strategy review final 280611

7/31/2019 Strategy Review Final 280611

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ThorntonsStrategy Review Presentation28 June 2011


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Business Objectives

A profitable & rebalanced organisation

A customer-focused business

A revitalised brand


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Agenda

Where We Are Today JH

The Transformation Plan JH

The Financial Implications MR

In Conclusion JH

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Where We Are TodayJonathan Hart


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Strong Brand

We are ranked 20th in the Superbrand Index

We are leading growth in our core markets

Our customers continue to see us as the strongest brand in the mass premium chocolate market

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Customer Advocacy : April 2010 2011 **

* Source: AC Neilsen MAT April 2011

**Source: Brand Tracking April 2011

We are No. 1* in inlaid boxed chocolatessubcategory with 34.0% market share, up

from 31% a year ago

We are No. 3* in boxed chocolates category

with 11.3% market share, up from 8.7% last

year

Total sales of Thorntons branded products at

RSP are more than 350m and growing5

0

5

10

15

20

25

30

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Strong Product Innovation & Quality

Over 13% of our sales come from new products

Customer satisfaction with our quality remains high

Four Gold Awards from the Academy of Chocolate in 2011

Our Master Chocolatier Keith Hurdman awarded joint Chocolatier ofthe Year 2011

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Multi-Channel Model

OurCommercial channel has delivered significant double digit

growth every year for the past 5 years

Our multi-channel model provides significant opportunities and

spreads business risk

OurFranchise channel allows us to offer Thorntons productswhere we do not have our Own Stores

OurDirect channel has consistently grown in line with the overall

gifting market since it launched 13 years ago

We have a well invested & maintained UK based manufacturing

facility

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Primary Challenge - Own Stores (1)

Diverse portfolio ranging from Mega Malls to Factory Outlets, Cafes

and High Street Stores

Our Retail estate requires restructuring to reflect the significant

changes in consumer shopping behaviours over the past decade

We havent sufficiently differentiated the Retail experience

We havent de-seasonalised the business

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Our Own Stores have been impacted threefold from

The changing shopping habits as supermarkets and malls have

grown

Primary Challenge - Own Stores (2)

The impact of the economy on some secondary and tertiary retail

locations

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The Transformation PlanJonathan Hart


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Role Own Stores

Our Own Stores will play an important dual role

in our business

A profitable sales & distribution channel as part

of a rebalanced organisation

Showcase our revitalised brand, helping todrive sales across all our channels

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Objectives Own Stores

Fixing our Own Stores is an essential and urgent task with two key

elements

Create a sustainable own store structure

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We have reviewed every Own Store location against the following

criteria

Long-term sustainability through sufficient footfall

Creating a Sustainable Structure - Own Stores (1)

CACI data (strength of location)

Trading patterns and comparison to a model Thorntons store

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Our Own Store Review has concluded the following

We can run a profitable and sustainable Own Store channel with between 180-200 stores

We will close a minimum of 120 of our 364 stores over the next 3years taking advantage of

lease breaks

We will explore measures to exit up to 60 further stores during the same period We expect to secure a Franchisee in the majority of the locations where we are exiting an Own

Store - key in rebalancing the sales and contribution from Own Stores as they close

We may re-site or open stores in the UKs top 100 retail locations if the right opportunities

arise

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Our Own Store Channel will run three formats

Core Retail (c.150 Stores currently 299 Stores)

Profitably supporting the brand with a revitalised proposition

Located primarily in the top 150 retail locations


Factory Outlets (c.30 Outlets currently 29 Outlets)

Supports the ongoing requirement to manage excess stocks/misshapes etc

Further opportunities will be limited

Cafes (c.35, 10 in Factory Outlets, 25 in Core Retail currently 36 Cafes)

Profitable, all year round business Not actively seeking further opportunities at this time

Requires different model store profile and significant investment

Extension through existing non-cafe stores not an option

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Develop a differentiated and less seasonal business

While the brand will remain famous for the key seasons We will grow the relevance forother gifting occasions in our customers lives e.g. birthdays,

anniversaries, thank-yous, congratulations, love yous, just becauses, etc

Differentiate and Deseasonalise Own Stores (1)

Create new products We will extend our core gifting category by developing innovative, good value little gifts

Significantly increasing the number of opportunities to personalise and customise gifts

Improve the merchandising

Improve the customer experience

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Customers Own Stores

Our brand proposition shapes our focused customer objective

We know and understand our customers well"When I go into

Thorntons, I'd like to

see something a bit

new and different.

When I enter a

Thorntons I want to have

a bit of me-time, losing

touch with the outside

I want my shopping

experience to feel

more special.

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Nikki

(young & carefree)

Jill

(40s, family focused)

world for a while."

Jean

(in her 60s)

Our current average frequency of visit and purchase is just over 5 times a year

Our customer objective is forour customers to visit and purchase from our stores just

once more per year


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Differentiate and Deseasonalise - Own Stores (2)

Developing the Proposition

New retail category management and trading team will be formedto create the plans supporting the new proposition in terms of

category focus, range and price architecture, trading and

promotional plans

New Format Store reflecting new proposition will be trialled preChristmas 2011

Investment behind new Format in 2012

Packaging refresh by Christmas 2012

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Creating new products

Innovation is key

New little gifts category under 5 in development following successful trials (launch by

Christmas 2011)

for introduction throughout the next 12 months

Better align Own Stores and the Thorntons Direct channel by introducing best-selling ideas in

Own Stores - Hampers to be launched in Own Stores for Christmas 2011

New flagship boxed-chocolate brand to be developed for launch in 2012 to sit alongside

