - - 940 The above table does not include the notional value of net debt for which interest rate swaps are in place. 116 NOTES TO THE FINANCIAL STATEMENTS IN TEREST RATE SEN SITIVITY AN ALYSIS The following sensitivity analysis illustrates the impact that a change of 50 basis points in interest rates at the balance sheet date would have increased/(decreased) equity and profit by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. Interest rate increase of 0.5% Interest rate decrease of 0.5% IMPACT ON PROFIT 26 JANUARY 2019 IMPACT ON EQUITY 26 JANUARY 2019 IMPACT ON PROFIT 27 JANUARY 2018 IMPACT ON EQUITY 27 JANUARY 2018 £’000 (470) 470 £’000 (470) 470 £’000 (410) 410 £’000 (410) 410 II ) CR EDIT RIS K Credit risk is the risk that counterparties to financial instruments do not perform I II ) L I QUID I TY RI S K Prudent liquidity risk management implies maintaining sufficient cash and marketable according to the terms of the contract or instrument. The Group’s principal financial securities, the availability of funding through an adequate amount of committed credit assets are cash, trade and other receivables, and derivative financial assets. The Group’s facilities and the ability to close out market positions. Due to the dynamic nature of the credit risk is primarily attributable to its trade and other receivables. underlying businesses, Group treasury maintains flexibility in funding by maintaining availability under committed credit lines. TR AD E AND OTHER RECEIVAB LE S Credit risk arises on credit exposure to wholesale, license and concession partners Management monitors rolling forecasts of the Group’s liquidity reserve (which comprises the undrawn borrowing facility and cash and cash equivalents) on the basis including outstanding receivables and committed transactions. The Group substantially of expected cash flow. This is generally carried out at entity level in the operating mitigates credit risk through credit insurance, standby letters of credit or supplier finance companies of the Group in accordance with practice and limits set by the Group. In addition, arrangements when possible. the Group’s liquidity management policy involves projecting cash flows in major currencies Wholesale partner receivables risk is mitigated by credit insurance being taken out and considering the level of liquid assets necessary to meet these, and monitoring balance up to the amount of the credit limit. All new wholesale customers are checked against sheet liquidity ratios against internal and external regulatory requirements. Based on appropriate trade references and details such as frequency/delinquency. The limits applied current cash flow projections, the Group expects to have sufficient headroom against to each customer are set in conjunction with our credit insurer’s advice. Monitoring of its borrowing facilities (see section below for further details on the borrowing facilities). credit limits is undertaken on a daily basis. The table on the following page analyses the Group’s financial liabilities and derivative All territorial license partners require a standby letter of credit up to the amount of financial liabilities into relevant maturity groupings based on the remaining period to the their credit limit, which is determined based on creditworthiness and volume of business. contractual maturity date, at the balance sheet date. The amounts disclosed in the table are The Group is not able to protect its license partner income with credit insurance, although the contractual undiscounted cash flows. Balances due within twelve months equal their it does not consider this a significant credit risk. Forecasts are obtained from all its license carrying balances as the impact of discounting is not significant. partners throughout the period to allow extensive visibility of future income. No credit limits were exceeded in the reporting period and management will continue with its current approach to credit control to prevent any future losses from non-performance arising. 117 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 22 . FI N ANCIAL INSTRUM ENTS AN D RISK M AN AGE M E N T CONTIN UED AT 26 JANUARY 2019 NON-DERIVATIVE FINANCIAL LIABILITIES Trade and other payables Bank overdraft Term loan DERIVATIVE FINANCIAL LIABILITIES Derivative financial instruments AT 27 JANUARY 2018 NON-DERIVATIVE FINANCIAL LIABILITIES Trade and other payables Bank overdraft Term loan DERIVATIVE FINANCIAL LIABILITIES Derivative financial instruments CARRYING AMOUNT CONTRACTED AMOUNT LESS THAN 1 YEAR £’000 £’000 CONTRACTED AMOUNT 1–2 YEARS £’000 CONTRACTED AMOUNT 2–5 YEARS £’000 96,839 91,496 47,000 689 74,064 76,043 52,500 3,918 96,839 91,496 4,000 493 74,064 76,043 5,500 3,437 - - 4,000 196 - - 4,000 481 - - 39,000 - - - 43,000 - The