Half Year Results - Part 1
20 October 2010
Home Retail Group plc
Half-Year Results
Home Retail Group, the UK's leading home and general merchandise retailer, today announces its results for the 26 weeks to 28 August 2010.
Operating highlights
§ A solid performance at Argos, given particularly challenging conditions for its core customers and in certain product categories
§ Further increase in Homebase's market share, representing another good performance in its peak seasonal trading period
§ Leadership in multi-channel convenience, driven by continuing strong growth in Check & Reserve and further investment initiatives in both businesses
§ Operational standards maintained or improved, while further cost actions have delivered enhanced efficiency
§ Increased investment plans progressing well, including Argos store refurbishments and the roll-out of further installation services at Homebase
Financial highlights
§ Sales down 3% to £2,720m; like-for-like sales down 6.5% at Argos and 0.8% at Homebase
§ Cash gross margin down 6% to £1,040m; gross margin rate down approximately 150 basis points at Argos and approximately 100 basis points at Homebase
§ Operating and distribution costs reduced by £39m or 4% to £947m, with positive cost productivity achieved in both businesses
§ Benchmark operating profit1 down 23% to £93m, with a decline of £25m or 32% at Argos and £3m or 6% at Homebase; Group operating margin of 3.4%
§ Benchmark profit before tax2 down 23% to £95m
§ Share buy-back of £109m year-to-date, representing 5% of issued ordinary share capital, which enhanced earnings per share by 2% in the period
§ Basic benchmark earnings per share3 down 21% to 7.7p
§ Reported profit before tax of £103m; reported earnings per share of 8.8p
§ Closing net cash position of £327m; cash generation of £22m pre buy-back
§ Interim dividend maintained at 4.7p
Terry Duddy, Chief Executive of Home Retail Group, commented:
"Homebase has completed another good performance in its peak trading period. At Argos, its core customers have been under greater pressure and there were some particularly challenging conditions in certain product categories. The Group's profit result was however supported by further excellent cost management, earnings per share were enhanced by the share buy-back programme and the interim dividend has been maintained.
"We are about to enter our busiest trading period, and whilst we are planning cautiously, we do so from a position of operational and financial strength. This position also allows us to continue to invest in both Argos and Homebase, further extending our multi-channel leadership and differentiated formats. This will maintain our competitive advantage and ensure the Group remains well-placed for the future."
1. Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.
2. Benchmark profit before tax (benchmark PBT) is defined as profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items, costs related to demerger incentive schemes, financing fair value remeasurements, financing impact on retirement 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 options and share awards).
Enquiries
Analysts and investors (Home Retail Group)
Richard Ashton Finance Director 01908 600 291
Stuart Ford Director of Investor Relations
Media (Finsbury)
Rollo Head 020 7251 3801
There will be a presentation today at 9.30 am 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 18 weeks of 29 August 2010 to 1 January 2011, will be announced by Home Retail Group on Thursday 13 January 2011.
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
|
26 weeks to £m |
28 August 2010 |
29 August 2009 |
|
|
|
|
|
Argos |
1,812.8 |
1,887.8 |
|
Homebase |
855.3 |
866.0 |
|
Financial Services |
52.2 |
51.1 |
|
Sales |
2,720.3 |
2,804.9 |
|
|
|
|
|
Cost of goods |
(1,680.1) |
(1,698.1) |
|
Gross margin |
1,040.2 |
1,106.8 |
|
Group gross margin % rate |
38.2% |
39.5% |
|
|
|
|
|
Operating and distribution costs |
(947.0) |
(986.2) |
|
|
|
|
|
Argos |
54.4 |
79.7 |
|
Homebase |
46.2 |
48.9 |
|
Financial Services |
2.5 |
2.5 |
|
Central Activities |
(9.9) |
(10.5) |
|
Benchmark operating profit |
93.2 |
120.6 |
|
Group operating margin % rate |
3.4% |
4.3% |
|
|
|
|
|
Net interest income (see below) |
1.5 |
3.0 |
|
Share of post-tax results of joint ventures and associates |
- |
(0.9) |
|
Benchmark PBT |
94.7 |
122.7 |
|
|
|
|
|
Financing fair value remeasurements |
9.2 |
5.0 |
|
Financing impact on retirement benefit balances |
2.3 |
0.1 |
|
Discount unwind on non-benchmark items |
(3.2) |
(3.3) |
|
Costs related to demerger incentive schemes |
- |
(7.7) |
|
Profit before tax |
103.0 |
116.8 |
|
|
|
|
|
Taxation |
(28.3) |
(39.1) |
|
of which: taxation attributable to benchmark PBT |
(28.9) |
(39.5) |
|
Benchmark effective tax % rate |
30.5% |
32.0% |
|
|
|
|
|
Profit for the period |
74.7 |
77.7 |
|
|
|
|
|
|
|
|
|
Basic benchmark EPS |
7.7p |
9.7p |
|
|
|
|
|
Basic EPS |
8.8p |
9.0p |
|
|
|
|
|
Weighted average number of shares for basic EPS |
849.3m |
860.9m |
|
|
|
|
|
|
|
|
|
Interim dividend |
4.7p |
4.7p |
|
|
|
|
|
|
|
|
|
Closing net cash position |
326.9 |
352.3 |
|
|
|
|
|
|
|
|
|
Net interest reconciliation: |
|
|
|
|
|
|
|
Bank deposits and other interest |
1.3 |
2.5 |
|
Financing costs charged to Financial Services |
1.6 |
1.8 |
|
Discount unwind on benchmark items |
(1.4) |
(1.3) |
|
Net interest income |
1.5 |
3.0 |
|
|
|
|
|
Financing fair value remeasurements |
9.2 |
5.0 |
|
Financing impact on retirement benefit balances |
2.3 |
0.1 |
|
Discount unwind on non-benchmark items |
(3.2) |
(3.3) |
|
Income statement net financing income |
9.8 |
4.8 |
The above tables and those throughout this announcement have been prepared in accordance with Note 1 to the Financial Information on page 22.
