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Home Retail Grp Plc (HOME)

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Wednesday 23 October, 2013

Home Retail Grp Plc

Half Year Results - Part 1

RNS Number : 1471R
Home Retail Group Plc
23 October 2013
 



23 October 2013

 

 

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 31 August 2013.

 

Operating highlights

§ Good first half, with both businesses delivering a positive like-for-like sales performance

§ Argos Transformation plan progress:

-     Internet penetration increased to 43% of Argos' total sales, with mobile commerce growing 124% to account for 16% of total sales

-     Launched both new and improved smartphone and tablet apps

-     Reached eight million customer registrations

-     Expanded 'hub & spoke' trial to around 50 stores

§ Homebase Renewal plan progress:

-     Completed a further five store refits

-     Launched a next or named day delivery proposition

-     Grew multi-channel sales by 28%

-     Achieved further market share gains

 

Financial highlights

§ Sales up 3% to £2,596m; like-for-like sales up 2.3% at Argos, and up 5.9% at Homebase   

§ Cash gross margin up 1% to £962m

§ Operating and distribution costs held broadly flat at £936m

§ Benchmark operating profit1 up 40% to £26.4m

§ Benchmark profit before tax2 up 53% to £27.4m

§ Basic benchmark earnings per share3 up 79% to 2.5p

§ Reported profit before tax of £14.2m; reported basic earnings per share of 1.6p

§ Cash generation in the period of £16m with closing net cash of £412m

§ Interim dividend of 1.0p (2012: 1.0p)

 

Terry Duddy, Chief Executive of Home Retail Group, said:

 

"The Group has had a good first half with both businesses delivering successive quarters of positive sales performance and market share gains.  Argos performed well and recorded its fifth consecutive quarter of like-for-like sales growth.  It has continued to grow its internet sales, powered by the growth in mobile commerce which now accounts for 16% of Argos' total sales.  Homebase traded strongly through its peak trading period, recording its best half of like-for-like sales performance since acquisition in 2002, and has now achieved 18 consecutive quarters of market share growth in the shed sector.

 

We continued to manage costs well, taking action to mitigate cost growth from sales related increases, underlying cost inflation and investment in strategic initiatives.  As a result, we were able to hold costs broadly flat year on year.  Cash performance was also good with the Group generating £16m of cash in the period to close the half with net cash of £412m, which supports the Group's ability to fund the investment plans in both businesses.

 

Both Argos and Homebase are making good progress with their investment plans, and remain on track to deliver their long term strategic objectives.  The Argos transformation is well underway, including the introduction of new smartphone and tablet apps, the extension of the 'hub & spoke' trial, the launch of a digital Christmas gift guide and the development of digital concept stores.  Homebase has completed five store refits, and plans to complete around 10 further refits in the current financial year.  These refitted stores are performing in line with our expectations.  In addition, the introduction of improved delivery options has supported multi-channel sales participation, which grew by 28%. 

 

As we look ahead to the second half of the year, we expect consumer spending will remain subdued, and whilst some macroeconomic indicators are improving, these have not yet led to an increase in household disposable income.  Overall we are making good progress and are in excellent operational shape as we approach the key Christmas trading period."

 

 

 

1.  Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, retirement benefit scheme administration costs, store impairment and onerous lease charges or releases and exceptional items.

 

2.  Benchmark profit before tax (benchmark PBT) is defined as profit before amortisation of acquisition intangibles, retirement benefit scheme administration costs, store impairment and onerous lease charges or releases, exceptional items, 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 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 Auditorium, 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 from 1 September 2013 to

4 January 2014, will be announced by Home Retail Group on Thursday 16 January 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

 

26 weeks to

£m

31 August

2013

1 September

2012 Restated1




Argos

1,716.8

1,686.4

Homebase

822.3

787.3

Financial Services

57.1

57.4

Sales

2,596.2

2,531.1




Cost of goods

(1,634.1)

(1,579.5)

Gross margin

962.1

951.6




Operating and distribution costs

(935.7)

(932.8)




Homebase

27.2

24.5

Financial Services

3.1

2.9

Central Activities

(11.6)

(11.9)

