The Works on track for return to earnings growth after slump in profits

The Works said trading started to turn around in the final three months and this has continued into the new financial year, with comparable store sales up 0.2% in the first 21 weeks

The high street retailer The Works has unveiled a drop in annual profits following sales difficulties and cost issues but remains optimistic it will bounce back to earnings growth in the coming year.

The stalwart for arts, crafts, and stationery lovers reported a hefty 40% plunge in its underlying pre-tax profits to £3.2m for the year ending on May 5 due to a 0.9% fall in like-for-like sales. Statutory pre-tax profit dipped 23%, landing at £6.9m.

However, The Works noticed a reversal in fortunes over the last quarter, a positive trend that's carried on into the new fiscal period, with comparable store sales seeing a slight uptick by 0.2% in the initial 21 weeks. This improved trade paints a promising picture for profitability in 2024-25, prompting an upswing in investor confidence, reflected by a jump of as much as 11% in the company's share price during the Tuesday morning trading hours.

The firm is on track with City forecasts for underlying earnings of £8.5m for the year, it added. Chief executive Gavin Peck commented: "Although consumer confidence remains subdued and we continue to face tough cost headwinds, the cost and operational action we have taken and the trajectory of recent trading means we are well positioned to offset these and return to profit growth in 2024-25. Operationally we are in a much stronger position this year as we head into the upcoming peak Christmas trading period."

In addition, the company disclosed that non-executive directors John Goold and Mark Kirkland, who also lead US private equity firm Kelso Group—a major shareholder of The Works—have resigned from their board positions, signifying their belief in the company's turnaround strategy.

Mr Goold and Mr Kirkland, who are chief executive and chief financial officer respectively of Kelso, said: "We joined The Works board on a temporary basis to provide additional guidance as the business underwent a period of change. Since then, significant progress has been made. We are content to step down now, knowing that the company is on a path to growth and with full confidence in the management team."

The Works has been aggressively cutting costs amidst inflationary pressures, closing down unprofitable stores while also opening new ones and relocating some. By the year's end, the store count stood at 511, following the closure of 24 sites and the opening of nine new shops, along with five relocations.

The firm has seen a spike in wage costs due to increases in the National Living Wage but is mitigating the impact by revamping staff working hours. Additionally, The Works is engaging in negotiations with suppliers and scaling back on discount promotions to counteract rising shipping costs.