CHIEF EXECUTIVE'S STATEMENT
Trading environment
Spending in our markets has remained in decline. Many consumers continue to face pressures on the amount of household cash flow that is available for discretionary goods purchases, and in general there is less confidence to spend given the uncertain outlook.
Argos' core customer demographic has been more impacted by the economic conditions. Unit volumes sold and shopping frequency have both increased at Argos, with particular success in small ticket areas such as toys and homewares. However, the weakness in core customer demand has been pronounced in areas such as big ticket furniture. In addition, certain parts of the technology market such as video gaming are in product cycle decline, and in televisions, while the football World Cup improved sales, there were strong comparatives from the excellent growth achieved by Argos in the previous year.
This latest performance at Argos has still seen market share held or gained in most product categories, which remains encouraging given the prevailing conditions for its core customers. Homebase's share gain reflects its momentum, and as with Argos, the strength of the overall offering.
Strong positioning
The Group's strong positioning continues to be derived from the following:
1. Differentiated and leading formats - with Argos as a truly multi-channel, value-orientated general merchandise retailer and Homebase as a more style-led, broader home enhancement retailer
2. Highly competitive customer offering - driven by the buying scale and sourcing skills of the Group, which support excellent value and choice for customers
3. Efficient cost base - where cost reductions or increased flexibility have been achieved while still maintaining or improving operational standards
4. Infrastructure advantages - which remain difficult to replicate and with increased capital spend this year adding more multi-channel, store and format improvements
5. Financial strength - with cash flow characteristics and a balance sheet position that supports investment for growth, the buy-back programme to return excess capital to our shareholders, and the Group's dividend policy
Long-term growth
The Group remains well-placed to benefit from:
1. Expansion of product ranges and related services - such as Argos' ability to grow its ranges online beyond the main catalogue, and Homebase to extend its presence in installation services and related home enhancement areas
2. The appeal of multi-channel shopping - consumers will increasingly seek to use the power of the internet and mobile devices together with the convenience of extensive store networks for collection, with Home Retail Group being a market leader in this field
3. Leverage of scale and infrastructure - advantaged sourcing operations and shared Group infrastructure such as home delivery and financial services will continue to provide customer and cost benefits
4. Long-run return to attractive growth rates in spending - driven by the long-term trend of consumers investing in their home environment, the pace of technology and other product development
We are therefore confident in the Group's ability to deliver growth in shareholder value over the longer term by maintaining our competitive advantage as the UK's leading home and general merchandise retailer.
BUSINESS REVIEWS
Argos
|
26 weeks to £m |
28 August 2010 |
29 August 2009 |
|
|
|
|
|
Sales |
1,812.8 |
1,887.8 |
|
|
|
|
|
Benchmark operating profit |
54.4 |
79.7 |
|
|
|
|
|
Benchmark operating margin |
3.0% |
4.2% |
|
|
|
|
|
|
|
|
|
Like-for-like change in sales |
(6.5%) |
(2.1%) |
|
New space contribution to sales change |
2.5% |
3.8% |
|
Total sales change |
(4.0%) |
1.7% |
|
|
|
|
|
Gross margin movement |
Down c.150bps |
Down c.100bps |
|
|
|
|
|
Benchmark operating profit change |
(32%) |
(7%) |
|
|
|
|
|
Number of stores at period-end |
749 |
739 |
|
|
|
|
As the UK's leading general merchandise retailer, Argos provides a unique offer of choice, value and convenience.
Operational review
Expanding choice
With 20,800 lines, the Autumn/Winter 2010 catalogue has increased the choice on last year by around 1,600 lines or 8%. Of this increase, 1,400 are immediately available stocked-in lines, with the remainder being home delivery lines. In this catalogue, the distinction of 'Extra' ranges has also been removed, meaning every store can now carry products from the full stocked-in range of 16,600 lines.
The trial continues of additional choice of around 10,000 lines on the internet. Argos will be testing an order-in for store collection capability on about 4,000 of these lines. The current focus of these extended internet ranges remains in areas such as technology, white goods and toys, with some new areas such as health & beauty and children's books added for this year's peak trading period.
Argos now has 750 'WOW' deals across all major product categories in the catalogue, more than double the level last year and including some of the biggest consumer brand names. Own brands have also been used to expand choice; for example, Chad Valley is now used across 400 products and is a driver of Argos' continued market share gain in toys; and the more recent brand acquisitions of Schreiber and Hygena are now being used on 1,000 furniture lines. In home furnishings, another small ticket category where market share has been gained, new product collections have been launched such as 'Colourmatch' to coordinate 300 lines across categories and 'Everyday' as a step-up brand. In technology, Argos is retailing the Apple iPad in 83 stores and via nationwide home delivery.
