Lush Fresh Handmade Cosmetics Financial report

30th March 2022

For the year ended 30 June 2021

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 2021.

Principal Activities

The Group’s principal activity is the manufacturing and retailing of fresh handmade cosmetics.

At the 30 June 2021, the Lush Brand operated through retail outlets in 48 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 2021 was 919 (2020: 922) of which 403 were in Group subsidiaries (2020: 427

£408m

Group Turnover

£780m

Brand Turnover

Group turnover of £408.7m represents a 6.6% decrease on 2020 and a 6.5% decrease when converted at consistent exchange rates. Including joint ventures, associates, licensees and franchises, Brand turnover was £780.2m which represents a decrease of 2.9% on 2020 and a 0.3% increase when converted at consistent exchange rates.

The decline in Group turnover was due to the entire financial year being impacted by Covid related closures and restrictions compared to just the latter half of 2020. On average each Group shop lost 66 days of trade due to Covid related closures, the worst impacted markets being in Germany and the UK where the averages were 155 and 133 days respectively. The rate of decline in our sales has naturally varied by market depending on the degrees of lockdowns and restrictions enforced as various ‘waves ’impacted our markets at different times and on the degree to which our stores depend on tourism or whether located in high density or more suburban locations. Our most severely impacted market has been Italy where sales were 47% lower than our last pre-Covid full year of 2019, suffering from heavy restrictions throughout the year whilst also having a large concentration of shops in tourist locations. At the other end of the scale is United Arab Emirates which grew total sales by 1% vs 2019 and was generally less impacted by the pandemic whilst also putting in place a very efficient vaccination programme.

We continued to see online sales perform strongly as our shops suffered from closures and restrictions. Compared to 2019 total shop sales fell by 42.3% and were partially offset by increased online sales which grew by 130.0%, helped by our investment in additional new features and services such as free P&P over a certain order value, personalisation features and the introduction of a new App.

Last year’s results were heavily impacted by fixed asset impairment and onerous lease provisions of £32.6m which we classified as ‘significant items’ and excluded in our analysis of movements in underlying profit. As a result of these provisions our reported profit in 2021 reflects not having to charge depreciation or rent in respect of these assets. In order to present a more appropriate comparison between the two financial years, we have excluded the ‘benefit ’of these reduced charges in 2021 (classified as ‘significant items’ in the table above) in calculating the underlying EBITDA and Operating profit. We have also classified unrealised exchange losses of £6.4m as significant items for consistency with the analysis provided last year.

Before ‘significant items’, the underlying Group EBITDA in the year was £41.1m, an improvement of £32.4m on 2020 despite the decline in sales referred to earlier. As in 2020 we were hugely appreciative of furlough and other government support provided across the markets which totalled £21.9m (2020: £16.8m) whilst our UK market also benefitted from a full year of rates relief worth £6.2m (2020: £1.8m); refer to ‘Government support vs our tax contributions’ section below for more detail.

As well as benefitting from government support, we also implemented and negotiated our own savings and efficiencies. We reviewed staff levels and structures across Retail, Manufacturing and our central support teams and have regrettably let people go; total staff levels across the Group have reduced by 25% compared to pre-Covid levels. We have also focused on using our resources more productively through collaborations between our manufacturing facilities during seasonal peaks and manufacturing staff also being repurposed to online fulfilment during quieter production periods. Our property teams continued their dialogue with landlords during the year as the pandemic’s impact on physical retail throughout the Group held firm. Further savings of £6.4m were made relating to closure periods, however our main focus was on securing better short-to-mid-term deals for our shops as leases expired or opportunities to re-gear arose. Within the UK that led to 20% of the portfolio being renegotiated and saw those rents reduce by 46%, with lease lengths of 3 years or lower, a fair reflection of the state of the market. Similar renegotiations took place in other Group countries bringing those rents down by approximately 30%, however dogmatic views by landlords in some markets meant that the savings achieved were not as great. 25 group shops closed in the financial year; some were due to strategic shifts in our store positioning, however half of the closures were due to our ongoing strategy to only work with like-minded landlords who see our relationship as a partnership, not one that is purely viewed from their rental income perspective.