Benchmark operating profit

26.4

18.8

Group operating margin % rate

1.0%

0.7%




Net interest income (see below)

1.0

1.7

Share of post-tax results of associates

-

(2.6)

Benchmark PBT

27.4

17.9




Amortisation of acquisition intangibles

(0.9)

(0.9)

Retirement benefit scheme administration costs 1

(1.0)

(1.0)

Net onerous lease provision releases

5.4

-

Exceptional items

(12.6)

35.0

Financing fair value remeasurements

1.2

1.3

Financing impact on retirement benefit obligations 1

(1.8)

(2.0)

Discount unwind on non-benchmark items

(3.5)

(3.6)

Profit before tax 1

14.2

46.7




Taxation 1

(1.7)

(13.6)

   of which: taxation attributable to benchmark PBT

(7.8)

(6.5)

   Benchmark effective tax % rate

28.5%

31.7%




Profit for the period 1

12.5

33.1







Basic benchmark EPS

2.5p

1.4p




Basic EPS 1

1.6p

4.1p




Weighted average number of shares for basic EPS

800.0m

800.4m







Interim dividend

1.0p

1.0p







Closing net cash position

412.2

316.4




Net interest reconciliation:






Bank deposits and other interest

0.1

0.7

Financing costs charged to Financial Services

1.5

1.6

Discount unwind on benchmark items

(0.6)

(0.6)

Net interest income

1.0

1.7




Financing fair value remeasurements

1.2

1.3

Financing impact on retirement benefit obligations 1

(1.8)

(2.0)

Discount unwind on non-benchmark items

(3.5)

(3.6)

Income statement net financing charge 1

(3.1)

(2.6)

 

The above tables and those throughout this announcement have been prepared in accordance with Note 1 to the Financial Information on page 22.  The Group has adopted IAS 19 (revised) during the period as set out in Note 18 on page 32. Prior year comparatives have been restated where marked 1.  The restatement does not impact on Benchmark PBT.



OPERATING COMPANY REVIEWS

 

Argos

 

26 weeks to

£m

31 August 2013

1 September 2012




Sales

1,716.8

1,686.4




Benchmark operating profit

7.7

3.3




Benchmark operating margin

0.4%

0.2%







Like-for-like sales change

2.3%

0.6%

Net space sales change

(0.5%)

0.0%

Total sales change

1.8%

0.6%




Gross margin movement

Down c.75bps

Down c.50bps




Benchmark operating profit change

136%

(3%)




Number of stores at period-end

737

739




 

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.  It is underpinned by a three-year investment programme.

 

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 leaner and more flexible cost base.

 

Argos is making good early progress on the Transformation programme, in both its trading performance and in building new capabilities.  It is confident of achieving its FY14 Transformation plan milestones and is on track to hit its longer-term goals.

 
Operational review

 

Reposition Argos' channels for a digital future

Multi-channel sales continue to grow and now represent £899m or 52% of Argos' total sales, up from 51% last year.  Total internet sales, including Check & Reserve, grew to reach 43% of Argos' total sales.  Sales from both smartphones and tablets grew even more rapidly and now represent 16% of sales.  The smartphone and tablet apps for both Apple and Android, have had around 1.6 million downloads since their launch, which has led to website visits from mobile devices growing by over 70%, and mobile sales growing by 124% versus last year.

 

Underlying its strong digital performance, Argos has improved its digital offer across both online and mobile commerce.  Argos introduced a new Android tablet app, and re-launched the apps for the Android smartphone, iPhone and iPad.  Further developments during the second half of the current financial year will include increased consistency in the customer journey across all digital channels with common features such as '1 click' reservation, single customer log-on and a persistent shopping trolley across all digital channels.  The mobile apps will also be transactional, which will enable customers to order and pay for products for home delivery as well as reserve products for store collection.

 

Argos has launched its Christmas gift guide catalogue and will also shortly introduce a digital version which will contain richer content and an innovative and intuitive shopping journey.  The catalogue version of the gift guide has also been enriched using augmented reality to create a more interactive and engaging customer experience.

 

The overall Transformation plan, and particularly digital improvement, is dependent on an ambitious technology agenda.  During the first half Argos entered into a contract with Accenture for both the development and the ongoing maintenance of its systems, and Argos has successfully managed the transition to this new contract arrangement.

