Preliminary Results - Part 1

Burberry Group PLC 24 May 2007 Burberry Group plc 2006/07 Preliminary Results 24 May 2007. Burberry Group plc reports preliminary results for its financial year to 31 March 2007. Summary of Results Year to 31 March -------------------- 2007 2006 Change Â£m Â£m % ------------------------------ ------ ------ ------ Turnover 850.3 742.9 14 Adjusted EBIT(1) 185.1 165.6 12 Operating profit 157.0 154.5 2 Attributable profit for the year 110.2 106.4 4 Free cash flow 84.8 61.8 37 Adjusted diluted EPS(1) 29.1p 24.1p 21 Dividend per Ordinary Share 10.5p 8.0p 31 Diluted EPS 24.7p 22.3p 11 Diluted weighted average number of Ordinary Shares 446.1m 477.6m (7) Financial Highlights â€¢Total revenue increased 15% on an underlying(2) basis to Â£850.3 million - Retail revenue increased 24% underlying, on a 12% comparable store gain - Wholesale revenue increased 8% underlying - Licensing revenue increased 10% underlying â€¢Adjusted EBIT increased 12% to Â£185.1 million - a 17% increase at constant exchange rates â€¢Adjusted retail/wholesale EBIT margin of 14.6% vs 14.5% in prior period - total adjusted EBIT margin of 21.8% vs 22.3% in prior period - movement reflects reduced licensing share of revenue â€¢Adjusted diluted EPS increased 21% to 29.1p â€¢Sharp acceleration in revenue, adjusted EBIT and EPS growth relative to prior year â€¢Continued strong free cash flow with Â£85 million generated in the year â€¢Final dividend of 7.625p per Ordinary Share proposed - 10.5p for full year, a 31% increase â€¢Bought 12.3 million shares at cost of Â£62 million during the year as part of ongoing repurchase programme _________ (1) 'Adjusted' refers to profitability measures calculated before Atlas and plant closure costs: - Atlas costs of Â£21.6 million (2006: Â£11.1 million) relate to the Group's infrastructure redesign initiative announced in May 2005. - Plant closure costs of Â£6.5 million relate to the closure of the Treorchy manufacturing facility in March 2007. (2) Underlying figures exclude the financial effect of the Taiwan acquisition and the portion of Burberry's business in Spain affected by the retail conversion, in both reporting periods. In addition, underlying figures are calculated at the same exchange rates used in the 2005/06 year's reported results for the period. Burberry completed the acquisition of the operations and assets of its distributors in Taiwan in August 2005 (the 'Taiwan acquisition') and initiated actions related to the retail conversion in Spain during the third quarter of 2005/06. Strategic and Operating Highlights â€¢Enhanced consistency of brand presentation - Centralised design and creative direction in London - Synchronised marketing programme â€¢Progressed primary product strategies - Outstanding outerwear performance driven by product innovation - Strong consumer response to luxury handbag initiatives - Launched new eyewear collection â€¢Advanced retail programme - Opened 12 stores, one replacement store, a net 13 concessions and three outlets - Accelerated pace of expansion to 13% average underlying selling space growth (from 8% in 2005/06) - Retail now largest distribution channel with 48% share of revenue â€¢Revitalised wholesale channel - strong growth across North America, Europe, Asia and emerging markets â€¢Achieved near-term operational objectives - Project Atlas successfully completed initial SAP implementations, and on schedule for major deployments in 2007/08 - Initiated development of integrated global supply chain â€¢Celebrated Burberry's 150th anniversary Commenting on the results Angela Ahrendts, Chief Executive, stated, 'With a 21% increase in adjusted EPS on a 15% underlying revenue gain, our 150th anniversary was an outstanding year for Burberry. On the strategic front, we advanced the luxury component of the brand, accelerated retail expansion and continued to evolve the operating model. We face the current year with confidence, given the strength of our brand, effectiveness of our strategies and talent of our teams around the world.' Management will discuss these results during a presentation to analysts and institutions at 1:00pm today at Merrill Lynch Financial Centre, The Auditorium, 2 King Edward Street, London EC1A 1HQ (telephone +44 (0) 20 7968 0577). The presentation will also be broadcast live on the Internet at www.burberryplc.com and can be accessed by telephone at +44 (0) 20 7081 7194 (UK and International) and +1 866 432 7186 (US). Replay: +44 (0) 20 8196 1998 (UK and international) and +1 866 583 1035 (US), access number 299766#. Enquiries Burberry 020 7968 0577 Stacey Cartwright CFO Matt McEvoy Strategy and IR Brunswick 020 7404 5959 David Yelland Laura Cummings Robert Gardener Business and Financial Review Business Review Burberry's 150th year was marked by outstanding performance: a balance of strong financial results, important strategic advances and significant investment for the future. The Group generated total revenue of Â£850.3 million, representing 15% underlying(1) growth and a sharp acceleration from 3% in the previous financial year. Growth in operating profit before Project Atlas and plant closure costs ('Adjusted EBIT')(2) accelerated to 12%, for a total of Â£185.1 million. Adjusted diluted EPS(2) increased 21% to 29.1p. During the year, the Group completed a major strategic review of the business, more precisely identifying its opportunities and refining its strategy, as represented by these five strategic themes: â€¢Leverage the franchise â€¢Intensify non-apparel development â€¢Accelerate retail-led growth â€¢Invest in under-penetrated markets â€¢Pursue operational excellence In line with these themes, Burberry initiated incremental investment across the business to drive future performance. This investment was primarily directed toward enhancing the luxury component of the brand, advancing retail expansion, evolving to a more retail-oriented operating model and improving operational capabilities. These themes of strategic evolution and investment are reflected in the review of Burberry's 2006/07 results set forth below. Regions. All regions demonstrated progress in the year, with growth accelerating in the second half. Retail and Wholesale Revenue by Geographical Market (Destination) Reported % change Revenue Mix % ---------------- ---------------------- ------------------- (Â£ million) 2006/07 2005/06 Reported Underlying((1)) 2006/07 2005/06 ------ ------ ------ -------- ------ ------ Europe (excluding Spain) 229.8 191.5 20% 20% 27% 26% North America 196.5 177.9 11% 18% 23% 24% Asia Pacific 167.5 144.6 16% 18% 20% 19% Spain 151.8 134.1 13% 2% 18% 18% Rest of World 18.6 13.7 36% 36% 2% 2% ------ ------ ------ -------- ------ ------ Total 764.2 661.8 16% 16% 90% 89% Licensing 86.1 81.1 6% 10% 10% 11% ------ ------ ------ -------- ------ ------ Total 850.3 742.9 14% 15% 100% 100% ________ (1) Underlying figures exclude the financial effect of the Taiwan acquisition and the portion of Burberry's business in Spain affected by the retail conversion, in both reporting periods. In addition, underlying figures are calculated at the same exchange rates used in the 2005/06 year's reported results for the period. Burberry completed the acquisition of the operations and assets of its distributors in Taiwan in August 2005 (the 'Taiwan acquisition') and initiated actions related to the retail conversion in Spain during the third quarter of 2005/06. (2) 'Adjusted' refers to profitability measures calculated before Atlas and plant closure costs: - Atlas costs of Â£21.6 million (2006: Â£11.1 million) relate to the Group's infrastructure redesign initiative announced in May 2005. - Plant closure costs of Â£6.5 million relate to the closure of the Treorchy manufacturing facility in March 2007. â€¢Europe (excluding Spain). Sales performance was generally strong for the year. Excellent retail gains combined with wholesale strength to produce 20% underlying growth in the region. Sustained demand across a majority of markets, particularly Italy, Germany and Greece, drove strong wholesale performance. Retail sales were robust across the region with leading comparable store sales increases for the Group. These gains were complemented by contributions from new space additions. Retail strength also drove double digit gains in the UK market. During the year, Burberry opened stores in Manchester (UK), Prague (Czech Republic) and Vienna (Austria) and five concessions and an outlet in the region. â€¢North America. Strong performance across both the retail and wholesale channels produced 18% underlying revenue growth. Ongoing efforts with key accounts and the attractive spring/summer collection drove second half wholesale gains, and a strong performance for the year. In retail, sales growth was balanced between gains at existing stores and contributions from new space. In line with the strategy to accelerate expansion in underpenetrated markets, the Group opened five stores and two outlets in North America during the year. New stores included Atlantic City (New Jersey), Bergen County (New Jersey), Kansas City (Missouri), North Los Angeles (California) and Northbrook (Illinois). â€¢Asia Pacific. Double digit gains in both the retail and wholesale channels drove an 18% increase in Asia Pacific revenue for the year. Wholesale gains were led by demand from travel retail customers and initial sales of global products into the Japanese market. Retail performance was generally strong throughout the region with overall growth balanced between existing and new space. Stores in Hong Kong and other Southeast Asia markets achieved particularly strong gains. The Taiwan acquisition added to the reported increase. During the period, the Group opened a store in Sydney (Australia) and three concessions in Korea and Japan. â€¢Spain. Spain achieved a 2% underlying revenue gain for the year. The underlying decline in wholesale revenue, primarily driven by reduced orders in the speciality store channel, partially offset underlying retail strength. Led by new space additions, retail performance was complemented by excellent gains at existing stores and concessions. Completing their first full year of operation, the womenswear concessions demonstrated notable progress. As part of the objective to enhance brand positioning in this market, Burberry opened stores in Madrid and Seville. The Group also opened five concessions during the period. In addition, 24 childrenswear shop-in-shops were converted to the concession format late in the year. â€¢Rest of World. RoW revenues largely represent sales to emerging markets, including the Middle East, Eastern Europe, Russia and South America. Wholesale sales to these areas increased 36% underlying in the year, largely on increased sales to existing customers. These customers sell Burberry products primarily through franchised stores. The stores achieved excellent performance during the year. In conjunction with these franchise partners, the Group opened stores in Istanbul (Turkey), Kiev (Ukraine) and Mexico