Other operating expenditure such as travel, meetings and events has naturally fallen significantly and whilst we expect these costs to increase as our markets reopen, we do not anticipate them returning to pre-Covid levels.

With an improved underlying performance, a slight increase in our share of joint venture and associate earnings and the favourable movement in ‘significant items’, our reported profit before tax of £29.2m is £74.4m better than last year’s result.

Government support vs our tax contributions

When in March 2020 governments worldwide closed all but 88 of our 937 shops we could not imagine the consequences. Chemists and supermarkets, essential businesses that were not forced to close, were serving our customers. In the year ended 30 June 2021 the Lush Group lost £119m (22%) in sales compared to the pre pandemic year ended 30 June 2019 while industry figures show that worldwide sales of cosmetics dropped by just 3%.

Suddenly our colleagues in property were having to ask our landlords for help and our payroll and finance departments found that they were in the front line securing various government grants. Gratefully we made use of the ever-changing furlough schemes and income received from other government support schemes; £21.9m in the year ended 2021, £16.8m in the year ended 30 June 2020 as well as benefiting from a full year of UK Rates relief in the year ended 30 June 2021 worth £6.2m (2020: £1.8m). We also applied for and received a French government backed loan of £3.5m.

It was chaos and complicated and it is only now that we are confident about the long-term sustainability of the business. Before the pandemic in 2019 we paid £7.2m in corporation tax. However, that is only a small percentage of the total Lush contribution to governments. We also paid around £6.7m in property taxes (mainly UK rates) and £29.8m in employers’ payroll taxes. Even that is not the total picture; if, as so easily could have been the case, the business had not survived, the £77.8m that we generated in sales taxes in 2019 and the £36.2m Lush collected in payroll taxes from our Group employees would also have disappeared.

If we look at the 3 financial years to the year ended 30 June 2021, being one year of pre-pandemic activity and two years of pandemic restrictions, Lush benefited by receiving £46.7m from governments in furlough and property tax relief which was used to support our colleagues. While Lush’s direct contribution to worldwide governments paid in taxes over the same period were £100.4m and the total taxes, including sales tax and employee taxes collected, was over £380m. So the support from governments has been used for the purpose it was designed for; to protect the business for the future and to preserve jobs.

We expect governments to increase taxes over the coming years as they seek to recover the money they spent supporting businesses. In the UK for example, as part of the Spring 2021 Budget, the Chancellor announced a +6% increase in Corporation Tax from 19% to 25% from April 2023 which, based on current results, would cost our UK businesses an additional £1.5m per annum. In September the Prime Minister then announced 1.25% increases in both employer and employee National Insurance contributions as part of the Government’s plans on health and social care reforms. Based upon payments made in the year ended 30 June we estimate that these increases will cost the UK businesses an extra £0.5m per annum and our UK staff an extra £0.5m.

919

Total Brand Shops

Fair Tax MArk

Strategy

Having reviewed and restructured many areas of the business (the ‘Covid rinse’) we have a more profitable business model to take the business forward. In the financial year ending 30 June 2022 our sales are still tracking below pre-pandemic levels but with a greater return on the bottom line whilst liquidity is greatly improved, highlighted by our healthy surplus cash position (+£26.7m) at our traditional low point prior to Christmas trading.

We are now in a position to expand the business further and have ambitious plans for growth over the medium term, shifting towards a sales driven mentality to drive sustainable growth and based on the goals of the Master Plan below.

Our not so secret ‘Lush Cosmetics Master Plan’ has three main goals:

This product led approach is focused on what customers need throughout their lives. With a far greater proportion of teenagers today likely to lead 100 year lives, inventing cosmetic products with no harmful preservatives and that our customers can trust to protect their skin, hair, body and minds for 100 years, is a key part of this plan.

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. This move was prompted by evidence showing the negative impact algorithms can have on users’ mental health, and particularly the younger female demographic that we rely upon. We aim to reinvigorate our staff and customers with meaningful, inclusive campaigns such as this and to continue to spread our charitable giving to a wide spread of human rights, animal rights and environmental causes.

