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Wednesday 30 April, 2014

Home Retail Grp Plc

Full Year Results - Part 1

RNS Number : 8460F
Home Retail Group Plc
30 April 2014
 

30 April 2014

 

Home Retail Group plc

Full-Year Results

 

Home Retail Group, the UK's leading home and general merchandise retailer, today announces its results for the 52 weeks to 1 March 2014.  

 

Operating highlights

§ Good performances at both Argos and Homebase, with both businesses delivering positive like-for-like sales growth throughout the year

§ Argos Transformation plan progress:

-     Increased internet penetration to 44% of Argos' total sales, including mobile commerce which grew 89% to account for 18% of total sales

-     Launched improved smartphone and tablet apps

-     Achieved 11.6 million customer registrations

-     Trialled 'hub & spoke' distribution model in 49 stores

-     Added aspirational new brands to Argos range

-     Trialled six digital concept stores

§ Homebase Renewal plan progress:

-     Completed a further 12 store refits

-     Launched a next day delivery proposition

-     Grew multi-channel sales by 53%

-     Reduced the store estate in line with plans

 

Financial highlights

§ Sales up 3% at £5,663m

§ Cash gross margin up 2% to £2,034m

§ Operating and distribution costs up £13m to £1,921m as a result of ongoing investment in strategic initiatives across both Argos and Homebase

§ Benchmark operating profit1 up 21% to £113.0m

§ Benchmark profit before tax2 up 27% to £115.4m

§ Basic benchmark earnings per share3 up 35% to 10.4p

§ Reported profit before tax of £71.2m; reported basic earnings per share of 6.8p

§ Year-end cash balance of £331m

§ Full-year dividend up 10% at 3.3p (FY13: 3.0p); final dividend of 2.3p recommended

 

John Coombe, Chairman of Home Retail Group, commented:

 

"The Group has delivered a good financial performance in the year and it has maintained its strong financial position with a year-end cash balance of £331m.  The Board remains mindful of both the investment needs of the Group and the importance of the dividend to our shareholders and, after careful consideration, it is recommending a final dividend of 2.3 pence and thus a full-year dividend of 3.3 pence.  This represents a 10% increase against the previous year.

 

"I would like to take this opportunity to pay tribute to Terry Duddy who, over the last 15 years, the last seven as Chief Executive of Home Retail Group, has contributed so much to the Group.  We wish Terry every success for the future.  I would also like to welcome John Walden, who has been running Argos for the last two years, to the Board as our new Chief Executive."

 

John Walden, Chief Executive of Home Retail Group, added:

 

"The Group has delivered a good performance in what remained a challenging market.  Both retail businesses recorded positive like-for-like sales for all four reporting periods, resulting in 27% growth in Group benchmark profit before tax.  We also made good progress with our strategic plans in both businesses, which will become increasingly important in a competitive retail environment where shopping behaviours are changing rapidly."

 

 

1.  Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, post-employment benefit scheme administration costs, store impairment and onerous lease charges or releases and costs or income associated with store closures and exceptional items.

 

2.  Benchmark profit before tax (benchmark PBT) is defined as profit before amortisation of acquisition intangibles, post-employment benefit scheme administration costs, store impairment and onerous lease charges or releases and costs or income associated with store closures, exceptional items, financing fair value remeasurements, financing impact on post-employment benefit obligations, the discount unwind on non-benchmark items and taxation.

 

3.  Basic benchmark earnings per share(benchmark EPS) is defined as benchmark PBT less taxation attributable to benchmark PBT, divided by the weighted average number of shares in issue (excluding shares held in Home Retail Group's share trusts net of vested but unexercised share awards).

 

 

Enquiries

 

Analysts and investors (Home Retail Group)

Richard Ashton                 Finance Director                                   01908 600 291

Mark Willis                        Director of Investor Relations

 

Media (RLM Finsbury)

Rollo Head                                                                                 020 7251 3801

 

There will be a presentation today at 9.30am to analysts and investors at the King Edward Hall, Merrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ.  The presentation can be viewed live on the Home Retail Group website www.homeretailgroup.com.  The supporting slides and an indexed replay will also be available on the website later in the day.

 

An Interim Management Statement, covering the 13 weeks from 2 March 2014 to

31 May 2014, will be published on 12 June 2014.

 

Certain statements made in this announcement are forward looking statements.  Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward looking statements.

FINANCIAL SUMMARY

 

£m

52 weeks to 1 March 2014

52 weeks to

2 March 2013 Restated 1




Argos

4,051.1

3,931.3

Homebase

1,489.2

1,430.7

Financial Services

122.7

113.4

Sales

5,663.0

5,475.4




Cost of goods

(3,628.7)

(3,473.8)

Gross margin

2,034.3

2,001.6

Group gross margin % rate

35.9%

36.6%




Operating and distribution costs

(1,921.3)

(1,908.3)




Argos

112.3

100.3

Homebase

18.9

11.0

Financial Services

6.0

6.0

Central Activities

(24.2)

(24.0)

Benchmark operating profit

113.0

93.3

Group operating margin % rate

2.0%

1.7%




Net interest income (see below)

2.4

3.8

-

(6.0)

Benchmark PBT

115.4

91.1




Amortisation of acquisition intangibles

(1.8)

(1.8)

Post-employment benefit scheme administration costs 1

(1.9)

(2.1)

Adjustments in respect of store impairment and property provisions

2.1

14.6

Exceptional items

(41.4)

31.3

Financing fair value remeasurements

9.0

(1.1)

Financing impact on post-employment benefit obligations 1

(3.3)

(4.0)

Discount unwind on non-benchmark items

(6.9)

(7.1)

Profit before tax1

71.2

120.9




Taxation 1

(17.2)

(34.0)

   of which: taxation attributable to benchmark PBT

(32.5)

(29.7)

   Benchmark effective tax % rate

28.2%

30.6%




Profit for the year 1

54.0

86.9







Basic benchmark EPS

10.4p

7.7p




Basic EPS 1

6.8p

10.9p




Weighted average number of shares for basic EPS

795.0m

800.6m







Full-year dividend

3.3p

3.0p







Year-end cash balance

331.0

396.0







Net interest reconciliation:






Bank deposits and other interest

0.3

1.9

Financing costs charged to Financial Services

3.3

3.1

Discount unwind on benchmark items

(1.2)

(1.2)

Net interest income

2.4

3.8




Financing fair value remeasurements

9.0

(1.1)

Financing impact on post-employment benefit obligations 1

(3.3)

(4.0)

Discount unwind on non-benchmark items

(6.9)

(7.1)

Income statement net financing income/(charge)1

1.2

(8.4)

 

The above tables and those throughout this announcement have been prepared in accordance with Note 1 to the Financial Information on page 26.  The Group has adopted IAS 19 (revised) during the period as set out in Note 11 on page 32. Prior year comparatives have been restated where marked 1.  The restatement has no impact on Benchmark PBT.