Continental and Classics

Further development of relevant opportunities in the sharing and impulse categories

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Improving the merchandising by Christmas 2011

More than 100 store frontages to be refreshed

New browsing tables to be introduced

Lower-density merchandising, more open product

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Improving the customer experience

More engaging POS communication Programme to recruit to the brand now underway

New Customer Service programme from serving to engaging

New customer sampling programme a chocolate for everyone

Customer experience measurement programme launchingAutumn 2011

Investment in new website and CRM system over next 12

months will enable customer relationships to be deepened and

extended outside of the store

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Implications on other channels (1)

Franchise

Will be key in rebalancing the sales and contribution from our OwnStore closures

The estate will continue to grow strongly

Will benefit from the differentiation delivered throu h the all ear

round gifting strategy

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Commercial

Will benefit from the reduced Own Stores estate Will become the main sales channel over the next 3 years

Will see further growth in breadth and depth of distribution during key seasons as well as

throu h existin and new fla shi roducts

Will deliver further benefits to our business partners from Thorntons mass premium positioning

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Thorntons Direct

Will continue to deliver strong sales growth Will see its role change as the customer

direct segment aligns with and supports our

Own Stores

International

Will maintain steady sales growth and we will

invest resource over the next 12 months to

investigate the longer term opportunities for

the Thorntons brand

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Manufacturing

Our plan ensures that we continue to maintain and grow our factoryproduction levels within current capacity

Will see continued investment to reduce /kg produced

Our UK manufacturin base will continue to benefit us versus Euro-

based competitors

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Improve Efficiency

We have undertaken a review of all major costs and contracts

We are outsourcing our Warehousing and Distribution We will reduce our supply chain and central costs by c. 2m (annualised)

We already have plans in place to mitigate rising input costs e.g. forward purchasing

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Senior Executive Team

I will lead a new senior Executive in delivering this Transformation Plan

Executive responsibilities have been restructured

Peter Wright (Marketing Director) will leave the business

New Executive roles created for Brand & Customer Marketing, Retail Trading and Business

Development

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Financial ImplicationsMark Robson


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Current Trading FY2010/2011

Trading has continued to be challenging, as expected

Own Stores and Franchise experienced Q4 LFL declines

Commercial continued YOY growth in Q4

PBT before impairment charges and bank re-financing costs in linewith management expectations

Gross margin % (including H2) down YOY

Growth in Commercial channel sales participation

Effect of VAT rate increases

Discounting of Easter seasonal stock lines

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Financial Implications Sales FY2011/12

Retail

Ongoing challenge as implementation of plans commence andrecouping sales - low single digit negative LFL %

Commercial

Continuin rowth articularl Easter with market share rowth -

double digit positive % growthFranchise

Growth in line with new store openings

Thorntons Direct

Low single digit positive % growth

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Financial Implications Margins FY2011/12

Margin

Growth in Commercial channel sales participation and effect of VATrate increases will continue to influence margins

Improvements in manufacturing overhead absorption rates will help

offset the impact of channel sales mix / VAT

Raw materials

Continued price volatility

Hedging of cocoa prices in place, at least 6 months forward

Pro-active management via manufacturing efficiencies but also

product re-engineering and selective price increases

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Own Store Closures

Detailed property review of our portfolio including current/future trading; footfall and other fascias

Recent LFL differential between top trading stores and potential closure stores is 4 - 5%

Closure programme to follow lease expiry profile

Financial Implications Own Stores and Franchises

Potential closures stores - annual sales range from 150-250k To maintain contribution levels, only 50% of Own Store sales need to transfer to the Franchisee

opening in the same area

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Financial Implications Closure Costs

Three - year profile

Average closure costs at lease expiry/break clause forecast to be 35-

40k; implied total over 120 closures - 4.2-4.8m

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FY2012/13 c. 40%; FY2013/14 c. 20%

Average closure costs incurred in year to June 2011 c. 32k with 16

closures in the year

Lower costs to date with employees redeployed and exit costs

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Financial Implications Operating Expenses

Cost reduction programme continues

Distribution Outsourcing

Up front transition costs: c. 0.7m

. . - .

Central Costs

Process and procurement review underway

Annualised savings c. 1m

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Capital Expenditure

Annual expenditure over next 3 financial years: 7.5m-10.0m

Store format development/refit programmes c. 3-5m

Supply Chain - improve conversion costs c. 3-4m

Financial Implications - Cashflow

Triennial review as at end of May 2011 Forecast increase in pension scheme funding deficit

Annual contributions could increase from 2.2m to 2.5-3.0m

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New facilities

57.5 million revolving credit facility

4+ year term to October 2015

Financial Implications - Banking

Interest cover; net debt & fixed charge covenant ratios

5 million overdraft facility

One-off costs of c.400k for fees and write-off of the remaining

unamortised arrangement fees of the previous facilities

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Sales Overall modest growth

Retail: Declining in line with portfolio reductions and short

term LFL weakness

Commercial: Further growth short term thereafter maturing

Franchise: Continued growth in line with Own Store closures

Financial Implications 3-5 year expectations

International: Modest continued growth short term; medium termprospects yet to be defined

Return on sales

Delivering industry competitive returns over the medium to long term

Dividend Policy

FY2011, expect to recommend a nominal final dividend

Aligned to peer group in the medium term

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In conclusionJonathan Hart


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Conclusion

Delivering this transformation will have a positive impact on our

multi-channel strategy and our long-term corporate health

A healthier de-risked business

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strategy review final 280611

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