City (Mexico). â€¢Japan Licensing. Japan licences accounted for approximately 64% of Burberry's licensing revenue for the financial year. Led by apparel, ongoing licences produced a good gain in the period. This was partially offset by the effect of licence terminations, as part of Burberry's ongoing initiative to adjust the product mix in this market. The net result was a modest underlying increase in Japan licensing revenue. Channels. Revenue performance across Burberry's three channels of distribution was generally strong for the year, with each channel responding to the Group's renewed strategic emphases. Revenue by Channel of Distribution Reported % change Revenue Mix % ----------------- ----------------------- ------------------ Â£ million 2006/07 2005/06 Reported Underlying(1) 2006/07 2005/06 ----- ------ ------ ------- ------ ------ Retail 410.1 318.5 29% 24% 48% 43% Wholesale 354.1 343.3 3% 8% 42% 46% Licensing 86.1 81.1 6% 10% 10% 11% ----- ------ ------ ------- ------ ------ Total 850.3 742.9 14% 15% 100% 100% â€¢Retail. Retail sales increased 24% underlying, 29% reported. Comparable store sales increased 12%, with all regions achieving double digit gains. Benefiting from new luxury products, an effective marketing campaign, enhanced product flow and basic replenishment, Burberry experienced increases in store traffic and average selling prices. Underlying average retail selling space increased approximately 13%. The Taiwan acquisition and Spain retail conversion contributed ten percentage points to the reported gain. Currency movements reduced the reported gain by five percentage points. The Group opened 12 stores, one replacement store, a net 13 concessions and three outlets, reflecting a substantial increase in new space activity relative to the previous year. As a result, retail represented 48% of total revenue for the year and is now Burberry's largest distribution channel - an important strategic milestone in keeping with the Group's emphasis on retail-led growth. This channel shift hasfundamental implications for the Group's margin structure, leading to increases in both gross margin and expense ratio. â€¢Wholesale. Gaining momentum throughout the year, wholesale sales increased 8% underlying, 3% reported. With the exception of Spain, all regions achieved double digit underlying increases. Sales gains, primarily in the second half, were boosted by initial success of the basic replenishment programme and incremental orders associated with the new market calendar. On a reported basis, this increase was reduced by three percentage points due to the Spain retail conversion and Taiwan acquisition, and a further two percentage points by currency movements. â€¢Licensing. Strong growth in product licence revenue (approximately 36% of licensing revenue) coupled with the modest underlying increase in Japan licensing revenue produced a 10% underlying increase in total licensing revenue for the year. Among product licences, fragrances led gains, benefiting from the major launches of Burberry London for women and men in 2006 and introduction of the new Burberry Summer scent in spring 2007. Watches also performed well in the period, driven by both core and fashion styles. The first collection under Burberry's new global eyewear agreement launched during the second half. Supported by an extensive marketing campaign and a plan for distribution in 15,000 doors worldwide, eyewear contributed to product licence revenue growth. Currency movements reduced total underlying licensing revenue growth by four percentage points, resulting in a 6% reported gain. Products. Burberry's evolution from its historical wholesale origins to a more dynamic, retail-oriented operating culture had important implications for product design and merchandising during the year. Considering in-store environments, the Group seeks to enhance the aesthetic cohesion across product categories generally, and maximise the visual impact of each individual capsule presentation specifically. Toward this goal, Burberry centralised its design process in London, largely eliminating regional design centres, and physically integrated the category-specific design teams, to create a single, integrated design function. As part of enhancing the clarity of in-store presentations, product teams reduced significantly the number of styles developed within each collection. The product design cycle was revamped to increase the number of collections created, allowing new merchandise to be offered in stores monthly. These design and merchandising initiatives have been enabled by increased investment in product development and design and merchandising talent. Revenue by Product Category Reported % change Revenue Mix % ------------------- ---------------------- ------------------- Â£ million 2006/07 2005/06 Reported Underlying(2) 2006/07 2005/06 ------ ------ ------ -------- ------ ------ Womenswear 305.5 249.3 23% 19% 36% 34% Menswear 227.0 206.2 10% 13% 27% 28% Accessories 211.2 189.2 12% 15% 25% 25% Other 20.5 17.1 20% 21% 2% 2% Licensing 86.1 81.1 6% 10% 10% 11% ------ ------ ------ -------- ------ ------ Total 850.3 742.9 14% 15% 100% 100% â€¢Runway. Burberry's runway collection enjoyed outstanding results in the year. The spring and autumn collections continued to be among the most critically acclaimed and followed in Milan. Commercially, in keeping with Burberry's strategy to enhance the luxury and high-fashion elements of its business, sales of runway apparel collections approximately doubled for these two seasons. The addition of a women's Spring/Summer 2007 pre-collection in order to enhance new product flow contributed to this success. This pre-collection strategy continues with future seasons. Integration of design teams has stimulated incorporation of runway design innovation across all collections. â€¢Womenswear. Led by key strategic categories, womenswear produced an excellent performance. Outstanding outerwear sales, benefiting from product innovation, seasonless styles and balanced assortments, were a consistent feature throughout the year. Within outerwear, rainwear was a particular highlight. Strength in women's runway apparel also contributed to the category's growth. During the year, the Group made good progress in its objective to increase the sartorial/tailored segment of the product mix, while evolving its core casual offering. â€¢Menswear. Key womenswear trends were mirrored in menswear. Reflecting similar product development emphases, outerwear was a key driver of menswear revenue. Runway apparel performed well throughout the year. Strength in selected casual apparel categories also contributed to menswear's growth. As part of the Group's efforts to integrate further its operations, the International and Spain menswear divisions jointly developed a global outerwear offering. â€¢Accessories. The Group intensified non-apparel development. Driven by product design and development efforts to enhance innovation and elevate assortments, luxury handbag sales gained momentum throughout the year - accounting for an increasing percentage of the accessory mix. Successfully broadening distribution of these products within Burberry's store network also demonstrated their relevance to a wider consumer base. An exclusive range of handbags designed in celebration of Burberry's 150th anniversary - the Burberry Icons Collection - was a highlight of the year. In the Group's core scarf category, new designs were an important factor underpinning strong performance. Good progress in the small leathergoods, belt and shoe categories was also achieved in the year. â€¢Marketing. New product initiatives and the increasing retail orientation of the business are inducing a realignment of marketing strategies. In keeping with efforts to enhance the brand's consistency across consumer touch points, all Burberry visual imagery is now derived from a single source - whether print advertisement, catalogue or in-store display. The seasonal image campaign is also segmented to emphasise the primary sectors and groups within the product line. The programme's various elements are synchronised to appear with the flow of related products to stores. The Group is also reallocating marketing investment with a greater emphasis on direct, digital and event strategies. Operations. Enhancing operating efficiency and effectiveness is a primary objective for the Group. â€¢Project Atlas. Project Atlas, the cornerstone of Burberry's efforts to improve operational efficiency, completed its second year. During the period, key systems deployments were implemented as scheduled, with minor alterations to originally planned phasing to better accommodate changes in Burberry's business. Completed SAP deployments include UK-based financial and non-stock procurement, production planning, manufacturing and procurement. During the second half the Group also initiated a tactical software solution providing improved visibility of retail sales and inventory. The approximately Â£6 million of benefits associated with Project Atlas during the year were derived from reduced procurement and sourcing costs and replenishment-related gains. Expenses incurred in 2006/07 totalled Â£21.6 million. During the next six months, Atlas enters its most intensive stage with major SAP deployments in the Group's core product development operations and key geographical units. â€¢Supply chain. Important supply chain initiatives during the year included: - Burberry appointed its first head of global supply chain, developed a strategy for implementing a single, integrated structure across the business and began the process of building the required organisation. - To improve sourcing efficiency, the Group took initial steps to rationalise its supplier base and move toward a more vertical sourcing structure. - The Group completed the closure of a manufacturing facility in March 2007. This resulted in a Â£6.5 million charge in the 2006/07 financial year to cover redundancy payments and outplacement and training services for affected employees, a community contribution and asset write-offs. Expense savings associated with elimination of manufacturing losses are expected to be approximately Â£1.5 million annually. â€¢Global headquarters. In December 2006, Burberry entered into a lease for a new global headquarters. Located in central London (Westminster), the site will allow the Group to consolidate its operations, including design, showrooms, merchandising, marketing, supply chain, finance and executive and administrative functions, within a single facility. These functions are currently divided among five locations in London. The relocation is expected to take place in late 2008. Financial summary â€¢Revenue increased 15% on an underlying basis (14% reported) to Â£850.3 million for the year. â€¢Gross margin improved from 60.0% to 61.3% as a result of the increase in the retail channel's share of revenue, reduced markdowns, favourable product mix and sourcing gains. This increase was partially offset