CHIEF EXECUTIVE'S STATEMENT

 

This is my first year-end statement as Chief Executive of Home Retail Group and I am pleased to be able to report on a year of good performance for the Group.  Despite a backdrop of a subdued consumer environment throughout the year, both of our retail businesses achieved like-for-like sales growth in each of the Group's four reporting periods. The Group delivered benchmark profit before tax of £115.4m, a growth of 27% versus last year and benchmark EPS of 10.4p, an increase of 35% versus last year.

 

Argos delivered like-for-like sales growth with sales increases in a number of product categories, most notably electrical products including tablets, televisions, white goods and video game systems.  Growth in these categories more than offset small sales declines in furniture, homewares and jewellery.  Argos' multi-channel performance, particularly in mobile commerce, was a key factor in this growth.

 

Homebase also delivered a good sales performance including increasing sales of big ticket products throughout the year resulting from the continued investment in this area.  Homebase also achieved good sales of seasonal products during the second quarter, which benefited from favourable weather conditions.

 

With its strong financial position the Group was able to invest in the strategic growth plans in both businesses, and has made good progress.  These plans are important for the Group's future because, as one of the UK's leading home and general merchandise retailers, it participates in a competitive market where shopping behaviours are changing rapidly.  

 

Home Retail Group is embracing the connected world, in which digital technologies are dramatically altering the way people communicate, learn, entertain and shop.  Traditional retailing in particular is fundamentally changing.  Customers continue to shift their shopping habits, and most of them interact with digital devices at some point in their shopping journey.  They have come to expect multiple shopping channels, large product choice, low prices, and flexible options for obtaining their products, including collection in a local store and home delivery.  Home Retail Group believes that it can innovate and lead in this changing market, and thereby secure for itself long-term business growth.

 

Digital and multi-channel leadership 

Argos continued to grow its internet sales in the year, such that they now represent 44% of total Argos sales, up from 42% a year earlier.  Within this, mobile commerce grew by 89% to reach 18% of total Argos sales. 

 

Argos made a number of advances in its digital offer during the year including the introduction of 'My account', the launch of its first digital Christmas gift guide, and new tablet and smartphone apps.  These apps have now been downloaded 5.5 million times.

 

Digital channels and multi-channel experiences are no less important for Homebase, as the role of the internet in the shopping journey for both DIY and home enhancement products is beginning to develop.  Homebase's multi-channel sales grew by 53% and now represents 7% of its total sales.  Homebase plans to upgrade its online and mobile experiences in FY15 which will materially improve the digital shopping journey for its customers.

 

The Group's portfolio of 1,057 stores remains a core component of its multi-channel offer.  The Argos national store network, with 734 stores that are smaller and more efficient than traditional stores, is a potential strategic advantage in a digital future.  Increasingly customers will seek local product collection, and will appreciate face-to-face customer service.

 

Argos trialled six digital concept stores in the third quarter of FY14, which seek to define a new role for an Argos store in the future.  They showcase a number of the developments outlined in the Transformation plan announced in October 2012, including tablet-based browsers to replace in-store catalogues, streamlined customer journeys, fast track product collection and enhanced customer service.

 

Homebase continued to trial the new proposition for its stores with the refit of a further 12 stores during the financial year.  These stores offer more authoritative category merchandising and ranging including several branded concessions, improved kitchen, bathroom and furniture showrooms, a decorating centre and higher levels of customer service.  They are delivering sales growth that is in line with expectations. 

 

Compelling products and customer offers

The expanding impact of e-commerce has established a standard for broad product ranges, and made pricing and product availability transparent to customers.  The Group offers over 80,000 products across Argos and Homebase, including a substantial element of exclusive and own brand lines.  The Group attempts to meet customer needs for product choice and value by building partnerships with strong brands, and maximising its buying scale and sourcing capabilities particularly via direct import and direct sourcing of product.

 

During the year, Argos continued to expand its ranges with the addition of around 9,000 new lines including extensions of its existing branded product ranges into higher-end models, and the introduction of new aspirational brands.  Argos believes it can satisfy more of its customers' needs by developing an offer that has universal appeal, particularly beyond its entry and value lines.  Argos now sells around 43,000 lines including about 5,000 exclusively branded lines.

 

Homebase extended its exclusive brand strategy during FY14 with further introductions of high-end Odina fitted kitchens together with Schreiber kitchens and furniture, as well as the Qualcast range of garden power and garden hand tool products.  Homebase also increased the number of Habitat concessions within Homebase stores to 15, offering a breadth of premium quality and contemporary furniture, homewares, decorating products and accessories. 

 

Beyond great products, customers increasingly expect a retailer to offer options regarding how a customer's order for products is fulfilled, via local collection or home delivery.  Indeed, the cost and speed of fulfilment can be a distinguishing feature of a retail offer, and has thus become more competitive.  Home Retail Group intends to leverage its distribution and logistics scale, and unique store network, to offer convenient fulfilment.

 

Argos has devised a unique stocking model called 'hub & spoke'.  Under this model, Argos will stock larger ranges in each of around 120 'hub' stores, and operate frequent replenishment routes between a 'hub' and its four-to-six 'spoke' stores.  As a result, an extended range will be available to all Argos locations, potentially within hours.  During FY14 Argos trialled elements of the 'hub & spoke' model in a number of stores in the North East of England, the Manchester and Lancashire region, and London.  The trials provided good operational and customer insight, and equipped Argos for further expansion of the model in the future.