Group manages its liquidity risk using an unsecured revolving credit facility of £135.0m The Group, as part of its regular forecasting process, has a forward-looking view of expiring in September 2020. This facility provides the resources to fund the planned these financial covenant tests and based on current projections there are no indications working capital requirements and capital expenditure to support the Group’s long-term that any of these covenants will be breached during the term of the agreement. No growth strategy. Interest is payable based on LIBOR plus a margin. The Group had utilised covenants were breached during the year to 26 January 2019. £91.3m (2018: £72.9m) of the £135.0m credit facility as at 26 January 2019. In 2015/16, the Group borrowed £60.0m under a five year Sterling-denominated term credit facility with The Royal Bank of Scotland and Barclays. The facility was used E) C AP I TA L M AN AGEM EN T The Board’s policy is to maintain a strong capital base, defined as total shareholders’ equity, to support the purchase of The Ugly Brown Building and is secured upon the freehold totalling £244,718,000 at 26 January 2019 (2018: £224,050,000), so as to maintain investor, property interest in that building. The term loan is amortised over 15 years with refinancing creditor and market confidence and to sustain future development of the business. required every five years, with an interest rate based on LIBOR plus a margin and quarterly From time to time the Company purchases its own shares on the market; the timing loan repayments which commenced in December 2016. During the period, £5.5m (2018: of these purchases depends on market prices. Primarily the shares are intended to be £6.0m) was repaid. used for issuing shares under the Group and Company’s share option and award The facilities contain financial covenants which are believed to be appropriate in the programmes. Buy and sell decisions are made on a specific transaction basis by the Board; current economic climate and tested on a quarterly basis. The Group monitors actual the Group and Company do not have a defined share buy-back plan. and prospective compliance with these on a regular basis. It is the Board’s intention to achieve a dividend cover ratio of two times every year. The financial covenant tests are based upon the following: There were no changes in the Group and Company’s approach to capital management during the period. • a ratio of total net debt to EBITDA; • a fixed charge cover ratio; and • minimum net tangible assets. 118 NOTES TO THE FINANCIAL STATEMENTS 23. C ASH FLOWS FRO M FINAN CIN G AC TIVITI ES Reconciliation of movements of liabilities to cash flows arising from financing activities: AS AT 27 JANUARY 2018 CHANGES FROM FINANCING CASH FLOWS Proceeds from issue of share capital Repayment of borrowings Dividends paid TOTAL CHANGES FROM FINANCING CASH FLOWS TOTAL EQUITY-RELATED OTHER CHANGES TERM LOAN SHARE CAPITAL SHARE PREMIUM £’000 52,500 - (5,500) - (5,500) - £’000 2,224 4 - - 4 - £’000 10,487 68 - - 68 - RETAINED EARNINGS £’000 214,376 - - (27,350) (27,350) 40,236 AT 26 JANUARY 2019 47,000 2,228 10,555 227,262 24. B USINESS COMBINATIONS On 1 January 2019, the Group acquired the entire issued share capital of No Ordinary Shoes Limited and No Ordinary Shoes USA LLC from Pentland Group Plc. Prior to this date, Pentland held the exclusive global licence to manufacture and distribute footwear under the Ted Baker brand. The Group believes that this exciting opportunity will allow it to drive further growth in its footwear business by leveraging the Group’s global footprint and well invested infrastructure. Consideration comprised £20.3m payable in cash at completion, which was funded using the Group’s multi-currency revolving credit facility (see Note 22). Acquisition-related costs of £1.7m are included in exceptional costs within administrative expenses in the income statement (see Note 3) and in operating cash flows in the statement of cash flows. At 1 January 2019, the fair value of acquired assets, liabilities and any resultant goodwill for this business combination were determined on a provisional basis, pending finalisation of the post acquisition review of the fair value of the acquired net assets. Under IFRS 3, Business Combinations, adjustments to these provisional values can be made within one year of the date of acquisition relating to facts and circumstances that existed at the acquisition date. Details of the consideration, net assets acquired and goodwill are as follows: Consideration paid: Cash TOTAL CONSIDERATION Property, Plant And Equipment Inventories Trade And Other Receivables Cash And Cash Equivalents Trade And Other Payables Reacquired Right Deferred Tax TOTAL ASSETS AND LIABILITIES 119 £’000 