by increased product development costs and fulfilment expenses during this period of accelerated growth, as well as the licensing channel's reduced share of revenue. â€¢The channel shift in favour of retail was also an important contributor to the increase in the adjusted expense ratio (before Atlas and plant closure costs) from 37.8% to 39.5%. Additional factors underlying this increase include expenses associated with accelerated retail expansion and investment in people relating to product and supply chain initiatives. This increase was partially offset by initial Atlas expense benefits. â€¢The Group maintained its adjusted retail/wholesale EBIT margin at 14.6% in 2006/07 relative to 14.5% in 2005/06. Total adjusted EBIT margin was 21.8% relative to 22.3% in the previous period. This decrease was driven by licensing's reduced share of revenue. â€¢Adjusted EBIT increased to Â£185.1 million, a 12% gain. Excluding the effect of currency movements (an approximate Â£8.4 million translation-related reduction), adjusted EBIT increased 17%. â€¢Burberry's effective tax rate declined from 32.2% to 29.5%. This decline resulted from an approximate 1% ongoing decrease driven by the changing regional mix of the Group's business, coupled with an approximate 1.5% one-time reduction relating to the settlement of certain transfer pricing arrangements. â€¢Adjusted diluted EPS increased 21% to 29.1p. â€¢Including Atlas and plant closure costs, operating profit was Â£157.0 million with diluted EPS of 24.7p. â€¢Full year capital expenditure totalled Â£38.8 million. â€¢The Group generated Â£84.8 million of free cash in the year. â€¢The directors have proposed a 39% increase in the final dividend to 7.625p which would result in a full year dividend of 10.5p, a 31% increase. â€¢In the year, the Group repurchased 12.3 million shares (2.7% of shares outstanding at 31 March 2006) at a total expenditure of Â£62.2 million. 2007/08 Outlook Burberry's current outlook for the 2007/08 financial year includes the following features: â€¢Retail. Burberry plans an approximate 13% increase in average retail selling space. The majority of space expansion will be concentrated in the US and European markets. â€¢Wholesale. Based upon orders received to date, first half wholesale sales are expected to achieve a mid-teens percentage underlying gain relative to the comparative period. â€¢Licensing. The Group anticipates broadly flat underlying licensing revenue relative to 2006/07. - Licences in Japan are expected to produce a moderate underlying revenue gain for the year primarily as a result of continued apparel growth. - Growth in selected product licence categories is expected to be offset by decreases at others, reflecting product cycles and channel transitions - On a reported basis, yen-related exchange rate movements will reduce licensing revenue in excess of Â£6 million. â€¢Project Atlas. In keeping with alterations to systems implementation phasing required by changes in the business, Atlas expenses are budgeted at approximately Â£15 million for the financial year. In line with previous statements, Burberry expects P&L benefits associated with Project Atlas of approximately Â£20 million in the period. â€¢Tax rate. The Group anticipates an effective tax rate of approximately 31%. â€¢Capital expenditures. Capital expenditures are budgeted at approximately Â£60 million. The majority of investment is directed to retail operations, including planned renovation of approximately 20 high visibility stores. Financial Review Group results 2007 2006 --------------------- ---------------------- Year to 31 March Â£m Percentage Â£m Percentage of turnover of turnover --------------------------- ----- --------- ----- --------- Turnover Retail 410.1 48.2% 318.5 42.9% Wholesale 354.1 41.7% 343.3 46.2% Licensing 86.1 10.1% 81.1 10.9% --------------------------- ------- --------- ------- --------- Total turnover 850.3 100.0% 742.9 100.0% Cost of sales (329.0) (38.7%) (296.8) (40.0%) --------------------------- ------- --------- ------- --------- Gross profit 521.3 61.3% 446.1 60.0% Adjusted operating expenses (336.2) (39.5%) (280.5) (37.8%) --------------------------- ------- --------- ------- --------- Adjusted EBIT 185.1 21.8% 165.6 22.3% Atlas costs (21.6) (2.5%) (11.1) (1.5%) Plant closure costs (6.5) (0.8%) - - --------------------------- ------- --------- ------- --------- Operating profit 157.0 18.4% 154.5 20.8% Net finance(expense)/income (0.7) - 2.5 0.3% --------------------------- ------- --------- ------- --------- Profit before taxation 156.3 18.4% 157.0 21.1% Taxation (46.1) (5.4%) (50.6) (6.8%) --------------------------- ------- --------- ------- --------- Attributable profit for the year 110.2 13.0% 106.4 14.3% --------------------------- ------- --------- ------- --------- Adjusted diluted EPS 29.1p - 24.1p - Diluted EPS 24.7p - 22.3p - --------------------------- ------- --------- ------- --------- Diluted weighted average number of Ordinary Shares (millions) 446.1 - 477.6 - --------------------------- ------- --------- ------- --------- Burberry Group turnover is composed of revenue from three channels of distribution: retail, wholesale and licensing operations. Retail revenue is generated primarily from the sale of women's and men's apparel and accessories through the Group's directly operated store network. Wholesale revenue arises from the sale of these products to wholesale customers worldwide, principally leading and prestige department and speciality retailers and franchisees. Licence revenue consists of royalties receivable from Japanese and product licensees. At 31 March 2007, the Group operated 292 retail locations (2005/06: 260) consisting of 77 Burberry stores (2005/06: 66), 182 concessions (2005/06: 164) and 33 outlet stores (2005/06: 30). Turnover Total turnover advanced to Â£850.3 million from Â£742.9 million in the prior period, representing an increase of 14%, or 15% on an underlying basis. In determining 'underlying' performance, results are adjusted to exclude the financial effects of the Taiwan acquisition, the portion of Burberry's business in Spain affected by the retail conversion and the impact of currency exchange rate differences between periods. The Taiwan acquisition and Spain retail conversion shift sales from Burberry's wholesale channel to its retail channel. The financial effects of the relevant businesses are excluded from both reporting periods. Operating profit Gross profit as a percentage of turnover was 61.3% in 2006/07 relative to 60.0% in the prior year. The increase was driven by the increase in the retail channel's share of revenue, reduced markdowns, favourable product mix and sourcing gains. This gain was partially offset by increased product development and fulfilment expenses during this period of accelerated growth, as well as the licensing channel's reduced share of revenue. Adjusted net operating expenses (before Atlas and plant closure costs) as a percentage of turnover increased to 39.5% from 37.8% in the previous period. This increase in the adjusted expense ratio reflected the change in Burberry's cost structure with the revenue shift to the retail channel. Additional factors driving the rise include expenses associated with accelerated retail expansion and investment in people relating to product and supply chain initiatives. This increase was partially offset by initial Atlas expense benefits. As a result of the elements above, adjusted EBIT increased 12% to Â£185.1 million, or 21.8% of turnover relative to 22.3% in the previous year. Excluding the impact of exchange rate movements adjusted EBIT rose 17%. Exchange rate differences relative to the previous period reduced reported operating profit by Â£8.4 million. Expenses associated with Project Atlas totalled Â£21.6 million (2006: Â£11.1 million) and the plant closure resulted in a Â£6.5 million charge. Reported operating profit was Â£157.0 million for the year. Net finance income Net interest expense was Â£0.7 million in the year to March 2007, compared to net interest income of Â£2.5 million in the prior period, reflecting the change in the Group's capitalisation. In the prior year period, the Group maintained a cash balance in advance of completing in March 2006 its Â£250 million share repurchase plan. Burberry continued to repurchase shares during the year. Profit before taxation Burberry reported adjusted profit before taxation of Â£184.4 million in the year to March 2007 compared to Â£168.1 million in the prior period. Including Atlas and plant closure costs, profit before taxation was Â£156.3 million in the current period. Attributable profit Burberry recorded a 29.5% effective tax rate (2005/06: 32.2%) on profit, resulting in a Â£46.1 million tax charge, and reported attributable profit of Â£110.2 million for the year to March 2007 compared to Â£106.4 million reported in the prior period. The decline in Burberry's effective tax rate resulted from an approximate 1% ongoing decrease driven by the changing regional mix of the Group's business, coupled with an approximate 1.5% one-time reduction relating to the settlement of certain transfer pricing arrangements. Adjusted diluted earnings per share increased 21% to 29.1p compared to 24.1p in the prior period. Including Atlas and plant closure costs, the Group reported diluted earnings per share of 24.7p. In the year to March 2007, the diluted weighted average number of ordinary shares in issue was 446.1 million (2005/06: 477.6 million). Cash flow and net funds Historically, Burberry's principal uses of funds have been to support capital expenditures and working capital growth in connection with the expansion of its business, acquisitions, share repurchases and dividends. Principal sources of funds have been cash flow from operations and borrowings under its credit facilities. Burberry expects to finance the expansion of its business, capital expenditures, including strategic infrastructure investments, share repurchases and shareholder dividends with cash generated from operating activities and the use of credit facilities. The table below sets out the principal components of cash flow for the year to 31 March 2007 and 31 March 2006 and net funds at period end: Year to 31 March 2007 2006 Â£m Â£m ------------------------------- ---------- ---------- Adjusted EBIT 185.1 165.6 Atlas & plant closure costs (28.1) (11.1) ------------------------------- ---------- ---------- Operating profit 157.0 154.5 Depreciation and related charges 26.7 24.9 Loss/(Profit) on disposal of fixed assets 1.1 (1.6) Charges in respect of employee share incentive schemes 10.8 7.4 Increase in stocks (33.4) (17.8) (Increase)/Decrease in debtors (33.8) 2.2 Increase/(Decrease) in creditors 32.8 (21.2) ------------------------------- ---------- ---------- Net cash inflow from operating activities 161.2 148.4 Net interest (paid)/received (1.6) 1.6 Taxation paid (45.8) (43.6) Capital expenditures and acquisition related payments (35.7) (50.7) ------------------------------- ---------- ---------- Sale