Chief Executive's Review

Group

It has been a year of challenge and change for the Company. It has also been a period of progress with sales increasing by 9% to £193,767,000. A profit before taxation of £16,828,000 represents an increase of £371,000 against last year. As usual, The Perfume Shop provided the major part of that growth but the Department Store Division performed satisfactorily under difficult circumstances.

The Perfume Shop (TPS)

Sales increased during the year from £106,077,000 to £124,402,000 a year on year increase of 17%. Like for like growth, an important performance measure, was 6%. Profit during the period increased by 11% to £16,345,000.

The year saw the opening of a further 14 TPS stores together with one resite bringing the total U.K. stores to 110. At the same time we continued to develop the business in Eire by opening stores at Cork and Limerick thereby increasing the Irish store numbers to four and we believe there is a longer term potential for a total of 12 to 15 stores.

Every year, in this annual review, we emphasise the importance of taking the right property decisions for our business. New stores are only opened in attractive locations and on commercial lease terms. TPS will continue to follow this tried and tested path, opening between 12 and 15 stores per annum. New stores have already opened or been secured this year at Walsall, Mahon Point Cork, Sunderland, Cambridge, Hempstead Valley and Norwich.

As the size of the TPS business has grown over the past few years this has increased the demands upon our High Wycombe central support.

As a result, we introduced both a new store EPOS system whilst at the same time introducing a replacement Back Office and Merchandising system. Under normal circumstances this would have been phased as separate projects over a two year period but with the fast growth and demands of the business this proved impossible. At the same time as our original EPOS provider announced an “end of life” for our existing system and that support would be withdrawn by Christmas 2004, the demands upon our very basic original merchandising system became too heavy a burden.

There are further significant opportunities to be driven from our new systems, but these will not appear overnight. The new EPOS system was not as robust as had been hoped in the run up to Christmas, and whilst many of the initial operating problems have now been overcome, the full integration of EPOS with the Merchandising system has been delayed. Additionally with the issues surrounding the introduction of Chip and Pin technology throughout all stores, the demands upon our I.T. team become clear in the year ahead.

The year in front of us will see a focus upon the full “delivery” of systems as well as the early stages of a project that will determine our warehouse requirements for the foreseeable future. We are again approaching full capacity and will manage another Christmas from existing resources but this will probably be the last.

TPS is pursuing its plans to enter the Australian market. After much thought and discussion we finally concluded that the best way forward would be a greenfield site operation. Whilst this would be a “slow burn” it provides a full opportunity to shape a business that creates the best offer for the Australian customer, whilst at the same time developing relationships with suppliers that maximise their own Brand opportunity.

At Christmas Melanie Wadeley, a main board Director, moved to Australia as Managing Director of The Perfume Shop Pty Ltd together with one of our Senior Area Managers to commence work on this project. In four months they have achieved a great deal, securing a warehouse, commencing discussions with suppliers and opening two stores in Sydney. Whilst the initial resource for Australia has been provided from High Wycombe and certain key functions such as Finance and Buying will continue to be, it is now appropriate to begin developing an infrastructure in Sydney to provide for a growing business.

The plan is to have open by Christmas another five stores, four of which are already either committed to or terms agreed upon. Depending upon trading at these stores, the opening programme may be accelerated.

Unsurprisingly, it has not all been plain sailing and we are experiencing many of the same early problems that we did as we developed the U.K. business. Whilst we are confident of resolving these issues we must take the same careful steps on an identical path and by doing so we hope to recreate the successful model in Australia that we enjoy in the U.K. We are budgeting for a loss during the current financial year and a small profit the year thereafter.

For some time we have been operating a fully transactional TPS e-commerce site. Initially the investment made in this medium was modest with management and fulfilment of orders being processed from existing High Wycombe resources. Sales are now growing but there is still a long way to go before it can be regarded as a meaningful part of our business. We recognise however the importance of its future, whilst the majority of our customers will continue to wish to touch, feel and smell the product, there is a potential to attract and reach another area of retail spend through the internet. Consequently, we have decided to increase the investment in this venture as well as providing it with its own dedicated team to ensure that no stone is left unturned in maximising this market.

Department Store Division

Joplings

A year ago we took the decision to exit from the Joplings business based in the North East. Whilst we were achieving a 11% return on capital, with a significant sales base and trading from freehold properties, the board concluded that the medium term risk profile for this business was not appropriate to a publicly quoted company. The decision to exit was therefore taken and a process of sale commenced to ensure that shareholder value was at least protected and if possible maximised.

The final outcome has more than achieved that with cash of £26,650,000 being generated against a book value of £19,608,000 and closure costs of £3,628,000. The stores were sold: in Leamington’s case to property redevelopers in July 2004; Tynedale to Tesco in February 2005; Sunderland and Hexham in March 2005 to Owen Owen who are continuing to trade both stores in their existing form. There were, I regret to say, significant job losses and whilst it is easy to speak the words “exit” and “taking cost out of a business” this ignores that the real costs are to the people who work in these businesses.

Our team in the North East and Midlands business however remained committed, loyal and determined to do their jobs to the best of their abilities right to the end. This they achieved as evidenced by the trading profit of £2,948,000 and sales of £50,647,000 delivered during the year. Compare that to, but also with the knowledge of, the difficult circumstances these businesses were operating under against some of our competitors’ achievements in the past year and the enormity of this result can be clearly seen. I am personally very grateful to and appreciate all of “our” people in Joplings; they have been a privilege to work with.

We have retained Joplings Financial Services and Chargecard on a going concern basis until September 2005 when we will review its future. However, by the end of this calendar year the final exit from the North East will have been completed on terms that are significantly advantageous to shareholders.

De Gruchy

Sales of £18,718,000 compare against £18,228,000 last year and profit at £1,665,000 was an increase of £20,000.

The activity and uncertainty in our North Eastern business understandably had a knock on effect at De Gruchy. In addition to this an increasingly challenging Jersey economy made the going tough for this business.

However, it was not all disappointment, having written in previous annual reports that investment was the way forward for this business we were proved correct. The refurbishment of a major part of the Ground Floor that included Young Fashion, Accessories and the addition of a number of Fashion brands (LK Bennett, Hobbs, Bench etc.) new to Jersey made a real difference. Sales in that area have increased by 19% and profitability improved accordingly. This together with the success of the previously refitted Cosmetic Hall provides a compelling argument that when the customer is given the “offer” in appropriate space they react positively.

De Gruchy is a high quality store with a strong sales and profit base, as well as being one of the few trophy stores throughout the U.K. and Eire, it occupies a key position and part in the Jersey retail structure and we are advantaged that the entire property is owned freehold.

Shareholder Voucher

All shareholders with 2,000 ordinary 10p shares or more are eligible for a 10% discount voucher, which is enclosed with the Annual Report. The voucher will be accepted at all branches of The Perfume Shop and A de Gruchy.

Outlook

The Group’s strategy has changed significantly during the course of the year with the sale of the North Eastern Department Stores. The proceeds from this will be used to invest in TPS in the UK/Eire and for the necessary investment in Australia.

Trading conditions on the High Street since Christmas can certainly be described as challenging and sales this year will be hard won.

Current trading in the first seven weeks of the new financial year has been broadly in line with our expectations. Like for like sales at TPS were up 3.6%. TPS is, however, under competitive pressure from discount retailers and new market entrants, who have aggressive expansion plans. In addition, consumer spending has shown weakness in recent months. These factors have combined to make the Board cautious about the medium term prospects for the TPS business.

PHILIP NEWTON
Chief Executive

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