20,290 20,290 150 10,658 12,095 1,699 (6,801) 3,781 (1,292) 20,290 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 25 . R ELATED PARTIES The Group considers its Executive and Non-Executive Directors as key management and their compensation therefore comprises a related-party transaction. Total compensation in respect of key management for the period was as follows: Salaries and short-term benefits Contributions to money purchase pension schemes Share-based payment (credit)/charges 52 WEEKS ENDED 26 JANUARY 2019 52 WEEKS ENDED 27 JANUARY 2018 £’000 2,271 55 (76) 2,250 £’000 2,852 54 364 3,270 Directors of the Company as at 26 January 2019 and their immediate relatives control Hotel Limited* and, as such, these entities are related parties of the Company for the 35.1% of the voting shares of the Company. purposes of Chapter 11 of the Listing Rules. At 26 January 2019, No Ordinary Designer Label Limited (NODL), the main Previously the Group provided design services to THAT Bournemouth Company trading company, owed Ted Baker Plc £55,824,000 (2018: £55,232,000) and owed No Limited for which licence income fees were charged. No services were provided in the Ordinary Shoes Limited £11,370,000 (2018: £nil.) NODL was owed £186,546,000 (2018: year ended 26 January 2019 (2018: £nil). No amounts were outstanding as at 26 January £138,911,000) from the other subsidiaries within the Group. Transactions between 2019 (2018: £nil). subsidiaries were priced on an arm’s length basis. During the period the main trading company provided office space and support The Group has a 50% interest in the ordinary share capital of No Ordinary Retail services to THAT TopCo Limited for which charges were made of £130,720 (2018: Company Pty*, a company incorporated in Australia, through its wholly owned subsidiary £122,550) and other miscellaneous charges of £6,450 (2018: £8,946). As at 26 January No Ordinary Designer Label Limited. As at 26 January 2019, the joint venture owed 2019, THAT TopCo Limited owed £150,034 to the main trading company (2018: £102,418). £263,000 to the main trading company (2018: £666,000). In the period the value of sales During the period the main trading company supplied services to THAT Bournemouth made to the joint venture by the Group was £2,081,000 (2018: £2,648,000). Big Hotel Limited for which charges were made of £16,338 (2018: £6,741). As at 26 January Ray Kelvin and Lindsay Page are both directors of, and shareholders in, THAT 2019, THAT Bournemouth Big Hotel Limited owed £nil to the main trading company Bournemouth Company Limited*, THAT TopCo Limited* and THAT Bournemouth Big (2018: £1,849). * The registered office addresses are as follows: RELATED PARTY No Ordinary Retail Company Pty THAT Bournemouth Company Limited THAT TopCo Limited THAT Bournemouth Big Hotel Limited REGISTERED OFFICE ADDRESS 6 Albert St, Preston VIC 3072, Australia 6A St Pancras Way, London, NW1 0TB 6A St Pancras Way, London, NW1 0TB 6A St Pancras Way, London, NW1 0TB 120 NOTES TO THE FINANCIAL STATEMENTS 26. I M PACT OF I FRS 16, LEASE S IFRS 16, Leases, was issued in January 2016 and is mandatory for annual reporting The Group has elected to apply certain expedients as allowed by the standard on transition on 27 January 2019, namely: periods commencing 1 January 2019. The Group did not apply for early adoption of (i) to apply the short-term exemption for all asset classes and to apply low value IFRS 16 and will first report under the new standard in the interim consolidated financial exemptions; and statements for the 28 weeks ending 10 August 2019, and in the consolidated financial (ii) to exclude initial direct costs from the measurement of the right-of-use asset at the statements for the 52 weeks ending 25 January 2020. date of initial application. The Group has assessed the estimated impact that the initial application of IFRS 16 will have on its consolidated financial statements, as described below. The actual The value of lease commitments as at 26 January 2019 in respect of leasehold impact of adopting the standard may change due to any new leases or modifications to properties only is £254.3m (see Note 21). The Group’s lease portfolio within the scope existing leases in the 52 weeks ending 25 January 2020. of IFRS 16 consists of leased properties only, with a fixed rental element. Concessions and The standard specifies how leases are recognised, presented, measured and disclosed. turnover rents are not within the scope and therefore these will continue to be expensed Under IFRS 16, the distinction between operating and finance leases will be removed as incurred. The Group expects to recognise an increase in total liabilities of £186.9m, for lessees resulting in all leases being recognised on balance sheet (except short-term