Lush Fresh Handmade Cosmetics Financial report FY22
The Lush Financial Year runs from July – June.
Our statutory accounts are usually published by the end of March, the following year.
In September 2021, the Lush Group acquired the remainder of the Lush North America shares bringing the North American business – the largest of our global Lush markets – into the Lush Group. This required an additional piece of accounting work which added to the already increasing complexity of the accounting and auditing process. In light of this, we were granted a three month extension for the filing of our accounts giving us until the end of June this year to file our accounts instead.
For the year ended 30 June 2022
The Directors present their Strategic Report on Lush Cosmetics Limited (the “Company”) and its consolidated subsidiaries and equity accounted joint ventures and associates (together, the “Group”) for the year ended 30 June 2022.
The Group’s principal activity is the manufacturing and retailing of fresh handmade cosmetics.
At the 30 June 2022, the Lush Brand operated through retail outlets in 50 countries and manufacturing facilities in 6 countries through its subsidiaries, joint ventures, associates, licensees and franchises. The total number of permanent shops at 30 June 2022 was 886 (2021: 919) of which 656 were in Group subsidiaries (2021: 403). The Group’s
subsidiaries, joint ventures and associates are listed in Note 26 to the accounts.
Review of Business – Results overview
On 28th September 2021 we acquired full control of our North American joint venture, significantly increasing the size of the consolidated group.
This acquisition has resulted in a substantial change in the presentation of the North American results and financial position which makes comparison with the previous year more complex. Up to the date of acquisition this joint venture was accounted for under the equity method with the Group’s share of its profit presented in the profit and loss account as a single line item and the share of its net assets presented in the balance sheet as an investment. Since the date of acquisition and as a fully owned subsidiary, the North American business has been consolidated into the Group results on a line-by-line basis in accordance with the purchase method of accounting.
In order to provide a meaningful overview of our performance and position we have separated the impact of this acquisition out as summarised in the table below and commented on the performance of the “Old Group”. Some key definitions, reconciliations and explanations have been provided below:
Defining and presenting the Group
“Old Group” comprises the group structure immediately prior to the acquisition of the remaining shares in our North American joint venture and
represents what the Group results would have looked like if the acquisition had not occurred; these results are therefore comparable with FY21. The list of companies included in this “Old Group” and the group as reported at the year end can be seen in note 26 and a more detailed explanation of the
transaction and entities we describe as “North America” can be seen in note 28.
Share of the joint venture and associate
Our reported figures show 3 months of accounting for North America as a joint venture under the equity method and 9 months (post acquisition) of fully consolidating the North America results on a line by line basis. In order to show a like for like and underlying comparison with FY21 we have removed the fully consolidated results and added what our share of the North America results would have been using the equity method for this 9 month period. This adds £3.6m to Joint venture and associates earnings in the underlying figures used for comparison purposes.
Group Turnover for 2022 and 2021 in the table above can be reconciled to the Consolidated Profit and Loss account and the Turnover Analysis presented in note 1. 2022 Old Group turnover excludes North America turnover but includes an adjustment to reverse the elimination of manufacturing sales from Lush Ltd to the North American business of £23.4m to ensure that our 2022 Old Group turnover presented in the table is comparable with 2021.
657.1 = 2022 Group Turnover as presented in the Consolidated Profit and Loss
-249.7 = Less North America consolidated turnover
23.4 = Plus consolidation adjustment of post acquisition Old Group sales to North America
430.8 = 2022 Group Turnover excluding the impact of the North America acquisition
Group Turnover 2022
Old Group EBITDA as shown in the table above represents the Group Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) as
reported in the Consolidated Profit and Loss account less an adjustment for the impact of the North America acquisition and before our share of Joint Venture profits. This Old Group EBITDA enables proper comparison and explanation of the Group’s performance against the previous year.
14.8 North America EBITDA
-0.3 Less elimination of inter-company stock profit margin
North America EBITDA impact
The reconciliation above starts with the £14.8m of post acquisition EBITDA that is reflected in the Consolidated Profit and Loss account including acquisition accounting adjustments; however if the transaction had not occurred the overall impact on the Group’s results would have been lower by £14.5m due to differences in the stock profit calculation.