Offering value
Argos is a leading value retailer and committed to maintaining its highly competitive price position. This is supported by substantial sourcing scale and infrastructure advantages, together with the benefit of Argos' low cost operating model.
Weekly internet price comparisons, now made against 16 competitors on more than 10,000 products, are used to maintain Argos' overall competitively balanced pricing position. It continues to be the case that on the 1,000 highest volume and most popular products, Argos is cheaper in about half the comparisons and the same price in around a further 30% of cases.
The Argos Value range continues to be a key driver of strong value perception. These 300 lines have grown to account for around 7% of sales volume. Extending Argos Value, as well as other own brands such as Bush, has contributed to strong market share gains in categories such as white goods, for example.
Providing convenience
Multi-channel sales grew to 44% of Argos' sales in the first half of the year. The internet represented 32% of Argos' sales, up from 28% in the comparable period. The fastest growing channel continues to be online Check & Reserve, which expanded strongly to represent 21% of all sales.
Argos is successfully transferring the attraction of Check & Reserve to mobile shopping. The application on Apple devices, launched in May 2010, has been downloaded more than 850,000 times and has already grown to represent around 1% of sales by the end of the period. Further developments are planned to extend the range of mobile applications.
Home delivery represented 21% of Argos' sales, a marginal reduction in the mix reflecting the popularity of Check & Reserve and challenging conditions in the furniture market. For the delivery of larger items via the Group's in-house and market-leading 'two-man' home delivery service, improvements to increase convenience include the trial of extended delivery times into the evening.
Refurbishing stores
Following the successful brand relaunch with the Spring/Summer 2010 catalogue and across all other publications and online, the next stage to refresh the store estate is progressing well. There were 61 stores refurbished by 28 August 2010, with this growing to around 100 in time for peak trading.
As well as reflecting the new brand identity, the store refresh programme provides significant improvements to the Argos shopping process and to product displays such as consumer electronics and jewellery. There are new versions of catalogue browsers, stock checker units, kiosks and call forward systems. Around 500 stores, or two-thirds of the estate, are expected to be refurbished over three years, with an expected average cost of approximately £100k per store. Customer feedback has been very positive, and financial metrics will be closely tracked over the peak trading period to ascertain the potential for accelerating the programme.
Financial review
Sales in the 26 weeks to 28 August 2010 declined by 4.0% in total; net new space contributed 2.5% with a net four stores opened in the period, while like-for-like sales declined by 6.5%. Video gaming and large ticket home-related areas such as furniture saw challenging conditions. Against the excellent performance last year, sales of televisions were down on a one-year basis, but remained in strong growth over two years; there was improvement in the second quarter with the benefit of the football World Cup. Computers, white goods and toys all continued to show good growth, while small ticket homewares sales were ahead.
The gross margin rate was down by approximately 150 basis points. Around 125 basis points was driven by the anticipated net impact of adverse currency and shipping rates, with the balance being the result of increased promotional activity in the second quarter. The gross margin rate is expected to be down by 50 to 100 basis points for the full year, with the hedged currency rate becoming a marginal benefit in the second half.
Total operating and distribution costs were reduced by around 5% or £25m. Total sales declined by 4%, equivalent to a potential cost reduction of around £20m. Underlying cost inflation was around 1% or £5m. There was therefore around 2% or £10m of cost productivity as a result of continued strong cost management.
Benchmark operating profit for the 26 weeks to 28 August 2010 was £54.4m, a £25.3m or 32% decline on the comparable period last year. The profit performance in Argos' peak second half of the financial year will benefit from the hedged currency rate moving to a marginal benefit compared to being adverse in this first half.
Homebase
|
26 weeks to £m |
28 August 2010 |
29 August 2009 |
|
|
|
|
|
|
|
Sales |
855.3 |
866.0 |
|
|
|
|
|
|
|
Benchmark operating profit |
46.2 |
48.9 |
|
|
|
|
|
|
|
Benchmark operating margin |
5.4% |
5.6% |
|
|
|
|
|
|
|
|
|
|
|
|
Like-for-like change in sales |
(0.8%) |
2.8% |
|
|
New space contribution to sales change |
(0.4%) |
1.6% |
|
|
Total sales change |
(1.2%) |
4.4% |
|
|
|
|
|
|
|
Gross margin movement |
Down c.100bps |
Down c.325bps |
|
|
|
|
|
|
|
Benchmark operating profit change |
(6%) |
66% |
|
|
|
|
|
|
|
Number of stores at period-end |
345 |
350 |
|
|
Of which contain a mezzanine floor |
188 |
190 |
|
|
|
|
|
|
|
Store selling space at period-end (million sq ft) |
15.8 |
16.1 |
|
|
Of which |
- garden centre area |
3.7 |
3.7 |
|
|
- mezzanine floor area |
1.9 |
1.9 |
|
|
|
|
|
Homebase continues to be well positioned as a leading home enhancement retailer.