 

With around 90% of all sales still involving a store, the Argos store estate remains a key component of the Argos multi-channel model.  Argos has developed a digital concept store that will enable it to test a number of new digital and store innovations such as fast-track collection for customers who have pre-paid for items online or via a mobile device.  The digital concept stores will also remove the in-store laminated catalogue, paper, pens and stock check devices, replacing them instead with tablets. They will also offer a new and more flexible way to merchandise product and support supplier promotions.  Additionally, these stores will trial increased levels of customer support, including specially trained members of staff equipped with technology to support customers through their journey.

 

Provide more product choice, available to customers faster

Argos is well positioned through both its store estate and supply chain to cost-effectively offer a wide range of products for rapid fulfilment.  Central to Argos' fulfilment advantage will be the innovative use of its store portfolio together with its replenishment capabilities, in a 'hub & spoke' distribution model.  The hubs will have larger than average stock rooms, which can therefore hold a substantially wider range of product.  By using delivery vans to distribute this product to a network of nearby spoke stores, customers of these stores will effectively have access to this wider product range within hours.  This concept has been tested in the North East since January, and this trial has now been extended into around 50 stores enabling both the operational and customer offer aspects of this new network to be tested over the peak trading period.

 

Argos and eBay have also announced a trial of a UK collection service, enabling shoppers at about 50 selected eBay merchants to pick up products from 150 Argos stores throughout the UK. This trial will assess the opportunity for Argos to provide fulfilment for eBay's merchants, including the operational requirements, attractiveness to sellers and consumers, and opportunity for increased customer footfall.

 

Develop a customer offer that has universal appeal 

Argos continues to extend its product range and build category authority, with around 10 new brands, such as Denby and Stoves, introduced in the first half and around a further 15 new brands planned to be added from January 2014.  Argos is also extending its product range with a further 6,000 new lines becoming available during the Christmas peak.

 

Tablets continued to be a strong driver of growth in the first half of the financial year, with Argos' wide range of competitively priced products delivering a strong offer in a competitive market.  Argos expect the tablet market to continue to see strong growth throughout the forthcoming peak trading period and have recently announced the launch of a new own brand tablet, 'MyTablet', in the Christmas gift guide, which will retail below the £100 price point.

 

Argos' convenience credentials remain strong with a range of white goods available for in-store collection.  With about 450 stores stocking this offer, it is proving very popular with customers.  An extended range of white goods, which is available online, has also performed strongly.

 

Argos has commenced the implementation of a new dynamic price optimisation tool in key categories that will automate pricing recommendations, thereby enabling faster, and more data driven, pricing decisions.  Meanwhile, Argos continues to maintain a competitive price position on its highest volume lines, which are measured weekly using internet price comparisons.

 

Argos continues to invest in getting to know its customers better, improving customer data and analytics, which enables better targeting of its offer.  Argos now has a database that has reached eight million registered customers and during the peak season Argos expects to send around 100 million customer emails with bespoke product recommendations, including around 25 campaigns each week triggered from actual online browsing behaviour.

 

Argos has also improved customer service through the addition of a new sales assistance role in stores, improved call management in the contact centre, and higher rates of on-time home delivery.

 

Operate a leaner and more flexible cost base 

Argos is a leading value retailer and remains highly price competitive, supported by the Group's sourcing scale and infrastructure advantages, together with the benefit of Argos' low-cost operating model.  A continued focus on keeping the operating cost base lean and flexible has resulted in further cost productivity benefits being achieved in the first half of the current financial year. 

 

Over the next five years, Argos has around 275 store lease renewals or break clauses due.  Using this flexibility, Argos continues to focus on improving its store network by relocating or closing some older stores and opening some new stores if attractive sites are identified.  This ongoing review of its store portfolio will result in Argos closing around a net 5 stores in the current financial year.  Argos continues to negotiate for the addition of break clauses, where one does not currently exist, during the store lease renewal process and by the end of FY18, Argos expects to have around 75% of its store estate with lease terms of five years or less.