of shares by ESOPs 6.1 2.4 Issue of ordinary share capital 0.6 3.7 ------------------------------- ---------- ---------- Free cash flow 84.8 61.8 Share repurchases (62.2) (191.6) Equity dividends paid (36.5) (32.8) ------------------------------- ---------- ---------- Movement in net funds resulting from cash flows (13.9) (162.6) ------------------------------- ---------- ---------- Exchange rate (loss)/gain (1.4) 5.2 ------------------------------- ---------- ---------- Movement in net funds (15.3) (157.4) ------------------------------- ---------- ---------- Net funds at end of period (2.8) 12.5 ------------------------------- ---------- ---------- Net cash inflow from operating activities was Â£160.2 million compared to Â£148.4 million in the prior period. Stock levels increased Â£33.4 million as a result of growth in the business, the expanded retail network and the replenishment programme. The Â£33.8 million increase in debtors and Â£32.8 million increase in creditors are in line with growth of the business. Capital expenditures and acquisition related payments included net purchases of fixed assets of Â£34.3 million relating primarily to continued investment in the Group's retail operations and infrastructure. In line with its risk management policy, Burberry has continued to hedge principal foreign currency transaction exposures arising in respect of Yen denominated royalty income and Euro denominated product purchases and sales. In connection with share incentive awards, the Group sold Â£6.1 million (2005/06: Â£2.4 million) of equity from its Employee Share Ownership Trust and received Â£0.6 million (2005/06: Â£3.7 million) from the issue of new shares following the exercise of share options. In the year to March 2007 the Group repurchased 12.3 million shares at a total expenditure of Â£62.2 million. The Group paid an interim dividend of 2.875p per share (2005: 2.5p) on 1 February 2007. A final dividend of 7.625p per share is proposed, payable August 2007. As proposed, the total dividend for 2006/07 would increase 31% to 10.5p per share (Â£45.6 million aggregate amount). At 31 March 2007, 437.8 million ordinary shares were outstanding (446.7 million at 31 March 2006). Group Income Statement ---------------------------------------- ---- ------ ------ Note Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ---------------------------------------- ---- ------ ------ Turnover 3 850.3 742.9 Cost of sales (329.0) (296.8) ---------------------------------------- ---- ------ ------ Gross profit 521.3 446.1 Net operating expenses 4 (364.3) (291.6) ---------------------------------------- ---- ------ ------ Operating profit 157.0 154.5 Financing ---------------------------------------- ---- ------ ------ Interest receivable and similar income 6 5.5 4.3 Interest payable and similar charges 6 (6.2) (1.8) ---------------------------------------- ---- ------ ------ Net finance (charge)/ income 6 (0.7) 2.5 ---------------------------------------- ---- ------ ------ Profit before taxation 5 156.3 157.0 Taxation 7 (46.1) (50.6) ---------------------------------------- ---- ------ ------ Attributable profit for the year 110.2 106.4 ---------------------------------------- ---- ------ ------ The profit for the year is attributable to the equity holders of the Company and relates to continuing operations. ---------------------------------------- ---- ------ ------ Pence per share Earnings per share - basic 8 25.2p 22.9p - diluted 8 24.7p 22.3p ---------------------------------------- ---- ------ ------ ---------------------------------------- ---- ------ ------ Non-GAAP measures Â£m Â£m Operating profit 157.0 154.5 Project Atlas costs 4 21.6 11.1 Treorchy closure costs 4 6.5 - ---------------------------------------- ---- ------ ------ Adjusted operating profit 185.1 165.6 ---------------------------------------- ---- ------ ------ Pence per share Adjusted earnings per share - basic 8 29.7p 24.7p - diluted 8 29.1p 24.1p Dividends per share - interim 9 2.875p 2.5p - proposed final (not recognised as a liability at 31 March) 9 7.625p 5.5p ---------------------------------------- ---- ------ ------ Group Statement of Recognised Income and Expense Note Year to Year to 31 March 31 March 2007 2006 Â£m Â£m --------------------------------------- ---- ------ ------ Attributable profit for the year 110.2 106.4 Cash flow hedges - gains/(losses) deferred in equity 22 9.1 (3.8) Foreign currency translation differences 22 (28.9) 15.6 Net actuarial (losses)/gains on defined benefit pension scheme 22 (0.5) 0.7 Tax on items taken directly to equity 22 (1.5) 1.5 --------------------------------------- ---- ------ ------ Net income recognised directly in equity (21.8) 14.0 Cash flow hedges - transferred to the income statement 22 (5.9) (0.7) Tax on items transferred from equity 22 1.8 0.2 --------------------------------------- ---- ------ ------ Net income recognised directly in equity net of transfers (25.9) 13.5 --------------------------------------- ---- ------ ------ --------------------------------------- ---- ------ ------ Recognised income for the year 84.3 119.9 Total impact on adoption of IAS 32 and IAS 39 - 1.9 --------------------------------------- ---- ------ ------ Total recognised income for the year 84.3 121.8 --------------------------------------- ---- ------ ------ All the recognised income and expense for the year is attributable to the equity holders of the Company. Group Balance Sheet --------------------------------------- ---- ------ ------ Note As at As at 31 March 31 March 2007 2006 Â£m Â£m --------------------------------------- ---- ------ ------ ASSETS Non-current assets Intangible assets 10 133.6 135.4 Property, plant and equipment 11 162.7 167.0 Deferred taxation assets 12 24.6 16.6 Trade and other receivables 13 5.1 4.2 --------------------------------------- ---- ------ ------ 326.0 323.2 --------------------------------------- ---- ------ ------ Current assets Stock 14 149.8 124.2 Trade and other receivables 13 137.2 108.0 Derivative financial assets 15 5.3 2.8 Income tax recoverable - 0.2 Cash and cash equivalents 16 131.4 113.7 --------------------------------------- ---- ------ ------ 423.7 348.9 --------------------------------------- ---- ------ ------ Total assets 749.7 672.1 --------------------------------------- ---- ------ ------ LIABILITIES Non-current liabilities Long term liabilities 17 (10.4) (14.6) Deferred taxation liabilities 12 (10.2) (10.5) Retirement benefit obligations 18 (1.8) (1.8) Provisions for liabilities and charges 19 - (2.8) --------------------------------------- ---- ------ ------ (22.4) (29.7) --------------------------------------- ---- ------ ------ Current liabilities Bank overdrafts and borrowings 20 (134.2) (101.2) Derivative financial liabilities 15 (0.5) (2.1) Trade and other payables 21 (170.7) (126.9) Income tax liabilities (25.0) (25.6) --------------------------------------- ---- ------ ------ (330.4) (255.8) --------------------------------------- ---- ------ ------ Total liabilities (352.8) (285.5) --------------------------------------- ---- ------ ------ --------------------------------------- ---- ------ ------ Net assets 396.9 386.6 --------------------------------------- ---- ------ ------ EQUITY Capital and reserves attributable to the Company's equity holders Ordinary share capital 22 0.2 0.2 Share premium account 22 167.3 151.8 Capital reserve 22 26.0 25.8 Hedging reserve 22 1.8 (0.2) Foreign currency translation reserve 22 (6.2) 21.2 Retained earnings 22 207.8 187.8 --------------------------------------- ---- ------ ------ Total equity 396.9 386.6 --------------------------------------- ---- ------ ------ Approved by the Board on 23 May 2007 and signed on its behalf by: John Peace Stacey Cartwright Chairman Chief Financial Officer Group Cash Flow Statement Note Year to Year to 31 March 31 March 2007 2006 Â£m Â£m --------------------------------------- ---- ------ ------ Cash flows from operating activities Operating profit 157.0 154.5 Depreciation 25.9 22.5 Amortisation 1.8 2.0 Impairment (releases)/charges (1.0) 0.4 Loss/(profit) on disposal of property, plant and equipment 1.1 (1.6) Charges in respect of employee share incentive schemes 10.8 7.4 Increase in stocks (33.4) (17.8) (Increase)/decrease in debtors (33.8) 2.2 Increase/(decrease) in creditors 32.8 (21.2) --------------------------------------- ---- ------ ------ Cash generated from operations 161.2 148.4 Interest received 4.6 3.0 Interest paid (6.2) (1.4) Taxation paid (45.8) (43.6) --------------------------------------- ---- ------ ------ Net cash inflow from operating activities 113.8 106.4 Cash flows from investing activities Purchase of tangible and intangible fixed assets (34.3) (30.7) Proceeds from sale of property, plant and equipment 0.1 3.6 Payment of deferred consideration (1.4) (19.2) Acquisition of subsidiary 26 (0.1) (4.4) --------------------------------------- ---- ------ ------ Net cash outflow from investing activities (35.7) (50.7) Cash flows from financing activities Dividend paid in the year 22 (36.5) (32.8) Issue of ordinary share capital 0.6 3.7 Purchase of shares through share buy back 22 (62.2) (191.6) Sale of own shares by ESOPs 22 6.1 2.4 Draw down on loan facility 20 10.0 50.0 --------------------------------------- ---- ------ ------ Net cash outflow from financing activities (82.0) (168.3) --------------------------------------- ---- ------ ------ Net decrease in cash and cash equivalents (3.9) (112.6) Effect of exchange rate changes on opening balances (1.4) 5.2 Cash and cash equivalents at beginning of period 62.5 169.9 --------------------------------------- ---- ------ ------ Cash and cash equivalents at end of period 57.2 62.5 --------------------------------------- ---- ------ ------ Analysis of cash and cash equivalents Note As at As at 31 March 31 March 2007 2006 Â£m Â£m --------------------------------------- ---- ------ ------ Cash at bank and in hand 16 72.0 70.2 Short term deposits 16 59.4 43.5 --------------------------------------- ---- ------ ------ Cash and cash equivalents as per the balance sheet 131.4 113.7 Bank overdrafts 20 (74.2) (51.2) --------------------------------------- ---- ------ ------ Cash and cash equivalents per the cash flow statement 57.2 62.5 Bank borrowings 20 (60.0) (50.0) --------------------------------------- ---- ------ ------ Net (debt)/cash (2.8) 12.5 --------------------------------------- ---- ------ ------ NOTES TO THE FINANCIAL STATEMENTS 1 Basis of preparation Burberry Group is a luxury goods manufacturer, wholesaler and retailer in Europe, North America and Asia Pacific; licensing activity is also carried out, principally in Japan. All of the companies which comprise Burberry Group are owned by Burberry Group plc ('the Company') directly or indirectly. The consolidated financial statements of the Burberry Group have been prepared in accordance with EU endorsed International Financial Reporting Standards ('IFRS'), IFRIC interpretations and parts of the Companies Act 1985 applicable to companies reporting under IFRS. These consolidated financial statements have been prepared under the historical cost convention, except as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss. At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective: IFRS 7 Financial Instruments: Disclosures Effective for annual periods beginning on or after 1 January 2007 IFRS 8 Operating Segments Effective for annual periods beginning on or after 1 January 2009 IFRIC 8 Scope of IFRS 2 Effective for annual periods beginning on or after 1 May 2006 IFRIC 9 Reassessment of Embedded Derivatives Effective for annual periods beginning on or after 1 June 2006 IFRIC 10 Interim Financial Reporting and Effective for annual periods Impairment beginning on or after 1 November 2006 IFRIC 11 IFRS 2: Group and Treasury Share Effective for annual periods Transactions beginning on or after 1 March 2007 IFRIC 12 Service Concession Arrangements Effective for annual periods beginning on or after 1 January 2008 The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the Group. The parent Company has not adopted IFRS as its statutory reporting basis. Audited financial statements for the parent Company have been prepared in accordance with UK GAAP. Basis of consolidation The Group's annual financial statements comprise those of the parent Company and its subsidiaries, presented as a single economic entity. The results of the subsidiaries are prepared for the same reporting year as the parent Company, using consistent accounting policies. The effects of intra-group transactions are eliminated in preparing the Group financial statements. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the portion of the reporting period during which Burberry Group plc had control. Critical judgements in applying accounting policies No critical judgements, apart from those involving estimations (see below) have been made by management in the process of applying the entity's accounting policies which would have a significant effect on the amounts recognised in the financial statements. Key sources of estimation uncertainty Preparation of the consolidated financial statements in conformity with IFRS requires that management make certain estimates and assumptions that affect the reported revenues, expenses, assets and liabilities and the disclosure of contingent liabilities. If in the future such estimates and assumptions, which are based on management's best judgement at the date of the financial statements, deviate from actual circumstances, the original estimate and assumptions will be modified as appropriate in the period in which the circumstances change. 1. Basis of preparation (continued) Key sources of estimation uncertainty (continued) Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Such estimates include, but are not limited to goodwill and asset impairment, stock provisioning, income and deferred tax. These are discussed below. Impairment of goodwill The Group is required to test whether goodwill has suffered any impairment. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. The use of this method requires the estimation of future cash flows expected to arise from the continuing operation of the cash generating unit and the choice of a suitable discount rate in order to calculate the present value. Impairment of assets Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount of an asset or a cash generating unit is determined based on value-in-use calculations prepared on the basis of management's assumptions and estimates. Stock provisioning The Group manufactures and sells luxury goods and is subject to changing consumer demands and fashion trends. As a result, it is necessary to consider the recoverability of the cost of stocks and the associated provisioning required. Stock provisioning is based on the age and condition of stock, as well as anticipated saleability. Income and deferred taxes The Group is subject to income taxes in numerous jurisdictions. Judgment is required in determining the provision for income taxes in each territory. There are many transactions and calculations during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts which were initially recorded, such differences will impact the income tax and deferred tax provisions and assets in the period in which such determination is made. 2 Accounting policies The consolidated financial information of Burberry Group plc and all its subsidiaries have been prepared in accordance with IFRS. The principal accounting policies of the Group are: a) Turnover Turnover, which is stated excluding Value Added Tax and other sales related taxes, is the amount receivable for goods supplied (less returns, trade discounts and allowances) and royalties receivable. Wholesale sales are recognised when goods are despatched to trade customers, as this reflects the transfer of risks and rewards of ownership, with provisions made for expected returns and allowances. Retail sales, returns and allowances are reflected at the dates of transactions with customers. Provisions for returns on retail and wholesale sales are calculated based on historical return levels. Royalties receivable from licensees are accrued as earned on the basis of the terms of the relevant royalty agreement, which is typically on the basis of production volumes. 2 Accounting policies (continued) b) Share schemes Share incentive plans The cost of the share incentives received by employees (including directors) is measured with reference to the fair value of the equity instruments awarded at the date of grant. The Black-Scholes option pricing model is used to determine the fair value of the award made. The impact of performance conditions is not considered in determining the fair value on the date of grant, except for conditions linked to the price of Burberry Group plc shares i.e. market conditions. Vesting conditions which relate to non-market conditions are allowed for in the assumptions used for the number of options expected to vest. The estimate of the number of options expected to vest is revised at each balance sheet date. The cost of the share based incentives is recognised as an expense over the vesting period of the awards, with a corresponding increase in equity. The proceeds received from the exercise of the equity instruments awarded, net of any directly attributable transaction costs, are credited to share capital and share premium. c) Operating leases Burberry Group is a lessee of property. Gross rental expenditure in respect of operating leases is recognised on a straight line basis over the period of the leases. Certain rental expense is determined on the basis of turnover achieved in specific retail locations and is accrued for on that basis. Lease premiums and incentives Amounts paid to acquire the rights to a lease ('Lease premiums') are written off in equal annual instalments over the life of the lease contract. Lease incentives, typically rent free periods and capital contributions, are recognised over the full term of the lease. d) Dividend distribution Dividend distributions to Burberry Group plc's shareholders are recognised as a liability in the period in which the dividends are approved by the shareholders. e) Pension costs Defined benefit schemes Prior to the demerger of the Group from GUS plc on 13 December 2005, it was agreed that existing employees of the Burberry Group who were participating in the GUS defined benefit pension scheme would continue to do so until 31 December 2007 or such earlier date as required by HM Customs & Revenue or by Burberry. When eventual withdrawal of members of the Burberry Group from the GUS pension scheme takes place on or before 31 December 2007, Burberry must pay any liabilities due under section 75 or 75A of the Pensions Act 1995. GUS has indemnified Burberry on an after tax basis against any amounts which are in excess of Â£1.25m. Eligible employees of Burberry Group also participate in defined benefit schemes in the USA, France and Taiwan. Where arrangements are funded, assets are held in independently administrated trusts. The cost of providing defined benefit schemes to participating Burberry employees is charged to the Income Statement over the anticipated period of employment. The asset or liability recognised in the Balance Sheet, in respect of defined benefit schemes, represents Burberry's share of the present value of the defined benefit obligation at the balance sheet date, less the fair value of plan assets, together with adjustments for unrecognised actuarial gains and losses and past service costs. 2 Accounting policies (continued) e) Pension costs (continued) Net actuarial gains and losses are recognised directly to equity through the Group Statement of Recognised Income and Expense ('SORIE'). Defined contribution schemes Burberry Group eligible employees also participate in defined contribution pension schemes, the principal one being in the UK with its assets held in an independently administered fund. The cost of providing these benefits to participating Burberry employees is recognised in the Income Statement and comprises the amount of contributions payable to the schemes in respect of the year. f) Intangible fixed assets Goodwill Goodwill is the excess of purchase consideration over the fair value of identifiable net assets acquired. Goodwill on acquisition is recorded as an intangible fixed asset. Fair values are attributed to the identifiable assets, liabilities and contingent liabilities that existed at the date of acquisition, reflecting their condition at that date. Adjustments are also made to bring the accounting policies of acquired businesses into alignment with those of Burberry Group. Goodwill is assigned an indefinite useful economic life. Impairment reviews are performed annually, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Trademarks and trading licences The cost of securing and renewing trademarks and other intellectual property is capitalised as an intangible fixed asset and amortised by equal annual instalments over its useful economic life, typically ten years. The useful economic life of trademarks and other intellectual property is determined on a case-by-case basis, in accordance with the terms of the underlying agreement. Computer software The cost of acquiring computer software (including licences and separately identifiable external development costs) is capitalised as an intangible asset at purchase price, plus any directly attributable cost of preparing that asset for its intended use. Software costs are amortised by equal annual instalments over their estimated useful economic lives, which are up to five years. g) Property, plant and equipment Property, plant and equipment is stated at cost or deemed cost, based on historical revalued amounts, less accumulated depreciation and provision to reflect any impairment in value. Depreciation Depreciation of property, plant and equipment is calculated to write off the cost or deemed cost, less residual value, of the