 

Homebase launched a new express delivery proposition in FY14, which offers next day or named day delivery on a range of around 15,000 products.  The offer allows customers to order products via the internet for delivery to either their home or the Homebase store of their choice.  Homebase was encouraged by the take-up rates for this offer, and expects to continue to improve its home delivery and other fulfilment offerings.

 

Continued cost management

The Group has a strong track record of delivering organisational and infrastructure changes that have historically reduced its costs and improved the flexibility of its businesses while improving its operational standards. 

 

While both Argos and Homebase continue to deliver cost saving initiatives, investment in the strategic initiatives in both businesses added costs during FY14 and contributed to a small increase in the Group's total costs.  The Group expects costs to increase somewhat in future years as it continues to invest in its strategic growth plans.  However, the Group will continue to seek cost reductions to partially mitigate these increases.

 

A key focus for the Group remains its store lease portfolio, which it continues to reshape to provide flexibility to adjust to changing strategies and market conditions.  The Group has made good progress in this area in FY14, and with around 400 store lease renewals or break clauses due over the next five years, representing around 38% of the store portfolio, the Group has ongoing flexibility to adjust further the store portfolio as its strategies and markets require.  Total lease commitments stood at £2.6bn at the end of FY14, which is a £1.7bn, or 39%, reduction from the peak total lease commitments of £4.3bn at the end of FY08.

 

Outlook

Although there are signs that economic conditions are beginning to improve, with recent reports of reductions in inflation, increases in employment and growing levels of consumer confidence, the Group will continue to assume a subdued consumer environment until the recovery is more broadly based.  The Group has made good progress so far with its strategic plans, which its financial performance has begun to reflect.  However, the plans are multi-year and they are early in their development.  Many of the important systems capabilities, new customer propositions and increased financial expectations lie ahead, and the Group cannot count on external factors to drive the business forward.  The Group has a strong financial position, which will enable it to invest in the Argos Transformation plan to reinvent it as a digital retail leader, and in the Homebase Renewal plan.  Overall the Group is well positioned for the future.



 

OPERATING COMPANY REVIEWS

 

Argos

 

52 weeks to

£m

1 March

2014

2 March

2013




Sales

4,051.1

3,931.3




Benchmark operating profit

112.3

100.3




Benchmark operating margin

2.8%

2.6%







Like-for-like sales change

3.3%

2.1%

Net space sales change

(0.3%)

(0.6%)

Total sales change

3.0%

1.5%




Gross margin rate movement

Down c.50bps

Down c.50bps




Benchmark operating profit change

12%

6%




Number of stores at year-end

734

737




 

In October 2012 Argos outlined a five-year Transformation plan to reinvent itself as a digital retail leader; transforming from a catalogue-led business to a digitally-led business.  The plan is designed to address the competitive challenges, exploit the market opportunities and restore sustainable growth.

 

There are four key elements to the Transformation plan:

1.  Reposition Argos' channels for a digital future;

2.  Provide more product choice, available to customers faster;

3.  Develop a customer offer that has universal appeal; and

4.  Operate a lean and flexible cost base.

 

In what remained a challenging market environment in FY14, Argos made good progress against its key Transformation milestones and delivered a solid trading performance throughout the year.

 

Operational review

 

Reposition Argos' channels for a digital future

Internet-led sales grew to represent 44% of total Argos sales in FY14 aided by a strong performance from both mobile phones and tablets, which grew by 89% and now represent 18% of total Argos sales.  Check & Reserve also continued to grow and represented 32% of total Argos sales, with the remaining 12% of internet-led sales being fulfilled through home delivery.

 

Underlying its strong internet performance, Argos has improved its digital offer across both online and mobile commerce.  The launch of a 'My account' function has enabled Argos to improve consistency across its online channels, whilst introducing several new features such as a single customer login, '1 click' reservation and a persistent trolley.  Further developments during the year included the functionality that enables customers to order products via their mobile device for home delivery. 

 

Argos has made significant technological improvements during the course of the year which, as with all enhancements of this scale, had an element of execution risk.  Argos dealt well with the risk involved and managed the challenges that arose while delivering a strong trading performance, particularly in the second half of the year.  Argos has confidence in delivering the future upgrades required in this area.

 

Over its peak trading period Argos introduced the Christmas gift guide in both paper and digital forms.  The digital version offered richer content together with a unique and intuitive shopping journey.  The traditional paper gift guide was enriched with augmented reality through 'Blippar' in order to increase the level of customer interaction and to direct customers to the wider online offering. 

 

Over the coming year Argos will build on these digital enhancements by redesigning its online checkout to accommodate flexible payment and credit options, improving search functions and making it easier for customers to find their product by showing real-time stock availability by location.  Argos will also further personalise the shopping experience on its digital channels, which will improve its ability to offer relevant products and promotions to customers.  In addition, a dynamic route scheduling system will be implemented which will allow customers to select accurate narrow timeslots for home delivery.  Argos will also introduce a new secure payment infrastructure which will enable customers to store their card details safely with Argos for future use.

 

The Argos store network remains a critical part of the Argos strategy by providing customers with local convenience and an important human connection.  Argos trialled six digital concept stores during the Christmas trading period that incorporated many new developments, including online prepayment, fast track product collection and a dynamic voice-driven picking system that facilitates rapid retrieval of customer orders.  Argos' traditional laminated catalogues were replaced in these stores with tablet browsers which enable customers to search for products, efficiently check stock availability and streamline their store experience.  The stores also incorporate the 'hub & spoke' distribution model to provide customers with access to extended product ranges for prompt collection.  Early customer feedback on the digital concept stores has been encouraging, and Argos plans to extend its trial of the concept to around an additional 25 stores in FY15.

 

The 'hub & spoke' distribution model will allow Argos to consider different store formats that could hold little or no stock.  During FY15 it will trial formats that will include Argos stores embedded within Homebase stores and a small format store within London.  During FY15 Argos will also complete the roll out of the voice picking system and fast track collection across the estate.

 

Provide more product choice, available to customers faster

Argos is uniquely positioned, through its store estate and supply chain, to provide market-leading fulfilment options to customers on a national scale.  An initial 32 store 'hub & spoke' trial in the North East provided us with good operational insight into the workings of this new model which were then implemented into a further 13 store trial in the Manchester and Lancashire region over Argos' peak trading period as well as the four London digital concept stores.  In the Manchester and Lancashire trial, customers were able to take advantage of same day access to expanded product ranges from hub stores and Argos was able to test a number of different stocking options, delivery frequencies and also the ratio of the number of hub stores to the number of spoke stores.  Following these trials, Argos will begin to roll out the 'hub & spoke' model during FY15.