 

Financial Review

 

Total sales in the 26 weeks to 31 August 2013 increased by 1.8% to £1,717m. Net space sales change reduced sales by 0.5% with the store portfolio remaining at 737. Like-for-like sales increased by 2.3%.  Electrical products continued to deliver sales growth driven by strong growth in tablets and white goods, which together with strong sales of seasonal products in the second quarter, more than offset declines in furniture and homewares. 

 

The gross margin rate was down by approximately 75 basis points.  This was principally driven by an adverse sales mix impact, resulting from the improved performance in margin dilutive electrical products.

 

Total operating and distribution costs decreased by £5m with increases from the impact of increased sales, underlying cost inflation and revenue investment in strategic initiatives being more than offset by further cost savings.  Benchmark operating profit was £7.7m; a £4.4m or 136% increase on the comparable period last year.

 


Homebase

 

26 weeks to

£m

31 August

2013

1 September

2012




Sales

822.3

787.3




Benchmark operating profit

27.2

24.5




Benchmark operating margin

3.3%

3.1%







Like-for-like sales change

5.9%

(6.2%)

Net space sales change

(1.5%)

0.0%

Total sales change

4.4%

(6.2%)




Gross margin movement

Down c.100bps

Up c.150bps




Benchmark operating profit change

11%

(18%)

 



Number of stores at period-end

333

340

Of which contain a mezzanine floor

186

187




Store selling space at period-end (million sq ft)

15.3

15.6

Of which

- garden centre area

3.5

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.

 

Operational review

 

Store estate and format development

Homebase has continued to trial its dramatically different store format, supported by increased levels of customer service, which creates a shopping experience where customers find ideas and inspiration for their homes and gardens.  Following the evolution of the new store proposition in Ruislip and Solihull last year, five additional stores, including Battersea, were refitted in the period, with around a further ten planned for completion in the second half of the financial year.  Whilst it is still early days for these stores, they are trading in line with expectations and there has been a high level of positive customer response to the refits.  Each of the five stores includes a Habitat concession, providing further differentiation within the sheds market.

 

As part of Homebase's ongoing management of the store portfolio, a further three stores were closed in the period.  This level of store closures is consistent with its plans at the start of the year. Homebase expect to close a total of around 10 stores in the current financial year and will continue to examine the opportunity for store closures, relocations or downsizes as either leases expire or lease break clauses occur.  Over the next five years, Homebase has around 70 store lease renewals or break clauses due.

 

In Ireland, following the recent conclusion of the examinership process, two stores have been closed since the half year date and rent reductions have been achieved across the remaining 13 Irish stores.

 

Multi-channel offer

Multi-channel sales participation has grown by 28% year-on-year to represent 6% of Homebase's total sales.  This growth has been driven by increased website traffic and 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/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 customer connectivity and to allow Homebase to offer improved services to customers whilst they are in a store.

 

Homebase continues to use social media to engage and interact with its customers, for example videos on Homebase's YouTube channel, which have now been viewed around 1.3m times, offer customers help, advice and useful 'how to' guides.

 

Exclusive brands

A key differentiator for Homebase is its strong portfolio of exclusive brands, such as Odina, Schreiber, Qualcast, Laura Ashley and Habitat.  During the period, Odina has been made available to more customers, with displays now in 44 stores, up from 28 at the start of the year.  The Schreiber kitchen range has been further extended to 317 stores following a low-cost investment programme incorporating either an edited display of the range or a carcass display. This year the Qualcast range has been increased to around 100 products, a 35% increase on last year, expanding the range of garden power and garden hand tool products.

 

In addition to the five new Habitat concessions, Habitat products are now available in around 300 stores, including ranges in furniture, paint, wallpaper and tiling. Habitat gives the Homebase customer greater choice with premium quality, contemporary styling, as well as some bestselling iconic designs.  

 

Customer service

Homebase has continued its improvements in customer service in a number of areas during the period.  A trial to improve process efficiency in stores resulted in a significant number of hours being identified that could be released and reinvested into customer service.  Following the success of this trial, a roll-out will commence in the second half of the current financial year.