assets in equal annual instalments over their estimated useful lives at the following rates: ------------------------------- -------------------- Land Not depreciated Freehold buildings Up to 50 years Leaseholds - less than 50 years expired Over the unexpired term of the lease Plant, machinery, fixtures and fittings 3 - 8 years Retail fixtures and fittings 2 - 5 years Office equipment 5 years Computer equipment Up to 5 years ------------------------------- -------------------- 2 Accounting policies (continued) g) Property, plant and equipment (continued) Profit/loss on disposal of property, plant and equipment Profits and losses on disposal of property, plant and equipment represent the difference between the net proceeds and net book value at the date of sale. Disposals are accounted for when the relevant transaction becomes unconditional. h) Impairment of assets Assets that have an indefinite useful economic life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). i) Stock Stock and work in progress are valued on a first-in-first-out basis at the lower of cost (including an appropriate proportion of production overhead) and net realisable value. Provision is made to reduce cost to no more than net realisable value having regard to the age and condition of stock, as well as its anticipated saleability. j) Taxation including deferred tax The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense which are taxable or deductible in other years and it further excludes items which are never taxable or deductible. The Group's liability for current tax is calculated using tax rates which have been enacted or substantially enacted by the balance sheet date. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the temporary difference arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is exempt from deferred tax. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred tax liability is settled. Deferred tax assets and liabilities are not discounted. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. 2 Accounting policies (continued) k) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company's equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company's equity holders. l) Financial instruments A financial instrument is initially recognised at fair value on the Balance Sheet when the entity becomes a party to the contractual provisions of the instrument. A financial asset is no longer recognised when the contractual rights to the cash flow expire or substantially all risks and rewards of the asset are transferred. A financial liability is no longer recognised when the obligation specified in the contract is discharged, cancelled or expires. The Group's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, borrowings and derivative instruments, the accounting for which is explained below. Cash and cash equivalents Cash and cash equivalents comprise cash and short term deposits with an original maturity date of three months or less, held with banks, liquidity funds as well as bank overdrafts. Bank overdrafts are recorded under current liabilities on the Balance Sheet. Trade and other receivables Trade and other receivables arise when the Group provides money, goods or services directly to a third party with no intention of trading the receivable. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. Receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is recognised in the Income Statement. Trade and other payables Trade and other payables arise when the Group acquires money, goods or services directly from a supplier. They are included in current liabilities, except for maturities greater than 12 months after the balance sheet date. Payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised costs and the difference between the proceeds (net of transaction costs) and the redemption value is recognised in the Income Statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Derivative instruments Burberry Group uses derivative financial instruments to hedge its exposure to fluctuations in foreign exchange rates arising on certain trading transactions. The principal derivative instruments used are forward currency contracts taken out to hedge highly probable future royalty receivables and product purchases. 2 Accounting policies (continued) Derivative instruments (continued) The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Derivatives are initially recognised at fair value at the trade date and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (1) hedges of the fair value of recognised assets and liabilities or a firm commitment (fair value hedge); or (2) hedges of highly probable forecast transactions (cash flow hedges); or (3) classified as held for trading. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together with any changes in the fair value of the hedged item that is attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity. The gain or loss relating to the ineffective portion of the gain or loss is recognised immediately in profit or loss. Amounts deferred in equity are recycled in profit or loss in the periods when the hedged item is recognised in profit or loss. If it is expected that all or a portion of a loss deferred in equity will not be recovered in one or more future periods or the hedged transaction is no longer expected to occur the amount that is not expected to be recovered will be reclassified to the Income Statement. If a derivative instrument is not designated as a hedge, the gain or loss on revaluation is recognised in the Income Statement. m) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). Transactions in foreign currencies Transactions denominated in foreign currencies within each entity in the Group, are translated into the functional currency at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies, which are held at the year end, are translated into the functional currency at the exchange rate ruling at the balance sheet date. Exchange differences on monetary items are recognised in the Income Statement in the period in which they arise, except where these exchange differences form part of a net investment in overseas subsidiaries of Burberry Group, in which case such differences are taken directly to the foreign currency translation reserve within equity. Translation of the results of overseas businesses The results of overseas subsidiaries are translated into the Group's presentation currency of Sterling each month at the weighted average exchange rate for the month according to the phasing of the Group's trading results. The weighted average exchange rate is used, as it is considered to approximate the actual exchange rates on the date of the transactions. The assets and liabilities of such undertakings are translated at the year end exchange rates. Differences arising on the retranslation of the opening net investment in subsidiary companies, and on the translation of their results, are taken directly to the foreign currency translation reserve within equity. 2 Accounting policies (continued) m) Foreign currency translation (continued) The principal exchange rates used were as follows: Weighted average profit rate Closing rate ---------------------------- --------------------- Year to Year to Year to Year to 31 March 31 March 31 March 31 March 2007 2006 2007 2006 ------------------------------- ------ ------- ------ ------ Euro 1.49 1.46 1.47 1.43 US dollar 1.91 1.78 1.97 1.74 Hong Kong dollar 14.80 13.77 15.38 13.48 Korean won 1,801 1,797 1,851 1,688 ------------------------------- ------ ------- ------ ------ Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. The average exchange rate achieved by Burberry Group on its Yen royalty income, taking into account its use of Yen forward sale contracts on a monthly basis approximately 12 months in advance of royalty receipts, was Yen 199.2: Â£1 in the year to 31 March 2007 (2006: Yen 190.3: Â£1). n) Non-GAAP measures Non-GAAP measures are presented in order to provide a clear and consistent presentation of the underlying performance of the Group's ongoing business. Such presentation will be prepared on a consistent basis in the future. 3 Segmental analysis (i) Primary segment - analysis by origin The geographical segment from which the products or services are supplied to a third party or another segment defines analysis by origin. All licensing activity is recorded in Europe since the intellectual property of Burberry is owned by Burberry Limited, a UK based subsidiary. (a) Turnover and profit before taxation - by origin of business Europe comprises operations in France, Germany, Italy, Switzerland, Austria, Belgium, Czech Republic, Hungary and the UK. North America comprises operations in the USA. Asia Pacific comprises operations in Australia, Hong Kong, Japan, Korea, Malaysia, Singapore and Taiwan. Year to 31 March Europe (excl Spain) North America Asia Pacific Spain Total --------------- ------------------- --------------- --------------- --------------- --------------- 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m --------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross segment turnover 433.9 386.6* 192.6 173.2 214.4 182.4 177.6 154.9 1,018.5 897.1* Inter-segment turnover (163.2) (153.2)* - - (1.3) (0.5) (3.7) (0.5) (168.2) (154.2)* --------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Turnover 270.7 233.4 192.6 173.2 213.1 181.9 173.9 154.4 850.3 742.9 --------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ --------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Operating profit 96.9 104.8 12.5 6.3 34.2 22.3 13.4 21.1 157.0 154.5 Net finance (charge)/income (0.7) 2.5 --------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Profit before taxation 156.3 157.0 Taxation (46.1) (50.6) --------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Attributable profit for the year 110.2 106.4 --------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ * Restated for inter-segment turnover and reclassifications The results above are stated after the allocation of costs of a Group wide nature. Inter-segment turnover reflects the level of revenue between segments and is priced at arm's length. 