Operational review
Developing ranges
Seasonal categories account for more than one-third of sales in the first half of the year. Despite weather conditions being slightly worse across the whole of the summer than the favourable conditions last year, seasonal ranges showed growth. The increase in sales was generated by improved ranges of garden furniture and BBQs, new selections of outdoor toys and further improvements to the customer offer across planting and 'grow your own'.
Decorating projects drive a substantial proportion of footfall to Homebase. Range reviews will continue to increase the emphasis on affordably stylish decorating. During the period a substantial space reconfiguration has been launched in 61 stores, with this planned to be in around 100 stores by the end of the year. Space has been taken from wallpaper and transferred to flooring and tiling, with the whole area being revamped. A range review in lighting has also recently been completed, introducing 450 new lines to a range of over 1,000 products.
Expanding installation services
Homebase has achieved growth in kitchens, bathrooms and bedrooms, with installation services being a key driver. While the national roll-out of the kitchen installation service was completed more than two years ago, momentum continues to build given the infrequency of the purchase and as awareness of the Homebase service grows. The bathroom installations offer was in less than one-third of stores at the start of the year, but will be nationwide in time for the New Year peak trading period. Similarly, the 'installed' fitted bedroom furniture trial has almost doubled with 188 stores having a display by the end of the period. Trials also continue to test flooring and tiling installation services.
Improving value
Homebase's overall competitive price position has seen a major improvement and customer perception of its value for money is the strongest it has ever been. Prices are automatically tracked against a number of major competitors. Based on the most recent analysis of more than 1,000 'known value items', over 80% of comparisons showed Homebase to be the same price or cheaper, and on 250 'entry price point' products 95% are the same price or cheaper at Homebase.
Among a number of initiatives that have driven improved competitive pricing and customer value perception, the 'Homebase Value' range has performed strongly since launch at the start of the year. This range of everyday essentials includes products across DIY, decorating and homewares and has recently been expanded to over 500 lines with the increase being a balance of rebranded and new lines.
Extending multi-channel
Internet sales, including the new 'Reserve & Collect' service, grew by 40% in the first half of the financial year and now accounts for 4% of sales. The value of products where customers used the online 'Stock Check' function (i.e. without going on to make a reservation) was the equivalent of a further 10% of total Homebase sales. The strong increase in unique visitors to www.homebase.co.uk was also driven by the 'Get into Gardening' customer community site, the Homebase online DIY advice centre and email marketing campaigns including those related to the highly successful Nectar partnership. Nectar continues to provide increased customer reach, new promotional mechanics and better customer segmentation to allow more targeted direct marketing programmes.
Further online initiatives are planned and include improved search and navigation, 'back in stock' notification and more online tools to aid co-ordination and visualisation. Longer term developments will explore areas such as online ideas centres including a 'get the look' picture gallery and more user generated content.
Developing the store portfolio
At the start of the year there remained around 75 of the 349 stores that had seen little or no investment for many years. The low cost 'midi refit' programme continues to successfully address uninvested stores in which a mezzanine cannot be installed, by achieving the broader home enhancement offer and improved store standards. Another 10 are being completed this financial year and plans are being considered to invest in a further 30 midi refits to address the bulk of the remainder of the uninvested stores.
Other improvements include: replacing an average of three kitchen displays and four bathroom displays per store; a new range of premium, design-led kitchens being trialled in four stores; and the BedStore&More concept being tested as a concession in three Homebase stores.
Four stores were closed during the period, with a further four stores expected to be closed in the second half of the year. A further small number of closures, relocations or downsizes will be sought as part of the ongoing management of the portfolio.
Financial review
Sales in the 26 weeks to 28 August 2010 declined by 1.2% in total; net closed space reduced sales by 0.4% with four stores closed in the period, while like-for-like sales declined by 0.8%. Against strong growth in the comparable period last year, seasonal categories were marginally ahead. 'Big ticket' sales were also ahead, with growth in kitchens, bathrooms and bedrooms. Reflecting the general market conditions, sales for the remaining categories were lower overall.
The gross margin rate was down by approximately 100 basis points. This was driven by the anticipated net impact of adverse currency and shipping rates. The gross margin rate is expected to be down approximately 50 basis points for the full year, with the hedged currency rate becoming a marginal benefit in the second half.
Total operating and distribution costs were reduced by around 3% or £10m. Total sales declined by 1.2%, equivalent to a potential cost reduction of around £5m. Underlying cost inflation was around 1% or £5m. There was therefore around 3% or £10m of cost productivity as a result of continued strong cost management.
Benchmark operating profit for the 26 weeks to 28 August 2010 was £46.2m, a £2.7m or 6% decline on the comparable period last year.
Financial Services
|
26 weeks to £m |
28 August 2010 |
29 August 2009 |
|
|
|
|
|
|
|
Sales |
52.2 |
51.1 |
|
|
|
|
|
|
|
Benchmark operating profit before financing costs |
4.1 |
4.3 |
|
|
Financing costs |
(1.6) |
(1.8) |
|
|
Benchmark operating profit |
2.5 |
2.5 |
|
|
|
|
|
|
|
As at |
28 August 2010 |
27 February 2010 |
29 August 2009 |
|
|
|
|
|
|
Store card gross receivables |
476 |
497 |
477 |
|
Personal loans gross receivables |
- |
- |
2 |
|
Total gross receivables |
476 |
497 |
479 |
|
Provision |
(69) |
(68) |
(74) |
|
Net receivables |
407 |
429 |
405 |
|
|
|
|
|
|
Provision % of gross receivables |
14.6% |
13.6% |
15.4% |
|
|
|
|
|
Financial Services works in conjunction with Argos and Homebase to provide their customers with the most appropriate credit offers to drive product sales, and to maximise profit from the transaction for Home Retail Group.