 

In order to drive further improvements in stock availability, Argos is planning to pilot an enhanced home delivery offer, with time slots available for larger 'two-man' delivery items for next day delivery and will also trial a same day or next day delivery offer on 'one-man' items from hub to home.

 

In September, Argos and eBay announced a trial of a UK collection service, enabling shoppers at selected eBay merchants to order products for collection at around 150 Argos stores throughout the UK.  This trial is still in progress with over 100 merchants having signed up to the initiative so far.

 

Develop a customer offer that has universal appeal 

Argos continues to improve the quality of its product range whilst simultaneously rationalising its offering to suit customer needs.  Argos added about 9,000 new lines during FY14, resulting in a total offering of around 43,000 lines.  The new lines included several aspirational brands, such as Emma Bridgewater homeware, Oxo Kitchenware, Baby Bjorn nursery products, Monsoon accessories, Denby kitchenware and Stoves appliances.  During FY15 Argos will further expand its ranges of branded and own brand products by around an additional 15,000 lines and will launch a new line of own brand home products.

 

Argos implemented a new dynamic price optimisation tool in certain product categories prior to the peak trading period which has enabled faster and more data driven pricing decisions, and has helped optimise its competitive pricing position.  Further developments to this tool during FY15 will include its implementation across further product categories, as well as the introduction of an enhanced commercial dashboard which will bring real-time digital and customer information to Argos' trading teams, enabling better decision-making.

 

Argos has continued to invest in getting to know its customers better.  With the launch of 'My account', Argos has now increased its customer database to 11.6 million registered customers.  The customer insight gathered as a result of the increased level of registrations has enabled a more tailored product offering based on customers' needs, and has also enabled Argos to run bespoke promotional offers based on both customers previous activity and their profiles.  During FY15, Argos will continue to expand its database of registered customers, collect more customer data and use this data to further improve customer satisfaction with its offerings.

 

Operate a lean and flexible cost base 

Argos has a strong track record of delivering significant organisational and infrastructure changes which have historically reduced its costs and improved the flexibility of the business, while maintaining or improving operational standards.  During FY14 costs reduced by £5m during the first half as a result of ongoing cost reduction initiatives, but increased by £10m during the second half, resulting in a £5m increase in FY14.  This second half increase is principally a result of the increased level of cost investment in strategic initiatives, for example, the opening of a digital hub in London to accommodate the newly hired digital team.  Argos will continue to work hard on cost reduction initiatives, but the impact of ongoing inflationary cost pressures, further cost investments in strategic initiatives and an increased level of depreciation as a result of an increased level of capital expenditure, are expected to result in net cost increases going forward.

 

Argos has continued to review its store portfolio during FY14 and to negotiate lease renewals onto shorter terms in order to improve the flexibility of its store portfolio.  In the past two years Argos has closed a net 14 stores and reduced the average lease term of the estate from 7.1 to 5.5 years.  Over the next five years, Argos has around a further 330 lease renewals or break clauses due.

 

Financial Review

Total sales in the 52 weeks to 1 March 2014 increased by 3.0% to £4,051m. Net space sales change reduced sales by 0.3% with the store portfolio reducing by a net 3 stores, to 734.  Like-for-like sales increased by 3.3%.  Electrical products continued to deliver sales growth driven by growth in tablets, TVs and white goods, which together with strong sales of video game systems following the launch of new consoles, more than offset small declines in furniture, homewares and jewellery. 

 

The gross margin rate was down by approximately 50 basis points.  The negative drivers were an adverse sales mix impact, resulting from the growth in sales of margin dilutive electrical products, combined with a reduction from the net impact of the adverse movement in US$ exchange rate and sea freight costs.  These reductions were partially offset by an improvement from a reduced level of stock clearance activity.

 

Total operating and distribution costs increased by £5m as a result of increased sales, underlying cost inflation and cost investment in strategic initiatives partially offset by further cost saving initiatives. Benchmark operating profit increased by £12.0m, or 12%, to £112.3m (FY13: £100.3m).

 



Homebase

 

52 weeks to

£m

1 March

2014

2 March

2013




Sales

1,489.2

1,430.7




Benchmark operating profit

18.9

11.0




Benchmark operating margin

1.3%

0.8%







Like-for-like sales change

5.9%

(4.9%)

Net space sales change

(1.8%)

(0.3%)

Total sales change

4.1%

(5.2%)




Gross margin rate movement

Down c.100bps

Up c.75bps




Benchmark operating profit change

71%

(52%)

 



Number of stores at year-end

323

336

Of which contain a mezzanine floor

184

186

Of which are new format

15

3




Store selling space at year-end (million sq. ft.)

14.9

15.4

Of which

- garden centre area

3.4

3.6


- mezzanine floor area

1.8

1.8





 

The Homebase strategy is to position itself as a clearly differentiated multi-channel home enhancement retailer, creating both a store and online experience, with a softer, more stylish look and feel.  Homebase is progressing with its Renewal plan which incorporates store format development, an enhanced multi-channel offer, exclusive brands and increased levels of customer service.  This plan accelerates the development of Homebase as a destination for a broader range of home and garden projects, securing a larger share of customer spend and a higher frequency of visit.

 

Operational review

 

Store estate and format development

Homebase has continued to trial the new format for its stores, supported by increased levels of customer service, which creates a shopping experience that helps customers find ideas and inspiration for their homes and gardens.  Following the evolution of the new proposition for stores in Ruislip and Solihull last year, 12 additional proposition stores were completed during FY14 taking the total number completed to 15.  These stores are achieving sales uplifts in line with expectations and there has been a high level of positive customer feedback to the refits. 

 

As part of Homebase's on-going management of the store portfolio, there were 13 store closures during FY14 leading to a reduction in the store portfolio to 323 stores.  This level of store closures was consistent with its plans at the start of the year and, over the next five years, Homebase has around a further 65 store lease renewals or break clauses due.  During the year, Homebase's stores in Ireland were subject to an examinership process which resulted in two store closures and rent reductions across the remaining 13 Irish stores.  Homebase will continue to examine the opportunity for store closures, relocations or downsizes.     