 

To further monitor and react to customer feedback, Homebase launched a customer survey tool called 'Paint Us a Picture'.  This tool is designed to encourage honest and constructive feedback on all areas of customer service.  Since the launch in March, over 95% of the customer responses rated their store experience as "satisfied" or "highly satisfied".

 

Loyalty programme

Homebase connects with about 7.1 million active Nectar customers and Nectar has a participation rate of around 65% of Homebase's sales.  Over the period Homebase has delivered new trials to specific customer groups including a new 'over 60s' proposition and double value redemption enabling customers to get even greater value for their points at Homebase.  Alongside this, around 20 million direct mailings and around 15 million emails, driving relevant offers to customers, have been sent resulting in greater brand engagement.

 

Financial review

 

Total sales in the 26 weeks to 31 August 2013 increased by 4.4% to £822.3m.  Net space sales change reduced sales by 1.5% with three store closures reducing the store portfolio to 333.  Like-for-like sales increased by 5.9%.  Seasonal products benefitted from the improved weather, particularly in the second quarter, annualising against a poor summer last year.  Big ticket sales were also ahead of the comparable period last year while the remaining categories were slightly down.  During the period Homebase continued to increase its market share in the DIY sheds market, as reported by the independent third party, GfK, with the latest gain being its 18th consecutive quarter of market share growth.

 

The gross margin rate was down by approximately 100 basis points.  The negative drivers were an adverse impact from a return to a more normal level of promotional sales, an adverse sales mix impact resulting principally from the strong performance of margin dilutive seasonal products and a reduction from the net impact of the movement in the US$ foreign exchange rate and sea freight costs.  These reductions were partially offset by a benefit from reduced levels of stock clearance activity.

 

Total operating and distribution costs increased by £6m, with increases from the impact of increased sales, underlying cost inflation and revenue investment in strategic initiatives being partially offset by further cost savings.  Benchmark operating profit was £27.2m; a £2.7m or 11% increase on the comparable period last year.

 

Financial Services

 

26 weeks to

£m

31 August

2013

1 September

2012




Sales

57.1

57.4




Benchmark operating profit before financing costs

4.6

4.5

Financing costs

(1.5)

(1.6)

Benchmark operating profit

3.1

2.9




As at

31 August

2013

2 March

2013

1 September

2012





Store card gross receivables

540

547

513

Provision

(70)

(72)

(76)

Store card net receivables

470

475

437





Provision % of gross receivables

12.9%

13.2%

14.9%





 

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 review        

 

In-house store card credit sales increased by 6% to £300m (2012: £284m) and represented 10.1% (2012: 9.8%) of Group retail sales.  This increased level of both credit sales and penetration, is a result of specific product range support and sales increases in categories that have higher credit attachment rates such as tablets 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 principally provided through product loans from a third party provider.  Including these product loans, total credit sales increased by 8% to £339m (2012: £315m) and represented 11.4% of Group retail sales.  Customer use of the online account management tools continues to grow with over 700,000 registered customers.

 

Financial review

 

Total sales in the 26 weeks to 31 August 2013 decreased by 1% to £57.1m.  Delinquency rates continue their trend of the last three years with a further reduction.  Financing costs were marginally down versus last year, with this internal recharge being based upon UK base rates with a corresponding credit being recognised in Group net interest income.  These benefits were partially offset by an increase in operating costs resulting in benchmark operating profit increasing by 7% to £3.1m (2012: £2.9m).

 

Store card net receivables grew by £33m versus a year ago to £470m, principally as a result of the increase in credit sales.  The Group finances these receivables internally with no third party debt being required. 



GROUP FINANCIAL REVIEW

 

Sales and benchmark operating profit

Group sales increased by 2.6% to £2,596.2m (2012: £2,531.1m) while Group benchmark operating profit increased 40% to £26.4m (2012: £18.8m).  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 were 3% lower at £11.6m (2012: £11.9m), driven by the continued control of central corporate costs.

 

Net interest income

Net interest income was £1.0m (2012: £1.7m).  Within this, third party interest income reduced to £0.1m (2012: £0.7m) as a consequence of the Group's higher average cash balance being offset by the amortisation of the refinancing fees in respect of the Group's new bank facility.