Group Operating profit
To make the FY22 results more comparable with FY21 we have calculated the impact on the Group Operating Profit had we not acquired the North American business. Our Operating Profit would be £5.1m lower which represents the North America EBITDA figure per above of £14.5m plus additional North America operating expenses and acquisition adjustments of £9.4m.
Total Brand Shops
Strategic report (CONt.)
Brand turnover (Group turnover as reported plus turnover from joint ventures, associates, licensees and franchises of £179.2m) in the year was £836.3m which is an increase of 7.5% on 2021 and a 10.5% increase when converted at consistent exchange rates.
Old Group turnover of £430.8m represents a 5.4% increase on 2021 and a 9.0% increase when converted at consistent exchange rates. However, the comparison with last year is confused as FY21 sales were heavily impacted by Covid related closures and restrictions throughout the year with different markets impacted at different times. A more meaningful comparison of sales is versus FY19, representing our last full financial year not impacted by Covid disruption. This shows that we had a year of contrasting halves in FY22 recording sales declines of -14% in the first half of the year and -23% in
the second half.
The first half of the year saw some markets initially severely impacted by the Omicron variant but then our sales growth trend gradually improved to Christmas with our UK market recording sales growth of +2% in Q2 versus FY19; seasonal sales could have been better but for further Covid disruption which impacted our Manufacturing capacity in the UK and Australia.
We were not able to maintain this sales momentum in the second half of the year as inflationary pressures compounded by the war in Ukraine resulted in a decline in consumer spending power in most of our main markets and understandably impacted customer sentiment. As a result our sales in the second half of the year fell well short of expectations.
With the majority of our shops fully open for most of the financial year the weighting of online sales naturally diminished, accounting for 18% of total sales in the year compared to 30% in FY21, but still in excess of the 10% that we were experiencing pre-pandemic.
Old Group EBITDA in the year was £17.3m which is £21.6m lower than FY21. The movement on last year is impacted by £6.8m of bonuses (including NI) paid out as a result of finalising the North America acquisition, accounting
adjustments relating to onerous leases (adverse movement of £8.6m on last year) and unrealised foreign exchange moving from an exchange loss to an exchange gain in the year (favourable movement of £7.1m). Excluding the items above there is still a £13.3m decline in EBITDA despite the increase in sales. This decline is mainly due to the amount of furlough and other government support that we received last year which has naturally reduced in FY22; total relief in FY22 was £5.1m versus £30.1m in FY21. We have also put through much needed wage and salary increases in many of our markets
(summarised in the Employees, Engagement and Diversity note later in this report) and added back some headcount across our support teams as the business returned to some sort of post pandemic ‘normal’. Our cost base has also been impacted by inflationary pressures in the second half of the year with notable increases in some raw material costs along with increased sea and air freight costs.
The reductions in Operating profit and Profit before tax are for the same reasons as explained for EBITDA and also impacted by a £5.9m adverse movement in the shop impairment charge compared to last year.
Our European markets have struggled to get back to pre-pandemic levels of sales with FY22 sales being 28% lower than FY19 compared to the UK which has recovered to -10%. Is Brexit to blame? Our popularity in Europe has certainly waned since Brexit and we need to rebuild the love for our UK owned brand across Europe. We invested in a Manufacturing facility in Germany after the referendum but this has lost money partly due to lost economies of scale on the lower sales.
In North America, US sales in the full financial year were 14% higher than FY21 and Canada sales were 12% higher with the latter still impacted by Covid restrictions for part of the year. From a trading perspective, the North American business generated £22.8m of EBITDA and £13.4m of Operating profit in the 9-month post acquisition period which includes the
impact of compensation increases that were awarded to our hourly paid and production staff in February 2022. These EBITDA and Operating profit contributions are reduced to £14.5m and £5.1m respectively after adjustments that were necessary to account for the acquisition in line with current accounting standards.
Financial position and current trading
The Group finished the year with net cash, being cash less debt, of +£68.0m with +£37.4m held within our North American businesses. The consolidated balance sheet at 30 June 2022 reflects a healthy position with net assets of £197.9m and net current assets of £115.0m.
Trading in FY23 has continued to be challenging with a continuation of inflationary factors impacting consumer sentiment. Old Group sales growth in Q1 was -1% versus FY22, whilst Q2 to Christmas improved to +2% (weighted by very strong sales in the UK which recorded its highest December sales on record) and Q3 sales were +7%. North America sales have struggled to a greater extent recording -12% in Q1, -13% in Q2 and -10% in Q3.