 

Multi-channel offer

Multi-channel sales have grown by 53% year-on-year to represent approximately 7% of total Homebase sales.  This growth has been driven by increased website traffic as a result of an increased investment in this channel as a route for customer acquisition, as well as the introduction of improved delivery options, allowing customers to order products via the internet for delivery to either their home or the Homebase store of their choice.  This service is now available on either a standard three day delivery basis or as a next day or named day offer.  Both services are available on around 15,000 Homebase products and have experienced good levels of uptake.  Wi-Fi is now available in all stores enabling customers to browse and shop whilst in store and allowing Homebase colleagues to assist them with their shopping mission.

 

Step changing multi-channel is an important part of the Homebase strategy and during FY15 Homebase will launch a new website, providing exciting new developments such as improved search functionality, registration and login and a much quicker and simpler buying experience.  This will be supported by the launch of new Apple and Android Apps.

 

Homebase continues to use social media to engage and interact with its customers, for example videos on Homebase's YouTube channel offer customers help, advice and useful 'how to' guides.

 

Exclusive brands

A key differentiator for Homebase remains its strong portfolio of exclusive brands, such as Habitat, Odina, Schreiber, Qualcast and Laura Ashley.  Homebase has 15 Habitat concessions and Habitat products are now available to order in all stores, across ranges such as furniture, paint and wallpaper.  Habitat gives the Homebase customer greater choice with premium quality, contemporary styling, as well as some bestselling iconic designs.

 

Homebase's premium Odina kitchen range has now been rolled out to 49 stores (FY13: 28).  The mid-market Schreiber kitchen range is now available in 317 stores either as an edited display of the range or as a cabinet display that showcases construction, material quality and provides examples of the range.  This year the Qualcast range has been increased to around 100 products, a 34% increase on last year, expanding the range of garden power and garden hand tool products.

 

Customer service & loyalty

Homebase has continued its improvements in customer service in a number of areas during the year.  A trial to improve process efficiency in stores by reallocating hours from operational tasks into customer service has been completed.  Following the success of this trial, the new processes have been implemented in over 70 stores during FY14 and will be rolled out to the rest of the estate during FY15.

 

To monitor and react to customer feedback further, Homebase launched a customer survey called 'Paint us a picture' during the year, which gives Homebase insightful and constructive feedback on all areas of customer service.  Since its launch in March 2013, the number of "highly satisfied" customers has gone from 60% to 66% and new format stores have all experienced significant increases in customer satisfaction post launch.

 

Homebase has a database of about 7.1 million active Nectar customers and a Nectar card is used on around 65% of sales.  Homebase sent around 37 million direct mailings and around 28 million emails during FY14 to drive relevant offers to customers.  Individually tailored coupons issued at point of purchase are being trialled to drive higher levels of repeat sales.

 

Financial review

Total sales in the 52 weeks to 1 March 2014 increased by 4.1% to £1,489m.  Net space sales change reduced sales by 1.8% with 13 store closures reducing the store portfolio to 323.  Like-for-like sales increased by 5.9%.  After a challenging start to the year, seasonal products benefited from the improved weather in the second quarter, annualising against poor weather through the summer in the prior year.  Big ticket sales were also ahead of last year, whilst remaining categories were broadly flat compared to last year.

 

The gross margin rate was down by approximately 100 basis points principally driven by an adverse impact from promotional sales in the first quarter and an adverse sales mix impact resulting from the strong performance of margin dilutive seasonal and big ticket products.

 

Total operating and distribution costs increased by £9m, as a result of increased sales, underlying cost inflation and cost investment in strategic initiatives partially offset by further cost saving initiatives.  Benchmark operating profit increased by £7.9m, or by 71%, to £18.9m (FY13: £11.0m).

Financial Services

 

52 weeks to

£m

1 March

2014

2 March

2013




Sales

122.7

113.4




Benchmark operating profit before financing costs

9.3

9.1

Financing costs

(3.3)

(3.1)

Benchmark operating profit

6.0

6.0










Store card gross receivables

594

547

Provision

(70)

(72)

Store card net receivables

524

475




Provision % of gross receivables

11.8%

13.2%




 

Financial Services works in conjunction with Argos and Homebase to provide their customers with the most appropriate credit offers to drive retail sales, and to maximise the total profit from the transaction for Home Retail Group.

 

Operational & financial review

 

In-house store card credit sales increased by 8% to £681m and represented 10.4% (FY13: 10.0%) of Group retail sales.  This increased level of credit sales and penetration is principally as a result of a retail sales mix into high credit attachment products such as televisions and white goods.  In addition to credit sales placed on the Group's own store cards, credit offers for purchases at Homebase, which are greater than £1,000, are now principally provided through product loans from a third party provider.  Including these product loans, total credit sales penetration increased to 11.6% (FY13: 11.0%) of Group retail sales.  Customer use of the online account management tools continues to grow with over 800,000 registered customers.

 

Store card net receivables grew by £49m versus a year ago to £524m, principally as a result of the increase in credit sales.  The Group finances these receivables internally with no third party debt being requiredDelinquency rates improved versus the comparable period last year.  Operating costs increased slightly, driven principally by increased volumes resulting in benchmark operating profit being unchanged at £6.0m (FY13: £6.0m).

 

In addition to benchmark operating profit there were two additional items which had a financial impact in FY14, which were as follows:

 

Financial Services offers Payment Protection Insurance ("PPI") to its customers.  In response to an industry wide review into the handling of PPI complaints by the Financial Conduct Authority, a full investigation has been undertaken with the support of an independent expert, which will result in a customer redress exercise being carried out.  As a result, the existing provision was increased by £25m.  This charge has been recognised in FY14 and taken as an exceptional item, outside of benchmark profit.

 

Until June 2010 Allianz Insurance provided Home Retail Group with an underwriting service for warranty products sold in both Argos and Homebase.  Allianz Insurance has recently notified the Group that under a profit share arrangement relating to the run off of these historical policies, the Group is due £11.4m.  This credit has been recognised in FY14 and taken as an exceptional item, outside of benchmark profit.