Operational review
The in-house store card operations drove £278m of Group retail sales, up 8% on the comparable period. The proportion of promotional credit sales continued to represent 76% of all sales placed on the store cards, where the offer of 'buy now, pay later' products remains a key enabler of sales in 'big ticket' categories. In addition to credit sales placed on the Group's own store cards, credit offers for purchases at Homebase of typically over £3,000 are provided through product loans from a third party provider. Including these product loans, total sales penetration increased to 10.0%.
The increase in sales and penetration is a result of successful additional credit offers in specific product categories such as mobiles and TVs and other tactical 'buy now, pay later' offer periods. While active accounts have increased, the number of new accounts added in the period reduced due to further amendments to credit score cut-offs resulting in lower acceptance rates.
The automated in-store applications process completed its roll-out during the period and customer use of the new online account management tool is running ahead of expectations.
Financial review
Store card gross receivables were broadly flat year-on-year. Delinquency rates improved versus the comparable period, resulting in a reduced bad debt charge. Financing costs were also marginally lower, with this internal recharge being based upon UK base rates. A corresponding impact is recognised in Group net interest income.
The benchmark operating result of £2.5m for the 26 weeks to 28 August 2010 reflects the financial return on the revolving (i.e. interest-bearing) element of receivables, as promotional credit products are recharged to Argos and Homebase at cost. The cost advantage of this internal arrangement versus third-party credit provision is therefore a benefit within the Argos and Homebase benchmark operating profits.
GROUP FINANCIAL REVIEW
Sales and benchmark operating profit
Group sales were 3% lower at £2,720.3m (2009: £2,804.9m) while Group benchmark operating profit declined 23% to £93.2m (2009: £120.6m). Within this, the drivers of the Argos, Homebase and Financial Services performance are analysed as part of the preceding business reviews.
Central Activities represents the cost of central corporate functions and the investment costs of new development opportunities. Costs for the period were 6% lower at £9.9m (2009: £10.5m). The HomeStore&More trial has now expanded to five stores in the UK. By the end of the year the BedStore&More concept will be in test at four of these stores and also as a concession within three Homebase stores. These trials will continue to assess the potential opportunity for the development of these formats in the UK. The Irish operations in which Home Retail Group has a strategic investment has six stores with a further two opening in the coming months.
Net interest income
Net interest income reduced to £1.5m (2009: £3.0m). Within this, bank deposits and other interest income for the period reduced to £1.3m (2009: £2.5m). This was a result of the effective interest rate earned being lower than the same period last year, together with the impact of the buy-back programme on the Group's net cash position.
Financing costs charged within Financial Services' benchmark operating profit saw the corresponding credit within net interest income reduce to £1.6m (2009: £1.8m). 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 £1.4m (2009: £1.3m). This arises from the accounting treatment whereby provisions for expected future liabilities are required to be discounted back to 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 joint ventures and associates
These amounted to £nil (2009: loss of £0.9m). The movement is due principally to lower costs incurred by the joint venture with Barclays Bank PLC in regard to the Argos credit card. The decision to no longer open new accounts was taken a year ago, and the Group's interest in the joint venture has been sold to Barclays Bank PLC who will now be fully responsible for the future management of the card accounts.
Benchmark profit before tax
Benchmark profit before tax declined 23% to £94.7m (2009: £122.7m).
Financing fair value remeasurements
Certain foreign exchange movements as well as changes in the fair value of certain financial instruments are recognised in the income statement within net financing income. These amounted to a net gain of £9.2m (2009: £5.0m), which arises principally as a result of translation differences on subsidiary cash balances. The gain reflects the strengthening of sterling against other currencies during the period. Equal and opposite adjustments to these 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 retirement benefit obligations
The credit through net financing income in respect of the expected return on retirement benefit assets net of the interest expense on retirement benefit liabilities was £2.3m (2009: £0.1m). The current service cost, which the Group considers a fairer reflection of the cost of providing retirement benefits, is already reflected in benchmark operating profit.
Discount unwind on non‑benchmark items
An expense of £3.2m (2009: £3.3m) within net financing income relates to the discount unwind on onerous lease provisions. As these provisions were items previously excluded from benchmark profit before tax, the discount unwind has also been excluded from benchmark profit before tax. As set out within the net interest income review above, these non-cash charges arise from the accounting treatment whereby provisions for expected future liabilities are discounted back to current value.
Profit before tax
The reported profit before tax for the period was £103.0m (2009: £116.8m).
Taxation
Taxation attributable to benchmark PBT was £28.9m (2009: £39.5m), representing an estimated effective tax rate for the full financial year (excluding joint ventures and associates) of 30.5% (52 weeks to 27 February 2010: 31.0%). The reduction in the effective rate largely reflects a lower amount of disallowable expenditure attributable to the successful completion of a number of tax efficiency projects.