Despite the challenging environment in 2022 we remain optimistic that the momentum gained during the year and our Master plan goals will continue to drive sustainable growth.
The three main goals of our not so secret ‘Lush Cosmetics Master Plan’ remain:
Overarching these goals is our mission to Leave the world Lusher than we found it and we believe that this mission and our goals will help to accelerate our growth and reach whilst we maintain our focus on what customers really want and what they care about.
Our product led approach offering cosmetic products with no harmful preservatives and that our customers can trust to protect their skin, hair, body and minds remains a key part of our plan, as does reminding customers of what we believe in, what we stand for and how we operate so that their love of our brand is reignited and they are reminded what makes Lush and our products so special.
When looking at our potential for growth and our ambition to be number one in every category the opportunities are enormous. Our Brand sales are still less than 0.25% of the Global Cosmetics industry and we aim to strengthen sales in all categories through the following priorities:
Doing what matters most to us.
On Black Friday 2021 we launched our ‘Global Anti-Social Media Policy’ which is our pledge to stop posting on Facebook, Instagram, Tiktok and Snapchat throughout the Lush brand until significant changes are made by these platforms.
When we made the decision to finally come off those Social Media platforms that refused to acknowledge or adjust for the dangerous impact of their algorithms on teenager mental health we knew it would impact our business. At the time we estimated that this might be £10m in sales but it could well have been £10m in profit or 10% of our £800m brand sales (£80m). We simply don’t know. The manipulation of those same algorithms renders it impossible to know what might have happened anyway. As many businesses have found, particularly smaller ones struggling to be seen and with smaller budgets to pay for visibility, it is those who generate the most clicks and revenue for the social media platforms, and who pay the most, that the algorithms favour. Whatever the figure for Lush, we remain proud of and committed to our stance and until we are convinced that proper actions have been taken to protect young people on these platforms we will not be returning to them.
We will instead continue our focus on reinvigorating our staff and customers through a more human approach with community activities, more meaningful, inclusive campaigns and on spreading our charitable giving to a wide spread of human rights, animal rights and environmental causes.
Pioneering on ways to care for the planet.
As described in more detail in the Impact Report within our Directors’ Report, our Climate and Nature Strategy outlines a To Do list of actions needed as part of our revolution to save our planet. To quote the environmentalist David Brower, “There is no business to be done on a dead planet”. We continue to drive towards our goals of 100% renewable energy throughout our business and to become carbon positive through insetting models rather than offsetting i.e. reducing CO2 emissions in our own supply chain rather than buying carbon offsets.
New shops, products, concepts and collaborations.
Our approach is not just about adding new shops or upsizing them for growth but really focusing on what ranges are available in which stores to optimise the customer experience and to ensure that every store can offer a product for every need and present these products in the best possible way. By honing our core product ranges with further curation in those stores that can accommodate additional product, the aim is for store managers to be able to adapt their offering to their local customers at the same time as being able to highlight and display new concepts and seasonal ranges when needed.
We remain very committed to physical retail and continue to move quickly when the most exciting opportunities arise. Our brand new anchor (an anchor being a large store in a key location offering most of our products and concepts) for Glasgow Buchanan Street is a great example of this. Moving into the most iconic building on the busiest shopping street in Scotland, this store (due to open for 2023 Christmas trading) will provide the perfect pitch with 1,769 square metres of space to house our shop and spa.
In total we expect to open 17 new shops in the year ending 30 June 2023 (13 opened to date) and to complete 13 “upsizes” or relocations (11 completed to date). As well as investing in our stores we are investing in our e-commerce and focusing on bringing our digital operations to top of class with aims to bring our Lush Lens to peak form and usage and our Lush Pay tills integrated with stock management systems to enable seamless supply for our customers and staff.
Our drive for a cosmetic revolution continues to focus on setting the best possible standards throughout our business operations. We believe a modern form of capitalism can co-exist with profitability; that we can operate high standards of business alongside our aspirations to become a real living wage payer globally, to become carbon positive through insetting rather than by offsetting our excesses, to become zero waste with Bring it Back deposit schemes globally that treat packaging like gold, by paying our suppliers fairly and working with them to ensure they can operate to the highest standards to protect and, where possible, regenerate the planet. Along with these areas of focus, by continuing to support good causes and organisations through our charitable giving, and by paying our fair share of taxes rather than operating in ways to minimize our liabilities, we will continue to strive for these better standards and hope that others will follow.