 

Financing costs charged within Financial Services' benchmark operating profit together with the corresponding credit within net interest income decreased to £1.5m (2012: £1.6m).  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 £0.6m (2012: £0.6m).  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 the provision eventually matching the liability in the accounting period that it becomes due.

 

Share of post-tax results of associates

These amounted to £nil (2012: loss of £2.6m), 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 operation. 

 

Benchmark PBT

Benchmark PBT increased 53% to £27.4m (2012: £17.9m) driven by the factors discussed above.

 

Amortisation of acquisition intangibles

A charge of £0.9m was recorded (2012: £0.9m), relating to the amortisation of the value of the brand which arose on the Habitat UK acquisition. 

 

Retirement benefit scheme administration costs

A charge of £1.0m was recorded (2012 restated: £1.0m), 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 retirement benefit obligations.

 

Net onerous lease provision releases

A net credit of £5.4m (2012: £nil) was recorded, relating to onerous lease provisions that are no longer required, principally following the conclusion of the examinership process in respect of Homebase's Irish store portfolio. 

 

Exceptional items

The exceptional charge recorded was £12.6m (2012: credit of £35.0m).  This charge is a result of the ongoing programme to transform Argos into a digital retail leader combined with a number of other restructuring actions.

 

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 £1.2m (2012: £1.3m), which arises principally as a result of translation differences on overseas subsidiary cash balances.  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 split between the income statement and the statement of comprehensive income.

 

Financing impact on retirement benefit obligations

The financing impact on retirement benefit obligations is a net charge of £1.8m (2012 restated: £2.0m).  The restatement of the 2012 comparative charge, as a result of adoption of IAS 19 (revised) for the first time during the current period, is explained in Note 18 to the financial information on page 32.

 

Discount unwind on non‑benchmark items

A charge of £3.5m (2012: £3.6m) 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 was £14.2m (2012 restated: £46.7m).

 

Taxation

Taxation attributable to benchmark PBT was £7.8m (2012: £6.5m), representing an effective tax rate (excluding associates) for the period of 28.5% (52 weeks to 2 March 2013: 30.6%).  The lower effective tax rate principally reflects two elements: the favourable impact of a relatively fixed level of disallowable expenditure in comparison to a higher level of profits together with the favourable impact of a 1% reduction in the UK corporation tax rate.

 

Taxation attributable to non-benchmark items amounted to a credit of £6.1m (2012 restated: charge of £7.1m).  The total tax expense was therefore £1.7m (2012 restated: £13.6m).

 

Number of shares and earnings per share

The number of shares for the purpose of calculating basic earnings per share (EPS) was 800.0m (2012: 800.4m), representing the weighted average number of issued ordinary shares of 813.4m (2012: 813.4m), less an adjustment of 13.4m (2012: 13.0m) 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 23.6m (2012: 4.0m) to 823.6m (2012: 804.4m).  Basic benchmark EPS is 2.5p (2012: 1.4p), with diluted benchmark EPS of 2.4p (2012: 1.4p).  Reported basic EPS is 1.6p (2012 restated: 4.1p), with reported diluted EPS being 1.5p (2012 restated: 4.1p).

 

Dividends

At this stage of the financial year, as we approach the peak trading period, the Board announces an interim dividend of 1.0p, this is consistent with the announcement at the 1 May 2013 full year results presentation that to reflect the weighting of the Group's profit to the second half of the financial year the interim dividend would be held at 1.0p, with any changes to the full year dividend being made to the final dividend.  The dividend will be paid on 22 January 2014 to shareholders on the register at the close of business on 15 November 2013. 

 

Balance sheet

 

As at

£m

31 August

2013

2 March

2013

1 September

2012





Goodwill

1,543.9

1,543.9

1,543.9

Other intangible assets

152.3

129.2

135.7

Property, plant and equipment

460.7

474.9

474.8

Inventories

965.3

941.8

1,001.1

Financial Services loan book

469.7

474.7

437.1

Other assets

197.1

198.8

187.5


3,789.0

3,763.3

3,780.1





Trade and other payables

(1,243.9)

(1,168.7)

(1,158.0)

Provisions

(213.6)

(217.8)

(232.0)


(1,457.5)

(1,386.5)

(1,390.0)