and a similar increase in total assets (after adjustments for prepayments and accrued leases and leases of low-value assets) and termed right-of-use assets. This will impact the lease payments recognised as at 27 January 2019). The difference between the value of timing of the recognition of lease costs within the income statement although it will not lease commitments and the increase in lease liabilities is largely driven by the requirement affect the Group’s cash flows. In the Group Income Statement, the operating lease charge, to discount the lease liabilities to present value. Discount rates ranging between 1.9% which is currently recognised within operating profit, will be replaced by a depreciation to 9.1% have been determined based on BB-rated corporate bond yields and vary by charge in respect of the right-of-use asset, and an interest cost in relation to the lease territory and lease length. The Group does not expect the adoption of IFRS 16 to affect its liability. While the overall cost of the lease over its term will be the same, the allocation ability to comply with financial covenants described in Note 22. between accounting periods will change due to method of calculating the interest cost. Operating cash flows will increase and financing cash flows will decrease because the The Group conducted an initial impact assessment and shared the results with the repayment of the principal portion of the lease liabilities will be classified as cash flows Audit Committee. Subsequently, a project team was established and over the last year from financing activities. has reviewed all of the Group’s leasing arrangements. The Group will adopt the simplified modified retrospective approach to transition and will not restate comparative amounts for the year prior to first adoption. For leases previously classified as operating leases, a lease liability is recognised for the remaining lease payments discounted using the incremental borrowing rate as at 27 January 2019. A corresponding right-of-use asset is recognised at an amount equal to the lease liability, adjusted for any previously recognised prepaid or accrued lease payments. The Group does not have any leases previously classified as finance leases. 121 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES TO THE FINANCIAL STATEMENTS 26 . I MPACT OF IFRS 16, LEASE S CO N TIN U E D BA L ANCE SHEET IMPACT Right-of-use asset Current lease liability INCOM E STATEMENT IMPACT Depreciation charge Interest expense AS AT 27 JANUARY 2019 AS AT 25 JANUARY 2020 £’000 186,923 (186,923) - £’000 155,165 (158,806) (3,641) YEAR ENDING 25 JANUARY 2020 £’000 (36,313) (8,014) (44,327) 27 . PO ST BALANCE SHEET EV EN TS On 4 March 2019, Ray Kelvin resigned from his position as Chief Executive Officer with immediate effect. Lindsay Page has been appointed as acting Chief Executive Officer and will continue in this role. David Bernstein, former Non-Executive Chairman, was appointed as Executive Chairman until no later than November 2020 to provide support to Lindsay. 122 FIVE YEAR SUMMARY (UNAUDITED) RESULTS Revenue Operating profit Profit before tax Profit before tax and impairment Profit before tax and exceptional items PROFIT FOR THE PERIOD ASSETS EMPLOYED Property, plant and equipment Other non-current assets Net current assets Non-current liabilities NET ASSETS FINANCED BY Shareholders' funds Non-controlling interest KEY STATISTICS Basic earnings per share Adjusted earnings per share Diluted earnings per share Dividends per share Dividend cover Dividend cover before exceptional costs Pre-tax return on capital employed before exceptional items Post-tax return on capital employed before exceptional items 53 WEEKS ENDED 31 JANUARY 2015 £’000 387,564 49,759 48,771 48,771 49,452 35,850 51,804 20,265 68,505 - 52 WEEKS ENDED 30 JANUARY 52 WEEKS ENDED 28 JANUARY 52 WEEKS ENDED 27 JANUARY 52 WEEKS ENDED 26 JANUARY 2016 £’000 456,169 59,369 58,664 58,853 58,664 44,235 123,397 25,615 82,143 (58,556) 2017 £’000 530,986 62,497 61,271 61,271 65,784 46,568 144,354 31,189 91,852 (56,851) 2018 £’000 591,670 70,727 68,789 73,322 73,465 52,744 139,075 40,733 92,515 (48,273) 2019 £’000 617,442 54,502 50,857 59,574 62,965 40,728 131,865 53,039 107,732 (47,918) 140,574 172,599 210,544 224,050 244,718 140,574 - 172,599 - 210,544 - 224,050 - 244,718 - 140,574 172,599 210,544 224,050 244,718 82.0p 83.2p 81.0p 40.3p 2.0 times 2.1 times 32.0% 23.5% 100.6p 100.6p 99.3p 47.8p 2.1 times 2.1 times 30.5% 23.0% 105.7p 114.0p 104.5p 53.6p 2.0 times 2.1 times 27.3% 20.8% 119.0p 127.7p 118.3p 60.1p 2.0 times 2.1 times 26.8% 20.6% 91.5p 114.2p 91.3p 58.6p 1.6 times 1.9 times 20.9% 16.7% 123 Ted Baker Plc Annual Report and Accounts 2018/19 NOTES 124 

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