GROUP FINANCIAL REVIEW

 

Sales and benchmark operating profit

Group sales were up 3% at £5,663m (FY13: £5,475m) while Group benchmark operating profit increased 21% to £113.0m (FY13: £93.3m).  The drivers of the Argos, Homebase and Financial Services performances have been analysed as part of the preceding business reviews.   Central Activities represents the cost of central corporate functions.  Costs for the year were broadly flat at £24.2m (FY13: £24.0m), with underlying cost inflation being offset by the continued control of central corporate costs.

 

Net interest income

Net interest income was £2.4m (FY13: £3.8m).  Within this, third party interest income for the year declined to £0.3m (FY13: £1.9m) as a consequence of increased level of bank fees in respect of the Group's new bank facility, which were partially offset by the increased income earned on the Group's higher average cash balance.

 

Financing costs charged within Financial Services' benchmark operating profit, together with the corresponding credit within net interest income increased to £3.3m (FY13: £3.1m).  This internal recharge is based upon UK base rates.

 

The charge within net interest income in relation to the discount unwind on benchmark items was £1.2m (FY13: £1.2m).  This arises from the accounting treatment whereby provisions for expected future liabilities are required to be discounted back to their current value.  As settlement of the liability moves closer to the present day, additional non-cash charges to unwind the discount are incurred; this will result in the absolute level of provision eventually matching the liability in the accounting period that it becomes due.

 

Share of post-tax results of associates

These amounted to £nil (FY13: loss of £6.0m), with the reduction being as a result of the previously disclosed disposal of the Group's 33% shareholding in Ogalas Limited, which trades as 'home store + more' in the Republic of Ireland, and the closure of the Group's Chinese joint venture.

 

Benchmark PBT

Benchmark PBT for the year increased 27% to £115.4m (FY13: £91.1m) driven by the factors previously discussed.

 

Amortisation of acquisition intangibles

A charge of £1.8m was recorded in the year (FY13: £1.8m), relating to the amortisation of the value of the brand which arose on the Habitat UK acquisition. 

 

Post-employment benefit scheme administration costs

A charge of £1.9m was recorded (FY13 restated: £2.1m), in respect of the administration costs incurred by the Home Retail Group Pension Scheme.  Prior to the adoption of IAS 19 (revised) this cost was charged against the expected return on plan assets within the financing impact on post-employment benefit obligations.

 

Adjustments in respect of store impairment and property provisions

A net credit of £2.1m (FY13: £14.6m) was recorded in the year, relating to store impairment and property provisions that are no longer required.  The net credit principally reflects a £3.0m (FY13: £nil) reversal of previous impairment provisions arising on the store portfolio, combined with a £0.9m net charge (FY13: £14.6m net release) in respect of property provisions.

 

Exceptional items

The exceptional charge recorded in the year was £41.4m (FY13: credit of £31.3m).  This charge is the net result of the following three items: a credit of £11.4m relating to Warranty Insurance and a charge of £25.0m relating to an increase to existing provisions held for PPI, both of which were discussed in more detail in the Financial Services business review, and a charge of £27.8m principally relating to the ongoing programme to transform Argos into a digital retail leader together with a number of other restructuring actions.

 

Financing fair value remeasurements

Certain foreign exchange movements are recognised in the income statement within net financing income.  These amounted to a net gain of £9.0m (FY13: loss of £1.1m), which arose principally as a result of translation differences on overseas subsidiary currency balances and the recycling of fair value gains on the sale of assets previously classified as available for sale.  Equal and opposite adjustments to the translation differences are recognised as part of the movements in reserves.  As required by accounting standards, the net nil exchange adjustment is therefore split between the income statement and the statement of comprehensive income.

 

Financing impact on post-employment benefit obligations

The financing impact on post-employment benefit obligations is a net charge of £3.3m (FY13 restated: £4.0m).  The restatement of the FY13 comparative charge, as a result of the adoption of IAS 19 (revised) for the first time during the current period, is explained in Note 11 to the financial information on page 32.

 

Discount unwind on non‑benchmark items

A charge of £6.9m (FY13: £7.1m) within net financing income relates to the discount unwind on onerous lease provisions.  As these provisions were items previously excluded from benchmark PBT, the discount unwind has also been excluded from benchmark PBT. 

 

Profit before tax

The profit before tax for the year was £71.2m (FY13 restated: £120.9m).

 

Taxation

Taxation attributable to benchmark PBT was £32.5m (FY13: £29.7m), representing an estimated effective tax rate (excluding associates) of 28.2% (FY13: 30.6%).  The lower effective tax rate principally reflects two elements: a 1% reduction in the UK corporation tax rate together with the favourable impact of a relatively fixed level of disallowable expenditure in comparison to the Groups higher level of benchmark PBT in FY14.

 

Taxation attributable to non-benchmark items amounted to a credit of £15.3m (FY13 restated: charge of £4.3m).  The total tax expense for the year was therefore £17.2m (FY13 restated: £34.0m).

 

Number of shares and earnings per share

The number of shares for the purpose of calculating basic earnings per share (EPS) was 795.0m (FY13: 800.6m), representing the weighted average number of issued ordinary shares of 813.4m (FY13: 813.4m), less an adjustment of 18.4m (FY13: 12.8m) representing shares held in Group share trusts net of vested but unexercised share awards.

 

The calculation of diluted EPS reflects the potential dilutive effect of employee share incentive schemes.  This increases the number of shares for diluted EPS purposes by 26.4m (FY13: 12.4m) to 821.4m (FY13: 813.0m).  Basic benchmark EPS is 10.4p (FY13: 7.7p), with diluted benchmark EPS of 10.1p (FY13: 7.6p).  Reported basic EPS is 6.8p (FY13 restated: 10.9p), with reported diluted EPS being 6.6p (FY13 restated: 10.7p).

 

Dividends

While the Board remains mindful of the investment needs of the Group, this is balanced with the importance of the dividend to our shareholders and as a financial discipline in itself, and after careful consideration by the Board, it is recommending a final dividend of 2.3p.  This takes the full-year dividend to 3.3p (FY13: 3.0p), which is a 10% increase in the full-year dividend.  The final dividend, subject to approval by shareholders at the AGM, will be paid on 23 July 2014 to shareholders on the register at the close of business on 23 May 2014.