Invested capital

2,331.5

2,376.8

2,390.1





Retirement benefit obligations

(84.7)

(85.1)

(122.0)

Net tax assets

28.9

10.7

39.3

Forward foreign exchange contracts

(0.4)

34.1

(6.5)

Net cash

412.2

396.0

316.4





Net assets

2,687.5

2,732.5

2,617.3





 

Net assets as at 31 August 2013 were £2,687.5m, equivalent to 340p (2012: 327p) per share excluding shares held in Group share trusts.  Invested capital as at 31 August 2013 was £2,331.5m, a reduction of £45.3m versus the balance sheet as at 2 March 2013.  This reduction in invested capital was principally driven by an increase in trade and other payables associated with the increased level of inventories, together with trade and other payables timing benefits of around £50m, which are expected to unwind in the second half of the current financial year.

 

The reduction in net assets of £45.0m versus the balance sheet as at 2 March 2013 was driven by the reduction in invested capital together with a reduction in forward foreign exchange contracts.  These reductions were partially offset by increases in both net tax assets and net cash.

 

  

Cash flow and net cash position

 

26 weeks to

£m

31 August

2013

1 September

2012 Restated1




Benchmark operating profit

26.4

18.8

Exceptional items

(12.6)

35.0

Retirement benefit scheme administration costs 1

(1.0)

(1.0)

Amortisation of acquisition intangibles

(0.9)

(0.9)

Net onerous lease provision releases

5.4

-

Statutory operating profit 1

17.3

51.9




Depreciation and amortisation

65.7

64.0

Movement in trade working capital

42.8

78.7

Movement in Financial Services loan book

5.0

19.6

Financing costs charged to Financial Services

1.5

1.6

Cash flow impact of restructuring provisions

(1.9)

(3.4)

Pension scheme deficit recovery payments

(11.0)

(8.0)

Movement in retirement benefit obligations 1

0.5

(37.5)

Other operating items

1.0

5.9

Cash flows from operating activities

120.9

172.8




Net capital expenditure

(74.8)

(25.6)

Taxation

(11.1)

(16.9)

Net interest

0.5

0.5

Other investments

10.9

(9.2)

Cash inflow before financing activities

46.4

121.6




Dividends paid

(16.0)

-

Purchase of own shares for Employee Share Trust

(14.1)

-

Net increase in cash and cash equivalents

16.3

121.6




Effect of foreign exchange rate changes

(0.1)

0.5

Increase in financing net cash

16.2

122.1




Opening financing net cash

396.0

194.3

Closing financing net cash

412.2

316.4




The Group has adopted IAS 19 (revised) during the period as set out in Note 18 on page 32. Prior year comparatives have been restated where marked 1. 

 

Cash flows from operating activities were £120.9m (2012: £172.8m).  This £51.9m decrease was principally attributable to a decrease in the cash inflow from trade working capital.

 

Net capital expenditure was £74.8m (2012: £25.6m), representing an increased level of investment across the Group in the previously outlined strategic plans of both businesses.  Tax paid was £11.1m (2012: £16.9m).   Other investment inflows of £10.9m (2012: outflow £9.2m) represent 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.

 

Dividends paid to shareholders amounted to £16.0m (2012: £nil) reflecting the final dividend payment of 2.0 pence.  A payment of £14.1m (2012: £nil) was made to the Home Retail Group Employee Share Trust to fund the purchase of 10.0m shares.  The shares contribute towards those already held by the Trust which are potentially needed to satisfy obligations arising from employee share schemes.

 

The Group strengthened its net cash position to £412.2m with a net cash generation of £16.2m in the first half of 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 31 August 2013 for the Group's defined benefit pension scheme obligations was a net deficit of £84.7m (2 March 2013: £85.1m). 

 

Group financing arrangements

The Group finances its operations through a combination of retained profits, property leases, a net cash position and through access to committed bank facilities where necessary.  The Group's net cash balance averaged approximately £460m (2012: approximately £350m) over the period and at 31 August 2013, the Group had £165m of undrawn, committed borrowing facilities, which expire in March 2016.  In addition, as at 31 August 2013 the Group's Financial Services business held a loan book balance of £470m. 