Taxation attributable to non-benchmark items amounted to a credit of £0.6m (2009: £0.4m), reflecting those items which qualify for tax relief.
The total tax expense for the period was therefore £28.3m (2009: £39.1m).
Number of shares and earnings per share
The number of shares for the purpose of calculating basic earnings per share (EPS) was 849.3m (2009: 860.9m). The weighted average number of issued ordinary shares reduced by 17.8m to 859.6m (2009: 877.4m), reflecting the weighted impact of the Group's share buy-back programme which purchased 44.9m shares during the period. The adjustment for shares held in Group share trusts net of vested but unexercised options and share awards was 10.3m (2009: 16.5m).
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 4.5m (2009: 10.2m) to 853.8m (2009: 871.1m).
Basic benchmark EPS is 7.7p (2009: 9.7p), with diluted benchmark EPS of 7.7p (2009: 9.6p). Reported basic EPS is 8.8p (2009: 9.0p), with reported diluted EPS being 8.7p (2009: 8.9p).
Dividends
Home Retail Group's dividend policy remains to target dividend cover over the medium term of around two times, based on full-year basic benchmark EPS. The dividend for the prior year was maintained at 14.7p, representing cover of 1.59 times.
While the outlook for earnings remains challenging, the Group has maintained a strong cash position. An interim dividend held at 4.7p is therefore being announced today. This will be paid on 19 January 2011 to shareholders on the register at the close of business on 12 November 2010 (an ex-dividend date of 10 November 2010).
Cash flow and closing net cash position
|
26 weeks to £m |
28 August 2010 |
29 August 2009 |
|
|
|
|
|
Benchmark operating profit |
93.2 |
120.6 |
|
Costs related to demerger incentive schemes |
- |
(7.7) |
|
Statutory operating profit |
93.2 |
112.9 |
|
|
|
|
|
Depreciation and amortisation |
64.6 |
64.0 |
|
Movement in working capital |
36.0 |
56.8 |
|
Financing costs charged to Financial Services |
1.6 |
1.8 |
|
Cash flow impact of FY 09 restructuring charge |
(4.2) |
(11.4) |
|
Other operating items |
(7.6) |
14.2 |
|
Cash flows from operating activities |
183.6 |
238.3 |
|
|
|
|
|
|
|
|
|
Net capital expenditure |
(65.2) |
(32.2) |
|
Brand acquisitions |
- |
(0.4) |
|
Taxation |
(3.8) |
(53.0) |
|
Net interest |
1.6 |
5.6 |
|
Net movement of term deposits |
- |
75.0 |
|
Loan to joint venture |
(0.4) |
(2.4) |
|
Cash inflow before financing activities |
115.8 |
230.9 |
|
|
|
|
|
Dividends paid |
(85.8) |
(85.7) |
|
Share buy-back programme |
(109.1) |
- |
|
Purchase of own shares for Employee Share Trust |
(4.5) |
(1.7) |
|
Other financing activities |
0.2 |
0.1 |
|
Net (decrease)/increase in cash and cash equivalents |
(83.4) |
143.6 |
|
|
|
|
|
Add back: net movement of term deposits |
- |
(75.0) |
|
Effect of foreign exchange rate changes |
(3.7) |
(0.7) |
|
(Decrease)/increase in financing net cash |
(87.1) |
67.9 |
|
|
|
|
|
Opening financing net cash |
414.0 |
284.4 |
|
Closing financing net cash |
326.9 |
352.3 |
|
|
|
|
|
|
|
|
|
Increase in financing net cash before share buy-back |
22.0 |
67.9 |
|
|
|
|
Cash flows from operating activities were £183.6m (2009: £238.3m). This £54.7m reduction was driven by lower operating profit, a reduced working capital inflow due to the unwind of some timing differences in respect of the previous year-end balance sheet date, and the cash flow impact of additional pension scheme payments of £14m.
Net capital expenditure was £65.2m (2009: £32.2m), reflecting increased investment plans across the Group, together with the purchase of the freehold for the Group's central office building. Tax paid was £3.8m (2009: £53.0m), benefiting from a £33m tax repayment regarding non-benchmark tax credits taken previously in relation to the successful completion of a number of tax efficiency projects. Dividends paid to shareholders amounted to £85.8m (2009: £85.7m), and £4.5m (2009: £1.7m) was used to purchase shares for the Employee Share Trust.
The share buy-back programme amounted to £109.1m (2009: nil). The increase in financing net cash before the share buy-back was £22.0m (2009: £67.9m).
The Group's financing net cash position at 28 August 2010 was £326.9m, a decrease of £87.1m in the half. The financing net cash position included a £50.0m term deposit which was purchased in March 2010 and matured after the balance sheet date in September 2010.