Finding new ways to engage with our customers. Following our Global ‘Anti-Social Media Campaign’, we are looking at ways to re-engage with our customers through a more human approach, by investing in more physical events, community activities and good old-fashioned ‘Lush Times’ catalogues. In place of social media, we aim to grow our YouTube presence, using Twitter for customer care, producing email newsletters for campaigns and tapping Pinterest for inspirational content.

Pioneering on ways to care for the planet. If many of our Generation Z’s are likely to live to be over 100 years old, how does a cosmetic company cater not only for its customers but for a healthy planet for 100+ years? It will take nothing short of a revolution. As described in more detail in the Impact Report within our Directors’ Report, we have started the revolution and will continue to focus on our aim to become carbon positive through insetting models rather than offsetting; ie. reducing CO2 emissions in our own supply chain rather than buying carbon offsets.

Building out our business across all channels and in every market. With North America now 100% owned we have an even greater need to ensure that all markets have access to the same products, concepts and online features as our home market so that the strength of the Brand is maximised in each market.  We will also be launching new website platforms in Poland and Taiwan in the year ending 30 June 2022 as we enter these markets on a Digital first basis with shop openings to follow.

Dazzling with new shops, products and concepts. This is not just about adding new shops for growth but really building up the size of our stores so that they can accommodate new concepts; we are still very much committed to physical retail and will move quickly when the most exciting opportunities arise. We will open 9 new shops in the year ending 30 June 2022 (4 opened to date) and complete 8 relocations (3 completed to date).  The relocations will generally encompass a larger sales area than those they replace; this will allow us to highlight our core ranges at their best as we know that the optimum sales area required to do this is 800-1000 sq. ft. Larger shops than these are still on our agenda, as they enable enhanced ranges to be offered, alongside a wish to see more ‘Anchor’ shops of c.10,000 sq. ft which can deliver the ultimate Lush experience, provided the financials make sense and potential landlords or developers share our vision. We are also investing in our existing estate through refits and remodels, providing a better working environment for our colleagues and a better shopping experience for our customers; this includes the rollout of a new look format which has an even keener focus on sustainability and reduced environmental impact than we have managed previously.

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 with 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.

Employees, Engagement and Diversity

Living Wage, Furlough and Employees

Our aspiration is for Lush to become a Global Living Wage payer to ensure all staff across the world earn an hourly wage that covers the real costs of living wherever they are. Our first challenge is to find credible, external organisations that can determine the right rates for us and to establish plans for each area of the business to ensure our business models can support this.

In the UK we are extremely grateful that the Living Wage Foundation calculates this rate for us each year and we fully support their approach of a fair day’s work deserving a fair day’s pay. In New Zealand we remain committed to their independently calculated Living Wage rates also. This year in Germany and Croatia we increased pay where we felt the need to widen the gap between minimum wage and a Lush base rate. We very much appreciate the UK Living Wage Foundation allowing businesses to temporarily pause their accreditation during the Covid-19 pandemic as it was only after we had carried out a review of all business areas and traded through Christmas 2020 that we felt that the business was secure and we could preserve as many roles as possible.

We resumed paying all UK staff at or above the real Living Wage rate of £9.50 per hour at the start of 2021; for shop staff this was effective from 20 February 2021 and for Manufacturing staff from 20 April 2021. This £9.50 rate, set by the independent Living Wage Foundation, is our minimum Lush UK hourly rate for all permanent and temporary staff, irrespective of age, and is +59p higher than the UK Government’s “over-23” National Living Wage rate.

A full restructuring review of all teams began in July 2020, particularly in our support teams. We entered into redundancy consultations across our UK business entities and sadly said goodbye to 195 of our UK colleagues due to redundancy. For comparison, on 30th June 2021 there was a total UK headcount of 3,658 staff vs 30th June 2020 which had 4,966.