Key Performance Indicators (KPIs)
The Group uses several KPIs to monitor the performance of the business, the main indicators being our turnover, EBITDA and profit before tax which are stated in the table on page 1. In addition, we also monitor the following indicators:
Like For Like sales (LFL)1 and Sales Growth
We review the LFL for all individual shops (including relocated stores) that have been trading for longer than one year and also from a total territory and Group perspective.
We have had temporary shop closures across all markets since March 2019 as a result of the pandemic which continued into the first half of FY22. With the consequent surge in online sales, we have temporarily reverted to total sales growth as a more appropriate measure for sales performance; these growth figures are referenced in the Results overview section above.
The LFL and sales growth measures are broken down further into ‘Business Drivers’, the main drivers being visitor numbers, customer conversion % (i.e. the rate at which our visitors are converted into sales) and average sale per transaction. These are recorded by shop and by individual market.
Gross margin %
We monitor this on a monthly basis for our individual Manufacturing and Retail operations and also from a Group perspective; we compare against our previous expectations to ensure that any variations can be understood, explained and acted upon where the costs are of a controllable nature.
Staff costs %
Staff costs across the business is our largest overhead and is reviewed on a monthly basis (by territory and by discipline) to identify variances against prior year and forecast and take subsequent action if necessary.
We review our actual and forecast cash balances regularly ensuring that we have sufficient cash reserves going forward and are also maintaining comfortable headroom against the loan facilities available to us.
1 Like-for-like (LFL) sales growth represents the constant currency, year on year sales growth for open stores that have been open for more than one year. This measure is widely used in the retail industry as an indicator of sales performance on a comparable basis. Constant currency is achieved by restating prior year sales figures at current year exchange rates.
Employees, Engagement and Diversity
Employees, Engagement and Diversity
Lush is continuing the aspirational journey of becoming a ‘Real Global Living Wage’ employer, which is even more crucial as we enter a period of increased cost of living. We are working closely with the Living Wage Foundation in the UK, a partnership that we are forever grateful for, but we are finding it challenging to find similar foundations in other countries that we operate in. Despite these challenges, and in the spirit of “Do not let perfect be the enemy of good”, we have made some big steps towards our goal.
Currently, we are officially paying the Real Living Wage across the UK and Ireland and in New Zealand. As real living wage organisations are not yet established in most other markets, we remain committed to paying above the government minimum wage, averaging at +20% above this across the world. In addition, we have been able to pay an estimated real living wage in Czechia and Hungary, which were rises of £1.47 (+27%) and £1.80 (+50%) respectively per hour in each market. We have also implemented a wage rise for our lowest paid staff in a further 16 countries, averaging at 12%. The most significant in terms of value have been in the USA (on average +27%), Japan (on average +17%) and Germany (+10% and a further +15% in FY23) as we strive to keep ahead of the minimum wages, whilst balancing profitability. This investment in our staff is in the region of £10m in 2022.
We are looking forward to implementing the next UK Living Wage increase in 2023, an increase of 10.1% which is the highest in the 11 years of the Living Wage Foundation, reflecting the sharp increase in the cost of living. We will also be continuing our research into credible, external organisations that are working towards Global Living Wages. The journey is challenging, however we are committed to paying for a ‘fair day’s work deserving a fair day’s pay’ in all our markets.
Equity, Diversity and Inclusion
The Group is committed to inclusive values and behaviours, practising equity, and diversifying the business. We continue to take a collective approach to actioning ‘All Are Welcome Always’ and Lush becoming the Company we want it to be.
Part of our commitment to equity, diversity and inclusion is to understand diversity across the global Lush businesses. In June 2022 we ran our first Global Demographic survey in 23 Lush Group and Partner markets covering over 6,000 staff and with a response rate of 43%. Our North American markets also ran a demographic survey using an in-house platform, covering 3,000 employees with a response rate of 47%.