Balance sheet
|
As at £m |
28 August 2010 |
27 February 2010 |
29 August 2009 |
|
|
|
|
|
|
Goodwill |
1,541.0 |
1,541.0 |
1,541.0 |
|
Other intangible assets |
92.0 |
92.7 |
99.2 |
|
Property, plant and equipment |
523.9 |
525.1 |
530.4 |
|
Inventories |
1,013.5 |
935.4 |
1,047.8 |
|
Instalment receivables |
407.4 |
429.4 |
405.4 |
|
Other assets |
169.1 |
178.1 |
204.2 |
|
|
3,746.9 |
3,701.7 |
3,828.0 |
|
|
|
|
|
|
Trade and other payables |
(1,184.2) |
(1,104.9) |
(1,181.7) |
|
Provisions |
(216.3) |
(219.1) |
(241.6) |
|
|
(1,400.5) |
(1,324.0) |
(1,423.3) |
|
|
|
|
|
|
Invested capital |
2,346.4 |
2,377.7 |
2,404.7 |
|
|
|
|
|
|
Retirement benefit obligations |
(71.4) |
(24.9) |
(99.4) |
|
Net tax assets |
57.4 |
52.1 |
72.3 |
|
Forward foreign exchange contracts |
(3.0) |
47.7 |
(37.3) |
|
Financing net cash |
326.9 |
414.0 |
352.3 |
|
|
|
|
|
|
Reported net assets |
2,656.3 |
2,866.6 |
2,692.6 |
Reported net assets as at 28 August 2010 were £2,656.3m, equivalent to 325p per share excluding shares held in the Employee Share Trust. The reduction in net assets versus the 27 February 2010 year-end balance sheet was £210.3m. Within this, invested capital reduced by £31.3m, driven by the working capital reduction of £36.0m. The reduction in net assets was therefore driven principally by the £46.5m movement in retirement benefit obligations, the £50.7m movement in forward foreign exchange contracts and the £87.1m reduction in financing net cash.
Retirement benefit obligations
Pension arrangements are operated principally through the Home Retail Group Pension Scheme, a defined benefit scheme, together with the Home Retail Group Stakeholder Pension Scheme, a defined contribution scheme.
The IAS 19 valuation as at 28 August 2010 for the defined benefit pension plans was a net deficit of £71.4m (27 February 2010: £24.9m). Plan assets increased to £700.8m (27 February 2010: £667.7m), driven by higher market values and additional contributions as part of the increases to funding agreed with the pension trustee following the previous triennial actuarial valuation. The present value of plan liabilities increased to £772.2m (27 February 2010: £692.6m), driven principally by a reduction in the assumed discount rate to 5.2% (27 February 2010: 6.0%).
Liquidity and funding
The Group maintains liquidity by arranging funding ahead of requirements and through access to committed facilities. At 28 August 2010, the Group had £700m of undrawn committed borrowing facilities, £685m of which does not expire until 2013. These facilities are in place to enable the Group to finance its working capital requirements and for general corporate purposes. The Group's net cash position is expected to continue to be sufficient to meet its financing needs in the foreseeable future.
Group financing arrangements
The Group finances its operations through a combination of retained profits and property leases, with borrowing facilities being available if required. The Group's net cash balances averaged approximately £500m over the period; the Group has not drawn upon its committed borrowing facilities at any point.
The Group has significant liabilities through its obligations to pay rents under operating leases; the operating lease rental expense for the last 12 months amounted to £376.6m. The capitalised value of these liabilities is £3,013m based upon an eight times multiple of the operating lease charge, or £3,130m based upon discounted cash flows of the expected future operating lease charges. In common with credit rating agencies and lenders, the Group treats its lease liabilities as debt when evaluating financial risk. Based upon Group EBITDAR for the last 12 months of £768.5m, fixed charge cover is 2.1x and the ratio to adjusted net debt with leases capitalised at eight times is 3.5x.
Capital structure management and share buy-back programme
The Board conducts regular reviews of the Group's capital structure. These reviews take account of the current and future trading environment, the Group's cash position, its significant lease obligations, maintaining a capital structure equivalent to a potential investment grade rating, continuing to invest appropriately in the business and maintaining flexibility in an uncertain economic environment.
On 28 April 2010, it was announced that the Group anticipated over the following 12 months to return to shareholders up to £150m of capital through a share buy-back programme. To date, 44,910,000 shares have been purchased at an average price of 241p and a net cash cost of £109.1m. The purchased shares represent 5.1% of the 877,445,001 issued ordinary shares at the 27 February 2010 balance sheet date. The remainder of the programme is expected to be completed by the end of the current financial year.
Accounting standards and use of non-GAAP measures
The Group has prepared its consolidated financial statements under International Financial Reporting Standards for the 26 weeks ended 28 August 2010. The basis of preparation is outlined in Note 1 to the Financial Information on page 22.
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 23.
Principal risks and uncertainties
The Group set out in its 2010 Annual Report and Financial Statements the principal risks and uncertainties which could impact its performance; these remain unchanged since its publication. The Group operates a structured risk management process which identifies and evaluates risks and uncertainties and reviews mitigation activity.
On a short-term forward-looking basis over the remainder of the financial year, the main area of potential risk and uncertainty centres on 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, currency exposures, the regulatory environment, product supply and other operational processes, infrastructure development, product safety, reliance on key personnel and business interruption. These risks, together with examples of mitigating activity, are set out in more detail in the 2010 Annual Report and Financial Statements on pages 32 and 33.