3 Segmental analysis (continued) (b) Other segmental items - by origin of business Europe (excl Spain) North America Asia Pacific Spain Total ----------------- ------------------- -------------- ------------- ------------- -------------- 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ------ ----- ----- ----- ----- ----- ----- ----- ----- ------ Capital expenditure 15.8 13.6 11.5 12.5 3.0 2.9 8.5 4.0 38.8 33.0 Depreciation 10.1 8.1 7.7 2.5 2.3 5.1 4.4 25.9 22.5 Impairment charge - 0.6 - 0.2 - - - - - 0.8 Release of impairment charge (0.7) (0.4) (0.3) - - - - - (1.0) (0.4) Amortisation 1.6 1.7 - - 0.1 0.1 0.1 0.2 1.8 2.0 Other non-cash expenses - share based payments 3.9 2.8 2.8 1.9 2.1 1.4 2.0 1.3 10.8 7.4 ----------------- ------ ----- ----- ----- ----- ----- ----- ----- ----- ------ (c) Assets and liabilities - by origin of business As at 31 March Europe North America Asia Pacific Spain Total ----------------- -------------- -------------- ------------- -------------- -------------- 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Segmental assets 179.1 142.3 143.8 145.9 33.8 28.7 120.1 103.5 476.8 420.4 Segmental liabilities (97.2) (67.5) (29.2) (25.5) (11.9) (12.8) (35.1) (30.9) (173.4) (136.7) ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net operating assets 81.9 74.8 114.6 120.4 21.9 15.9 85.0 72.6 303.4 283.7 ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Goodwill 116.9 121.2 Deferred consideration for acquisitions (10.0) (11.5) Net (debt)/cash (2.8) 12.5 Taxation (including deferred taxation) (10.6) (19.3) ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net assets 396.9 386.6 ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (ii) Secondary segment - analysis by class of business (being the channels to market) Year to 31 Retail Wholesale Total Licensing Total March Retail and Wholesale ------------- --------------- --------------- ----------------- -------------- --------------- 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross segment turnover 410.1 318.5 495.0 469.4* 905.1 787.9* 86.1 81.1 991.2 869.0* Inter-segment turnover - - (140.9) (126.1)* (140.9) (126.1)* - - (140.9) (126.1)* ------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Turnover 410.1 318.5 354.1 343.3 764.2 661.8 86.1 81.1 850.3 742.9 ------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Other segmental items Segment assets 470.3 415.1* 6.5 5.3* 476.8 420.4 Capital expenditure 38.7 33.0 0.1 - 38.8 33.0 ------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ * Restated for inter-segment turnover and reclassifications The results above are stated after the allocation of costs of a Group wide nature. (iii) Additional information Analysis of turnover is shown below as additional information: Turnover by product Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ------------------------------------------- ------ ------ Womenswear 305.5 249.3 Menswear 227.0 206.2 Accessories 211.2 189.2 Other 20.5 17.1 ------------------------------------------- ------ ------ Wholesale and Retail 764.2 661.8 Licensing 86.1 81.1 ------------------------------------------- ------ ------ Total 850.3 742.9 ------------------------------------------- ------ ------ Number of directly operated stores, concessions and outlets open at 31March 292 262 ------------------------------------------- ------ ------ 3 Segmental analysis (continued) (iii) Additional information (continued) Turnover by destination Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ------------------------------------------- ------ ------ Europe (excluding Spain) 229.8 191.5 North America 196.5 177.9 Asia Pacific 167.5 144.6 Spain 151.8 134.1 Rest of the World 18.6 13.7 ------------------------------------------- ------ ------ Wholesale and Retail 764.2 661.8 Licensing 86.1 81.1 ------------------------------------------- ------ ------ Total 850.3 742.9 ------------------------------------------- ------ ------ 4 Net operating expenses ------------------------------------------- ------ ------ Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ------------------------------------------- ------ ------ Distribution costs (149.7) (125.9) Administrative expenses (excluding Atlas and Treorchy costs) (185.5) (156.3) Project Atlas costs (21.6) (11.1) Treorchy closure costs (6.5) - Property rental income under operating leases 0.1 0.1 (Loss)/profit on disposal of property, plant and equipment (1.1) 1.6 ------------------------------------------- ------ ------ Total (364.3) (291.6) ------------------------------------------- ------ ------ Operating profit for the year to 31 March 2007 includes a charge of Â£21.6m (2006: Â£11.1m) relating to Project Atlas, our major infrastructure redesign initiative, which was announced in May 2005. This project is designed to create a substantially stronger platform to support long term operations and growth of the Group through the redesign of Burberry's business processes and systems. Investment in Project Atlas is expected to total around Â£50m over the three year period to 31 March 2008. Burberry completed the closure of its polo shirt manufacturing facility in Treorchy, South Wales, during the year. This resulted in closure costs of Â£6.5m. Included in the closure costs is Â£1.2m representing the present value of 10 annual payments of Â£150,000 Burberry has committed to the local Treorchy community (discounted at 4.5%). 5 Profit before taxation Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ------------------------------------------- ------ ------ Profit before taxation is stated after charging/ (crediting): Depreciation of property, plant and equipment - within cost of sales 1.5 1.3 - within distribution costs 3.2 2.8 - within administrative expenses 21.2 18.4 Amortisation of trademarks and other intellectual property (included in administrative expenses) 1.8 2.0 Fixed asset impairment charge relating to certain retail assets (included in administrative expenses) - 0.8 Release of asset impairment charge relating to certain retail assets (included in administrative expenses) (1.0) (0.4) Loss/(profit) on disposal of property, plant and equipment 1.1 (1.6) Project Atlas costs 21.6 11.1 Treorchy closure costs 6.5 - Employee costs (see note 28) 174.0 148.7 Operating lease rentals - minimum lease payments 31.0 27.7 - contingent rents 17.1 13.5 Auditor's remuneration 2.8 2.4 Net exchange (gain)/loss included in income statement (0.6) 0.8 ------------------------------------------- ------ ------ 5 Profit before taxation (continued) Auditor's remuneration is further analysed as follows: Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ------------------------------------------- ------- ------ Audit services in respect of the accounts of the company 0.4 0.4 Audit services in respect of the accounts of subsidiary companies 0.5 0.5 Other audit services supplied pursuant to legislation 0.1 0.4 Services relating to taxation - compliance services 0.1 0.2 - advisory services 1.7 0.9 ------------------------------------------- ------- ------ Total 2.8 2.4 ------------------------------------------- ------- ------ All work performed by the external auditors is controlled by an authorisation policy agreed by the Audit Committee. The over-riding principle precludes the auditors from engaging in non-audit services that would compromise their independence. Non-audit services are provided by the auditors where they are best placed to provide the service due to their previous experience or market leadership in a particular area. 6 Net finance (charge)/income Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Bank interest income 4.6 3.7 Interest income receivable from GUS related companies - 0.1 Other interest income 0.9 0.5 ----------------------------------------- ------ ------ Interest receivable and similar income 5.5 4.3 Interest expense on bank loans and overdrafts (6.2) (1.8) ----------------------------------------- ------ ------ Net finance (charge)/income (0.7) 2.5 ----------------------------------------- ------ ------ 7 Taxation (i) Analysis of charge for the year recognised in the Income Statement Analysis of charge for the year Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Current tax ------------- UK corporation tax Current tax on income for the year to 31 March 2007 at 30% (2006: 30%) 28.8 30.4 Double taxation relief (7.4) (7.1) Adjustments in respect of prior years 1.9 0.4 ----------------------------------------- ------ ------ 23.3 23.7 Foreign tax Current tax on income for the year 31.6 28.3 Adjustments in respect of prior years (4.2) 1.4 ----------------------------------------- ------ ------ Total current tax 50.7 53.4 ----------------------------------------- ------ ------ 7 Taxation (continued) Analysis of charge for the year Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Deferred tax -------------- UK deferred tax ----------------- Origination and reversal of temporary differences (3.2) 0.2 Adjustments in respect of prior years (0.6) 0.7 ----------------------------------------- ------ ------ (3.8) 0.9 Foreign deferred tax ---------------------- Origination and reversal of temporary differences (1.5) (1.9) Effects of changes in tax rates 0.5 - Adjustments in respect of prior years 0.2 (1.8) ----------------------------------------- ------ ------ Total deferred tax (4.6) (2.8) ----------------------------------------- ------ ------ Total tax on profit 46.1 50.6 ----------------------------------------- ------ ------ (ii) Analysis of charge for the year recognised in equity Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Current tax ------------- Current tax credit on share options (retained earnings) (2.8) (0.6) Current tax credit on exchange differences on loans (foreign currency translation reserve) (1.3) (0.2) ----------------------------------------- ------ ------ Total current tax recognised in equity (4.1) (0.8) ----------------------------------------- ------ ------ Deferred tax -------------- Deferred tax charge/(credit) on cash flow hedges recognised directly to equity (hedging reserve) 3.0 (1.5) Deferred tax credit on cash flow hedges settled during the year (hedging reserve) (1.8) (0.2) Deferred tax credit on share options (retained earnings) (4.4) (2.0) Deferred tax charge on actuarial gains/losses recognised during the year (retained earnings) - 0.2 Deferred tax credit on exchange differences on loan (foreign currency translation reserve) (0.2) - ----------------------------------------- ------ ------ Total deferred tax recognised in equity (3.4) (3.5) ----------------------------------------- ------ ------ The tax rate applicable on profit varied from the standard rate of corporation tax in the UK due to the following factors: Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Tax at 30% on profit before taxation 46.9 47.1 Rate adjustments relating to overseas profits (0.9) (0.9) Permanent differences 2.1 3.6 Tax losses for which no deferred tax recognised 0.2 - Adjustments in respect of prior years (2.7) 0.8 Adjustments to deferred tax relating to changes in tax rates 0.5 - ----------------------------------------- ------ ------ Total taxation 46.1 50.6 ----------------------------------------- ------ ------ The advanced pricing agreement in relation to internal sales between the UK and USA, previously under negotiation with the UK and USA Competent Authorities, has been finalised in the period. The net tax benefit to the Group has been recognised as a prior year adjustment to the current tax charge. As part of the agreements with GUS plc (Burberry Group's former parent company), certain tax liabilities, which arise and relate to matters prior to 31 March 2002 will be met by GUS plc. Any liability arising after 1 April 2002 will be payable by the Burberry Group. 