In the UK both furlough and flexible furlough was utilised by Lush Retail, although our Manufacturing teams barely needed the scheme due to being in full product production. On average, we had 800 employees per month in UK Retail on Flexible furlough; peaking in April 2021 with 1,426 retail employees.  The largest use of furlough schemes was in the UK and Italy. Italian staff received 65% of their wages which was topped up to 80% by Lush to ensure alignment across European markets.  By June 2021 there were only a few staff in Italy and Germany on the furlough scheme, and in the UK continued to use the scheme until it ended in September 2021.

 Equity, Diversity and Inclusion

The Group is committed to inclusive values and behaviours, practicing equity, and diversifying the business. There is still plenty of work to do, and why we need a collective approach to actioning ‘All Are Welcome, Always’ and becoming the Company we want to be.

The Group takes all reasonable steps to ensure that the same employment conditions are applied regardless of gender, race, ethnicity, physical appearance, religion, neurodiversity or disability.  Our Respect at Work policy has been refreshed and is now a Lush global People policy. By offering the business a shared language to identity microaggressions, we hope to resolve and mitigate discrimination and harassment, and take a zero tolerance approach to incidents that do occur.

In our commitment to equity, diversity and inclusion we aim to build a culture of open-mindedness, compassion and kindness that allows us space to learn and unlearn. For example, building employee driven Community Networks that evolve with the business, incorporating the direction of both employees and business leaders. This two-way process of employee participation allows for employees to have realistic access to impacting the ED&I direction, and the business has access to employee engagement and feedback to deliver its objectives. There are now community networks in Menopause, Disability and Chronic Illness, Neurodiversity, Black community, Asian community and Transgender and Non-binary community.

Work has continued to consider the names and written copy on our products based on customer and employee feedback with positive changes having been made.  The gift range we offer has been diversified for cultural holidays including Eid, Diwali and the Lunar New Year.

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. Through the EBT, we provide staff members with a formalised voice on important matters such as changes in ethics and ownership while establishing our democratically elected network of representatives as a trusted channel for staff to actively share ideas and opinions with the business.

Throughout the pandemic, the EBT and its representatives played a vital role in facilitating two-way communication between the business and our Group colleagues.  The promotion of the EBT as a channel for employee voice, alongside the launch of our first staff only publication The Lush Insider, frequent operational and performance updates and direct communications from leadership, have helped to maintain employee engagement throughout this time.

The EBT Trustee board has remained in place with no re-appointments and continues to be composed of two company appointed Trustees, two employee appointed Trustees and one independent Trustee. The board of Trustees have held regular virtual meetings to work on development plans and discuss matters of interest to the EBT and its beneficiaries with increased opportunities to actively share insight and matters of concern with the business on behalf of the beneficiaries, helping to influence thinking and decision making for the benefit of our staff.

We are still in the early development stages of our Employee Ownership journey and have made significant advancements this year.  We continue to seek opportunities across the Group for the EBT to effectively represent employee voice and preserve 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 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.

The EBT has grown in profile and trust within the business and is slowly developing to successfully fulfil its intended purpose for the business and our staff.

Lush Listens and Employee Engagement

Lush Listens is the global staff survey that provides a pulse check on sentiment at any given moment in time, giving us valuable data on staff engagement and morale. In the year ended 30 June 2021 we surveyed 6,694 staff across 46 countries, with a 67% participation rate.

Areas of strength highlighted offer us the chance to celebrate the culture at Lush. Peer Relationships, Organisational Fit (alignment to company values), Autonomy and Management Support scored the highest, showing us the level of support and genuine care that flows throughout our teams. To achieve this at a time when most teams were not working in their normal environment or sharing the same physical space is a significant achievement.

Areas of opportunity that have been identified are the areas we knew would be most impacted by the COVID19 pandemic. They are Reward, Strategy, Growth and Accomplishment. As we emerge from the crisis, we can take some reassurance in knowing that the areas of opportunity identified in the survey are already a priority for the business, and that commitment to fair pay for our lowest paid, creating opportunities for growth and development within our teams and better communication throughout the business are indeed being prioritised.

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