Appendix 1. Trading statement information as reported
|
Financial year 2009/10 |
|
Financial year 2010/11 |
|||||||
|
|
Q1 13 weeks to 30 May 2009 |
|
|
|
|
|
Q1 13 weeks to 29 May 2010 |
|
|
|
Argos |
|
|
|
|
|
|
|
|
|
|
Sales |
£937m |
|
|
|
|
|
£889m |
|
|
|
Like-for-like change in sales |
(2.8%) |
|
|
|
|
|
(8.1%) |
|
|
|
Net new space contribution |
3.7% |
|
|
|
|
|
2.9% |
|
|
|
Total sales change |
0.9% |
|
|
|
|
|
(5.2%) |
|
|
|
Gross margin movement |
Down c.75bps |
|
|
|
|
|
Down c.150bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebase |
|
|
|
|
|
|
|
|
|
|
Sales |
£465m |
|
|
|
|
|
£459m |
|
|
|
Like-for-like change in sales |
3.8% |
|
|
|
|
|
(1.4%) |
|
|
|
Net new space contribution |
2.0% |
|
|
|
|
|
0.0% |
|
|
|
Total sales change |
5.8% |
|
|
|
|
|
(1.4%) |
|
|
|
Gross margin movement |
Down c.250bps |
|
|
|
|
|
Down c.150bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 13 weeks to 29 Aug 2009 |
|
H1 26 weeks to 29 Aug 2009 |
|
|
|
Q2 13 weeks to 28 Aug 2010 |
|
H1 26 weeks to 28 Aug 2010 |
|
Argos |
|
|
|
|
|
|
|
|
|
|
Sales |
£951m |
|
£1,888m |
|
|
|
£924m |
|
£1,813m |
|
Like-for-like change in sales |
(1.4%) |
|
(2.1%) |
|
|
|
(5.0%) |
|
(6.5%) |
|
Net new space contribution |
3.9% |
|
3.8% |
|
|
|
2.2% |
|
2.5% |
|
Total sales change |
2.5% |
|
1.7% |
|
|
|
(2.8%) |
|
(4.0%) |
|
Gross margin movement |
Down c.125bps |
|
Down c.100bps |
|
|
|
Down c.125bps |
|
Down c.150bps |
|
|
|
|
|
|
|
|
|
|
|
|
Homebase |
|
|
|
|
|
|
|
|
|
|
Sales |
£401m |
|
£866m |
|
|
|
£396m |
|
£855m |
|
Like-for-like change in sales |
1.6% |
|
2.8% |
|
|
|
0.0% |
|
(0.8%) |
|
Net new space contribution |
1.3% |
|
1.6% |
|
|
|
(1.1%) |
|
(0.4%) |
|
Total sales change |
2.9% |
|
4.4% |
|
|
|
(1.1%) |
|
(1.2%) |
|
Gross margin movement |
Down c.400bps |
|
Down c.325bps |
|
|
|
Down c.75bps |
|
Down c.100bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 18 weeks to 2 Jan 2010 |
|
YTD 44 weeks to 2 Jan 2010 |
|
|
|
|
|
|
|
Argos |
|
|
|
|
|
|
|
|
|
|
Sales |
£1,922m |
|
£3,810m |
|
|
|
|
|
|
|
Like-for-like change in sales |
0.1% |
|
(1.0%) |
|
|
|
|
|
|
|
Net new space contribution |
3.8% |
|
3.8% |
|
|
|
|
|
|
|
Total sales change |
3.9% |
|
2.8% |
|
|
|
|
|
|
|
Gross margin movement |
Down c.250bps |
|
Down c.175bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebase |
|
|
|
|
|
|
|
|
|
|
Sales |
£501m |
|
£1,367m |
|
|
|
|
|
|
|
Like-for-like change in sales |
4.0% |
|
3.2% |
|
|
|
|
|
|
|
Net new space contribution |
0.6% |
|
1.3% |
|
|
|
|
|
|
|
Total sales change |
4.6% |
|
4.5% |
|
|
|
|
|
|
|
Gross margin movement |
Down c.375bps |
|
Down c.350bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 8 weeks to 27 Feb 2010 |
|
H2 26 weeks to 27 Feb 2010 |
|
FY 52 weeks to 27 Feb 2010 |
|
|
|
|
|
Argos |
|
|
|
|
|
|
|
|
|
|
Sales |
£537m |
|
£2,459m |
|
£4,347m |
|
|
|
|
|
Like-for-like change in sales |
(9.4%) |
|
(2.2%) |
|
(2.1%) |
|
|
|
|
|
Net new space contribution |
2.8% |
|
3.6% |
|
3.6% |
|
|
|
|
|
Total sales change |
(6.6%) |
|
1.4% |
|
1.5% |
|
|
|
|
|
Gross margin movement |
Down c.100bps |
|
Down c.225bps |
|
Down c.175bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebase |
|
|
|
|
|
|
|
|
|
|
Sales |
£205m |
|
£706m |
|
£1,572m |
|
|
|
|
|
Like-for-like change in sales |
(0.6%) |
|
2.6% |
|
2.7% |
|
|
|
|
|
Net new space contribution |
0.6% |
|
0.6% |
|
1.2% |
|
|
|
|
|
Total sales change |
0.0% |
|
3.2% |
|
3.9% |
|
|
|
|
|
Gross margin movement |
Down c.425bps |
|
Down c.400bps |
|
Down c.350bps |
|
|
|
|
This information is provided by RNS
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