 

The Group has additional liabilities through its obligations to pay rents under operating leases; the operating lease charge for the last 12 months amounted to £351.6m (2012: £360.6m).  Gross lease commitments stood at £2,803m at 31 August 2013 (2012: £3,092m) a reduction of £1,527m since the peak at £4,330m five years ago.  Based upon the discounted cash flows of these expected future operating lease charges, the capitalised value of these liabilities is £2,173m (2012: £2,438m) utilising a discount rate of 5.0% (2012: 4.4%). 

 

Accounting standards and use of non-GAAP measures

The Group has prepared its consolidated financial statements based on International Financial Reporting Standards for the 26 weeks ended 31 August 2013.  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 2013 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 areas of potential risk and uncertainty centre 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, failure to deliver the strategy, reliance on key personnel, failure to meet customer expectations, currency exposures, product supply and other operational processes, infrastructure development, product safety, the regulatory environment and business interruption.  These risks, together with examples of mitigating activity, are set out in more detail in the 2013 Annual Report and Financial Statements on pages 30 and 31.

 

Appendix 1.  Trading statement information as reported

 


 Q1

13 weeks to

2 June 2012






Q1

13 weeks to

1 June 2013



Argos










Sales

£819m






£828m



Like-for-like sales change

(0.2%)






1.9%



Net space sales change

0.4%






(0.7%)



Total sales change

0.2%






1.2%



Gross margin movement

Down c.25bps






Down c.75bps













Homebase










Sales

£421m






£422m



Like-for-like sales change

(8.3%)






1.4%



Net space sales change

0.2%






(1.2%)



Total sales change

(8.1%)






0.2%



Gross margin movement

Up c.225bps






Down c.200bps














Q2

13 weeks to

1 Sept 2012


H1

26 weeks to

1 Sept 2012




Q2

13 weeks to

31 Aug 2013


H1

26 weeks to

31 Aug 2013

Argos










Sales

£867m


£1,686m




£889m


£1,717m

Like-for-like sales change

1.4%


0.6%




2.7%


2.3%

Net space sales change

(0.4%)


0.0%




(0.3%)


(0.5%)

Total sales change

1.0%


0.6%




2.4%


1.8%

Gross margin movement

 Down c.75bps


 Down c.50bps




Down c.50bps


Down c.75bps











Homebase










Sales

£366m


£787m




£400m


£822m

Like-for-like sales change

(3.7%)


(6.2%)




11.0%


5.9%

Net space sales change

(0.2%)


0.0%




(1.7%)


(1.5%)

Total sales change

(3.9%)


(6.2%)




9.3%


4.4%

Gross margin movement

Up c.75bps


Up c.150bps




c.0bps


Down c.100bps












Q3

18 weeks to

5 Jan 2013


YTD

44 weeks to

5 Jan 2013







Argos










Sales

£1,744m


£3,430m







Like-for-like sales change

2.7%


1.6%







Net space sales change

(1.1%)


(0.5%)







Total sales change

1.6%


1.1%







Gross margin movement

Down c.50bps


Down c.50bps

















Homebase










Sales

£453m


£1,240m







Like-for-like sales change

(3.9%)


(5.4%)







Net space sales change

(0.6%)


(0.2%)







Total sales change

(4.5%)


(5.6%)







Gross margin movement

Down c.50bps


Up c.75bps


















Q4

8 weeks to

2 Mar 2013


H2

26 weeks to

2 Mar 2013


FY

52 weeks to

2 Mar 2013





Argos










Sales

£501m


£2,245m


£3,931m





Like-for-like sales change

5.2%


3.2%


2.1%





Net space sales change

(0.9%)


(1.0%)


(0.6%)





Total sales change

4.3%


2.2%


1.5%





Gross margin movement

Down c.75bps


Down c.50bps


Down c.50bps















Homebase










Sales

£191m


£644m


£1,431m





Like-for-like sales change

(1.5%)


(3.2%)


(4.9%)





Net space sales change

(1.3%)


(0.8%)


(0.3%)





Total sales change

(2.8%)


(4.0%)


(5.2%)





Gross margin movement

Up c.50bps


Down c.25bps


Up c.75bps





 


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