 

As the Group's earnings profile remains heavily weighted to the seasonal Christmas trading at Argos and hence the second half of the Group's financial year, it continues to be the Board's intention to hold the interim dividend for the year ending 28 February 2015 at 1.0p. 



Balance sheet

 

As at

£m

1 March

2014

2 March

2013




Goodwill

1,543.9

1,543.9

Intangible assets

193.6

129.2

Property, plant and equipment

456.7

474.9

Inventories

902.4

941.8

Financial Services loan book

524.1

474.7

Other assets

199.7

198.8


3,820.4

3,763.3




Trade and other payables

(1,162.7)

(1,168.7)

Provisions

(236.1)

(217.8)


(1,398.8)

(1,386.5)




Invested capital

2,421.6

2,376.8




Post-employment benefit obligations

(76.6)

(85.1)

Net tax assets

33.0

10.7

Forward foreign exchange contracts

(35.5)

34.1

Net cash

331.0

396.0




Net assets

2,673.5

2,732.5




 

Net assets as at 1 March 2014 were £2,673.5m, equivalent to 343p (FY13: 342p) per share excluding shares held in Group share trusts.  Invested capital as at 1 March 2014 was £2,421.6m, an increase of £44.8m versus the balance sheet as at 2 March 2013.  This increase in invested capital was principally driven as a result of an increase in the combined value of intangible assets and property, plant and equipment, which reflects the increased level of capital expenditure in the year, principally as a result of the strategic investment initiatives in both Argos and Homebase.  In addition, as previously discussed there was also an increase in the Financial Services loan book.  The increase in invested capital was partially offset by both a reduction in inventories and an increase in provisions.

 

The increase in invested capital of £44.8m was more than offset by the reduction in forward foreign exchange contracts and the reduction in net cash, the result of which was an overall decrease in net assets of £59.0m. 



Cash flow and net cash position

 

£m

52 weeks to

1 March 2014

52 weeks to

2 March 2013 Restated 1




Benchmark operating profit

113.0

93.3

Exceptional items

(41.4)

31.3

Post-employment benefit scheme administration costs 1

(1.9)

(2.1)

Amortisation of acquisition intangibles

(1.8)

(1.8)

Adjustments in respect of store impairment and property provisions

2.1

14.6

Statutory operating profit 1

70.0

135.3




Depreciation and amortisation

129.5

124.7

Movement in trade working capital

18.4

131.9

Movement in Financial Services loan book

(49.4)

(18.0)

Financing costs charged to Financial Services

3.3

3.1

Cash flow impact of restructuring charges

(28.2)

(9.0)

Pension scheme deficit recovery payments

(22.0)

(8.0)

Movement in post-employment benefit obligations 1

(13.6)

(34.2)

Other operating items

53.0

(3.7)

Cash flows from operating activities

161.0

322.1




Net capital expenditure

(173.1)

(78.7)

Taxation

(17.6)

(26.1)

Net interest

0.6

1.7

Other investments

25.2

(11.6)

Cash inflow before financing activities

(3.9)

207.4




Dividends paid

(23.9)

(8.0)

Purchase of own shares for Employee Share Trust

(37.1)

-

Net (decrease)/increase in cash and cash equivalents

(64.9)

199.4




Effect of foreign exchange rate changes

(0.1)

2.3

(Decrease)/increase in financing net cash

(65.0)

201.7




Opening financing net cash

396.0

194.3

Closing financing net cash

331.0

396.0




The Group has adopted IAS 19 (revised) during the period as set out in Note 11 on page 32. Prior year comparatives have been restated where marked 1

 

Cash flows from operating activities were £161.0m (FY13: £322.1m).  This £161.1m decrease was principally attributable to a decrease in the cash inflow from trade working capital combined with an increase in the Financial Services loan book.  There was also an increase in the outflow in respect of restructuring charges and pension scheme deficit recovery payments.  Other operating items principally relate to the adding back of the non-cash impact of the exceptional charges. 

 

Net capital expenditure was £173.1m (FY13: £78.7m), representing an increased level of investment across the Group in the previously outlined strategic initiatives of both retail businesses.  Tax paid was £17.6m (FY13: £26.1m).   Other investments inflow of £25.2m (FY13: outflow £11.6m) principally reflects the cash received in respect of the disposal of the Group's 33% shareholding in Ogalas Limited, which trades as 'home store + more' in the Republic of Ireland and the receipt of a loan repayment in respect of the Groups, now closed, Chinese joint venture.

 

Dividends paid to shareholders amounted to £23.9m (FY13: £8.0m).  A payment of £37.4m (FY13: £nil) was made to the Home Retail Group Employee Share Trust to fund the purchase of 22.5m shares.  The shares are in addition to those already held by the Trust and are needed to satisfy obligations arising from employee share schemes, a significant proportion of which relate to the save-as-you-earn plans offered to the Group's c.50,000 colleagues.  This payment was partially offset by the cash receipt in respect of the exercise of a small number of share options.

 

The Group's financing net cash position at 1 March 2014 was £331.0m, a decrease of £65.0m over the year.

 

Group pension arrangements

The Group's pension arrangements are operated principally through the Home Retail Group Pension Scheme, a defined benefit scheme, which was closed to future accrual with effect from 31 January 2013, together with the Home Retail Group Personal Pension Plan, a defined contribution scheme. 

 

The IAS 19 valuation as at 1 March 2014 for the defined benefit pension schemes was a net deficit of £76.6m (FY13: £85.1m).  The reduction in the deficit of £8.5m was driven by an increase of £58.3m in the scheme assets to £891.8m (FY13: £833.5m), partially offset by an increase of £49.8m in the present value of scheme liabilities to £968.4m (FY13: £918.6m).  The increase in the scheme liabilities was driven principally by a decrease in the assumed discount rate to 4.4% (FY13: 4.7%).

 

Group financing arrangements

The Group finances its operations through a combination of cash, property leases and through access to committed bank facilities where necessary.  The Group's net cash balances averaged approximately £516m (FY13: approximately £429m) over the year.  

 

The Group has a £165m committed unsecured borrowing facility, which is currently undrawn and which expires in March 2016.  In addition, as at 1 March 2014 the Group's Financial Services business held a net loan book balance of £524m (FY13: £475m).