The demographic surveys included questions on age, gender, sexuality, race and ethnicity, religion and belief, disability and chronic illness, neurodiversity and educational background. The survey’s findings are part of the ‘Lush Diversity Report 2022’ and is available on the ‘We Are Lush’ platform. The report’s findings show that Lush’s dominant demographics are white, able-bodied, neurotypical, cis-gendered women, aged 21-35, with no religious belief and having an undergraduate university degree or equivalent. Through the findings we have learnt that transparency is a goal in and of itself, as we have ambitions to improve the response rate for a more accurate understanding of who works at Lush. This report is part of a commitment to regularly monitor and measure diversity at Lush, and continuously work towards diversifying Lush.
Community networks continue to grow and evolve, allowing employee participation in ED&I direction and sharing valuable insight into employee engagement and feedback with the business. The UK and Ireland community networks started their second term in September 2022. These include active networks for Disability & Chronic Illness, the Global Majority, LGBTQIA+, Menopause, Menstruation, Neurodiversity, Parents & Carers and Trans & Non-Binary. We are now starting to see networks building outside of the UK and Ireland, for example Australia and New Zealand are beginning to build their Community Networks with the LGBTQIA+ network.
Employee Benefit Trust
10% of our shares are held on behalf of our staff in the Lush Cosmetics Ltd Employee Benefit Trust (EBT). We believe the Trust, which was established in 2017, will protect the prosperity of the Lush business and the company ethics through the Lush Ethical Charter, while recognising the contribution our employees make to its success. The EBT has grown in size, profile and trust within the business and is developing to successfully fulfil its intended purpose for the business and our staff.
This year, Lush North America joined the Lush Group and welcomed all employees as beneficiaries of the Lush EBT, taking the total number of beneficiaries to over 12,500. The structure of representation and staff-led election process was replicated across North America taking our total number of EBT Representatives to 827.
The EBT and its representatives play a pivotal role in facilitating two-way communication between all Group colleagues and the business continuing to provide vital, timely insight into staff sentiment while encouraging equal opportunity for contribution in making Lush the company we want it to be. We enjoy continued engagement through our first staff only publication ‘The Lush Insider’, regular operational and performance updates and direct communications from leadership through a multitude of in-person and digital channels including all-staff events which continue to ensure knowledge and information is shared directly with all colleagues.
The Trustee board continues to be composed of two company appointed Trustees, two staff-elected Trustees and one independent Trustee. Our very first staff-elected Trustees reached the end of their maximum three-year term this year. To maintain experience on the Trustee Board and ensure future appointments are staggered, one staff-elected Trustee will remain on the board for an additional year.
We are still in the early development stages of our Employee Ownership journey. We continue to build on our knowledge and experience to further develop our Employee Benefit Trust and employee ownership culture at Lush with the aim of effectively representing employee voice and preserving Lush’s ethics and independence. The intention is that the EBT will be offered re-issued shares by the Company to replace cancelled shares sold back to the Company from the shareholders when they wish to sell them, with those shareholders currently active in the business having agreed to a valuation method using the higher of net asset value and a multiple of five times the average post tax profits of the last three financial years. Over time a future EBT shareholding of 35% is envisaged.
Lush Listens and Employee Engagement
This year we have carried out another ‘Lush Listens’ global staff survey to provide information on sentiment and capturing valuable data on staff engagement and morale. The survey was sent to just under 12,500 employees across 46 countries, with a 68% response rate and covering our new North American colleagues for the first time.
‘Goal setting’ came out top of our strengths, followed by; ‘Organisational Fit’, ‘Peer Relationships’ and ‘Management Support.’ This shows there is a sense of belonging within Lush and our employees have clear goals with support from their managers. In last year’s survey our areas for opportunity were ‘Reward, Strategy, Growth and Accomplishment’. We have implemented several initiatives over the last year including ‘The Liz Bennett Awards’ which allows employees to nominate their colleagues for excellence in peer development. There is also the ‘Learning Fund’ for employees to apply for funding to add qualifications to their skillset. We also welcomed back our ‘3 Wishes’ initiative on a global scale, for every employee to submit 3 Wishes to a panel of objective peers to grant at random.
As the world faces new challenges which impact the cost of living, it is no surprise that ‘Growth’ and ‘Reward’ continued to be areas of opportunity for Lush. The shift in social climate sees more people moving jobs for better flexibility and more benefits, which we can see in requests for additional benefits. The focus of our people team for the next year is recruitment, retention and development; attracting talent and looking after those on the front line who are making and selling our products, and strengthening our connections with global counterparts to align our efforts in developing and empowering our people