 

The Group has additional liabilities through its obligations to pay rents under operating leases; the operating lease charge for the year amounted to £347.9m (FY13: £353.9m).  Total lease commitments stood at £2,627m at 1 March 2014 (FY13: £2,962m), which is a £1,703m, or 39%, reduction from the peak total lease commitments of £4,330m held at 1 March 2008.  Based upon the discounted cash flows of these expected future operating lease charges, the capitalised value of these liabilities is £2,046m (FY13: £2,362m) utilising a discount rate of 5.0% (FY13: 4.2%).

 

Counterparty credit risk management

The Group's exposure to credit risk with regard to treasury transactions is managed by dealing only with major banks and financial institutions with appropriate credit ratings and within limits set for each organisation.  Dealing activity is closely controlled and counterparty positions are monitored on a regular basis.

 

Interest rate risk management

The Group's principal objective is to manage the trade-off between the effective rate of interest and the credit risk associated with the counterparty bank or financial institution.  The annual effective rate of interest earned on the Group's net cash balances was unchanged in FY14 at 0.7% (FY13: 0.7%).  

 

Currency risk management

The Group's key objective is to minimise the effect of exchange rate volatility.  Transactional currency exposures that could significantly impact the income statement are hedged using forward purchase contracts.  Approximately one quarter of the Group's product costs are paid for in US dollars.  FY14 has seen a relatively stable period of hedged rates as noted in the table below.

 



 

US dollar hedged rates

FY14

FY13

Change

cents





First half

1.57

1.60

c.(3)

Second half

1.57

1.59

c.(2)

Full year

1.57

1.59

c.(2)





 

Share price and total shareholder return

The Group's share price ranged from a low of 121.7p to a high of 207.6p during FY14.  On 28 February 2014, the closing mid-market price was 196.2p, giving a market capitalisation of £1.6 billion.

 

Total shareholder return (the change in the value of a share including reinvested dividends) increased by 58% over the year.  This compares to an increase of 48% for the FTSE 350 General Retail index.

 

Accounting standards and use of non-GAAP measures

The Group has prepared its consolidated financial statements based on International Financial Reporting Standards for the 52 weeks ended 1 March 2014.  The basis of preparation is outlined in Note 1 to the Financial Information on page 26.

 

The Group has identified certain measures that it believes provide additional useful information on the underlying performance of the Group.  These measures are applied consistently but as they are not defined under GAAP they may not be directly comparable with other companies' adjusted measures.  The non-GAAP measures are outlined in Note 2 to the Financial Information on page 26.

 

Principal risks and uncertainties

The Group will set out the principal risks and uncertainties which could impact its performance, together with examples of mitigating activity, in its 2014 Annual Report and Financial Statements; an unedited full text excerpt will also be included in the Regulatory Information Service announcement accompanying the publication of the 2014 Annual Report.

 

The Group operates a structured risk management process which identifies and evaluates risks and uncertainties and reviews mitigating activity.  The main areas of potential risk and uncertainty centre on the execution and delivery of the Argos Transformation plan and the Homebase Renewal plan, together with the impact on sales volumes and thereby profitability in relation to economic conditions and overall consumer demand.  Other potential risks and uncertainties around sales and/or profit growth include the cost of goods and services to the Group, competitor activity, seasonal weather patterns, infrastructure development, reliance on key personnel, failure to meet customer expectations, currency exposures, product supply and other operational processes, product safety, the regulatory environment and business interruption. 

 

Annual report and annual general meeting

The 2014 Annual Report and Financial Statements is expected to be available at www.homeretailgroup.com and posted to shareholders on or around 30 May 2014.  The Annual General Meeting will be held from 11.00am on Wednesday 2 July 2014 at the Jurys Inn Milton Keynes, Midsummer Boulevard, Milton Keynes MK9 2HP.



Appendix 1.  Trading statement comparables

 


 Q1

13 weeks to

1 June 2013





Argos






Sales

£828m





Like-for-like sales change

1.9%





Net space sales change

(0.7%)





Total sales change

1.2%





Gross margin movement

Down c.75bps











Homebase






Sales

£422m





Like-for-like sales change

1.4%





Net space sales change

(1.2%)





Total sales change

0.2%





Gross margin movement

Down c.200bps












Q2

13 weeks to

31 Aug 2013


H1

26 weeks to

31 Aug 2013



Argos






Sales

£889m


£1,717m



Like-for-like sales change

2.7%


2.3%



Net space sales change

(0.3%)


(0.5%)



Total sales change

2.4%


1.8%



Gross margin movement

 Down c.50bps


 Down c.75bps









Homebase






Sales

£400m


£822m



Like-for-like sales change

11.0%


5.9%



Net space sales change

(1.7%)


(1.5%)



Total sales change

9.3%


4.4%



Gross margin movement

c.0bps


Down c.100bps










Q3

18 weeks to

4 Jan 2014


YTD

44 weeks to

4 Jan 2014



Argos






Sales

£1,808m


£3,525m



Like-for-like sales change

3.8%


3.1%



Net space sales change

(0.2%)


(0.4%)



Total sales change

3.6%


2.7%



Gross margin movement

Down c.50bps


Down c.50bps









Homebase






Sales

£464m


£1,286m



Like-for-like sales change

4.7%


5.4%



Net space sales change

(2.4%)


(1.8%)



Total sales change

2.3%


3.6%



Gross margin movement

Down c.75bps


Down c.100bps










Q4

8 weeks to

1 Mar 2014


H2

26 weeks to

1 Mar 2014


FY

52 weeks to

1 Mar 2014

Argos






Sales

£526m


£2,334m


£4,051m

Like-for-like sales change

5.2%


4.1%


3.3%

Net space sales change

0.0%


(0.1%)


(0.3%)

Total sales change

5.2%


4.0%


3.0%

Gross margin movement

c.0bps


Down c.50bps


Down c.50bps







Homebase






Sales

£203m


£667m


£1,489m

Like-for-like sales change

9.3%


5.9%


5.9%

Net space sales change

(2.4%)


(2.3%)


(1.8%)

Total sales change

6.9%


3.6%


4.1%

Gross margin movement

Down c.75bps


Down c.75bps


Down c.100bps

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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