8 Earnings per share The calculation of basic earnings per share is based on attributable profit for the year divided by the weighted average number of ordinary shares in issue during the year. Basic and diluted earnings per share before Atlas and Treorchy costs are also disclosed to indicate the underlying profitability of Burberry Group. Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Attributable profit for the year before Atlas and Treorchy costs 130.0 114.8 Effect of Atlas and Treorchy costs (after taxation) (19.8) (8.4) ----------------------------------------- ------ ------ Attributable profit for the year 110.2 106.4 ----------------------------------------- ------ ------ The weighted average number of ordinary shares represents the weighted average number of Burberry Group plc ordinary shares in issue throughout the year, excluding ordinary shares held in Burberry Group's Employee share option plans ('ESOPs'). Diluted earnings per share is based on the weighted average number of ordinary shares in issue during the year. In addition, account is taken of any awards made under the share incentive schemes, which will have a dilutive effect when exercised. Year to Year to 31 March 31 March 2007 2006 Millions Millions ----------------------------------------- ------ ------ Weighted average number of ordinary shares in issue during the year 437.8 464.4 Dilutive effect of the share incentive schemes 8.3 13.2 ----------------------------------------- ------ ------ Diluted weighted average number of ordinary shares in issue during the year 446.1 477.6 ----------------------------------------- ------ ------ ----------------------------------------- ------ ------ Basic earnings per share Year to Year to 31 March 31 March 2007 2006 Pence Pence ----------------------------------------- ------ ------ Basic earnings per share before Atlas and Treorchy costs 29.7 24.7 Effect of Atlas and Treorchy costs (4.5) (1.8) ----------------------------------------- ------ ------ Basic earnings per share 25.2 22.9 ----------------------------------------- ------ ------ Diluted earnings per share Year to Year to 31 March 31 March 2007 2006 Pence Pence ----------------------------------------- ------ ------ Diluted earnings per share before Atlas and Treorchy costs 29.1 24.1 Effect of Atlas and Treorchy costs (4.4) (1.8) ----------------------------------------- ------ ------ Diluted earnings per share 24.7 22.3 ----------------------------------------- ------ ------ 9 Dividends Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Prior year final dividend paid (5.5p per share (2006: 4.5p)) - GUS group - 14.2 - other shareholders 24.0 7.3 Interim dividend paid (2.875p per share (2006: 2.5p)) - other shareholders 12.5 11.3 ----------------------------------------- ------ ------ Total 36.5 32.8 ----------------------------------------- ------ ------ A final dividend in respect of the year to 31 March 2007 of 7.625p (2006: 5.5p) per share, amounting to Â£33.1m (2006: Â£24.0m), has been proposed for approval by the shareholders at the AGM subsequent to the balance sheet date. The final dividend has not been recognised as a liability at the year end and will be paid on 2 August 2007 to shareholders on the register at the close of business on 6 June 2007. 10 Intangible assets Cost Goodwill Trademarks and Computer Total trading software licences Â£m Â£m Â£m Â£m ------------------------------- ------ ------ ------- ------ As at 1 April 2005 114.0 11.8 5.2 131.0 Effect of foreign exchange rate changes 3.3 0.1 - 3.4 Additions 3.9 0.1 4.9 8.9 ------------------------------- ------ ------ ------- ------ As at 31 March 2006 121.2 12.0 10.1 143.3 Effect of foreign exchange rate changes (4.4) (0.3) (0.1) (4.8) Additions 0.1 0.7 3.8 4.6 ------------------------------- ------ ------ ------- ------ As at 31 March 2007 116.9 12.4 13.8 143.1 ------------------------------- ------ ------ ------- ------ Accumulated amortisation ------------------------------- ------ ------ ------- ------ As at 1 April 2005 - 2.3 3.5 5.8 Effect of foreign exchange rate changes - - 0.1 0.1 Charge for the year - 0.9 1.1 2.0 ------------------------------- ------ ------ ------- ------ As at 31 March 2006 - 3.2 4.7 7.9 Effect of foreign exchange rate changes - - (0.2) (0.2) Charge for the year - 0.9 0.9 1.8 ------------------------------- ------ ------ ------- ------ As at 31 March 2007 - 4.1 5.4 9.5 ------------------------------- ------ ------ ------- ------ Net book value As at 31 March 2007 116.9 8.3 8.4 133.6 As at 31 March 2006 121.2 8.8 5.4 135.4 ------------------------------- ------ ------ ------- ------ Impairment testing of goodwill The cash generating units which have the most significant carrying values of goodwill allocated to them are Spain and Korea. The carrying value of the goodwill allocated to these cash generating units is: As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Spain 86.9 89.1 Korea 22.3 23.1 Other 7.7 9.0 ----------------------------------------- ------ ------ Total 116.9 121.2 ----------------------------------------- ------ ------ At 31 March 2007 no impairment was recognised (2006: nil), as the recoverable amount of the goodwill for each cash generating unit exceeded its carrying value. The recoverable amount has been determined based on value in use. The value in use calculation was performed using pre-tax cash flow projections for 2007/08 based on financial plans approved by management. No growth has been assumed in the cash flow projections beyond this period (2006: 3%). These cash flows were discounted at a rate of 13.6% (2006: 12%) for Spain and 12.5% (2006: 11%) for Korea, being Burberry Group's pre-tax weighted average cost of capital adjusted for country specific tax rates. 11 Property, plant and equipment Cost Freehold land Leasehold Fixtures, Assets Total and buildings improvements fittings and in the course equipment of construction Â£m Â£m Â£m Â£m Â£m --------------------------- ------- ------- ------- ------- ------- As at 1 April 2005 82.0 55.5 93.7 4.6 235.8 Effect of foreign exchange rate changes 3.7 3.8 2.9 0.2 10.6 Additions 0.1 8.7 17.0 2.2 28.0 Disposals - (0.3) (2.3) - (2.6) Reclassifications 0.3 3.7 0.3 (4.3) - Acquisition of subsidiary - - 0.6 - 0.6 --------------------------- ------- ------- ------- ------- ------- As at 31 March 2006 86.1 71.4 112.2 2.7 272.4 Effect of foreign exchange rate changes (5.8) (7.1) (5.1) (0.2) (18.2) Additions 0.3 11.3 17.8 4.8 34.2 Disposals (0.1) (2.1) (7.6) - (9.8) Reclassifications - 0.6 1.4 (2.0) - --------------------------- ------- ------- ------- ------- ------- As at 31 March 2007 80.5 74.1 118.7 5.3 278.6 --------------------------- ------- ------- ------- ------- ------- Accumulated depreciation --------------------------- ------- ------- ------- ------- ------- As at 1 April 2005 17.2 13.3 50.9 - 81.4 Effect of foreign exchange rate changes 0.7 0.6 1.6 - 2.9 Charge for the year 2.5 4.3 15.7 - 22.5 Impairment charge on certain retail assets - 0.1 0.3 - 0.4 Disposals - (0.1) (1.7) - (1.8) Reclassifications 0.3 - (0.3) - - --------------------------- ------- ------- ------- ------- ------- As at 31 March 2006 20.7 18.2 66.5 - 105.4 Effect of foreign exchange rate changes (1.3) (1.6) (2.9) - (5.8) Charge for the year 3.0 5.4 17.5 - 25.9 Impairment release on certain retail assets - (0.1) (0.9) - (1.0) Disposals (0.1) (1.4) (7.1) - (8.6) --------------------------- ------- ------- ------- ------- ------- As at 31 March 2007 22.3 20.5 73.1 - 115.9 --------------------------- ------- ------- ------- ------- ------- Net book value As at 31 March 2007 58.2 53.6 45.6 5.3 162.7 As at 31 March 2006 65.4 53.2 45.7 2.7 167.0 --------------------------- ------- ------- ------- ------- ------- During the year to 31 March 2007 the trading performance of certain European and North American retail store assets which had previously been impaired were reviewed and due to improved trading conditions it was considered appropriate to release Â£1m of the impairment provision (2006: Â£0.4m charge). This release has been included in net operating expenses in the Income Statement. The impairment release was based on a review of the value of the assets in use and on pre-tax cash flows attributable to these assets in accordance with IAS 36 'Impairment of Assets'. Pre-tax cash flow projections are based on financial plans approved by management and extrapolated beyond the budget year to the anticipated lease exit dates using growth rates and inflation rates appropriate to each country's economic conditions. The pre-tax discount rate used in these calculations was 11%. Based on a valuation report prepared by Colliers Conrad Ritblat Erdman, dated 16 May 2006, the existing use value of Burberry Group's ten most significant freehold properties is Â£144m (based on closing exchange rates at 31 March 2007). This valuation is higher than the net book value of these assets. The directors do not intend to incorporate this valuation into the accounts but set out the valuation for information purposes only. The lease of the new global headquarters was signed in December 2006. The agreement incorporated a put option with the developers of the site for the Haymarket property with an exercise date of no later than 31 March 2008. The agreed price is in excess of the current net book value. 12 Deferred taxation Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and there is an intention to settle on a net basis, and to the same fiscal authority. The offset amounts are shown in the table below: As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Deferred tax assets 24.6 16.6 Deferred tax liabilities (10.2) (10.5) ----------------------------------------- ------ ------ Net amount 14.4 6.1 ----------------------------------------- ------ ------ The movement in the deferred tax account is as follows: Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ As at 1 April 6.1 2.0 Impact of adopting IAS 32 and IAS 39 - (1.5) Effect of foreign exchange rate changes 0.3 (0.7) Credited to the income statement 4.6 2.8 Credited to equity 3.4 3.5 ----------------------------------------- ------ ------ End of the year 14.4 6.1 ----------------------------------------- ------ ------ The movement in deferred tax assets and liabilities during the year, without taking into consideration the off-setting of balances within the same tax jurisdiction, are as follows: Deferred tax liabilities Accelerated Unrealised Share schemes Derivative Unused tax Other Total capital stock profit instruments losses allowances and other stock provisions Â£m Â£m Â£m Â£m Â£m Â£m Â£m --------------------- ------ ------ ------ ------ ------ ------ ------ As at 1 April 2005 16.4 (1.4) (0.4) - (0.7) 0.8 14.7 Impact of adopting IAS 32 and IAS 39 - - - (0.1) - - (0.1) Effect of foreign exchange rate changes 1.2 (0.2) - - - 0.1 1.1 Charged/(credited) to the income statement (1.7) (0.1) 0.4 - 0.2 (0.2) (1.4) Charged to equity - - - 0.1 - - 0.1 Other movements 0.1 (0.1) - - (0.2) (3.4) (3.6) --------------------- ------ ------ ------ ------ ------ ------ ------ As at 31 March 2006 16.0 (1.8) - - (0.7) (2.7) 10.8 Effect of foreign exchange rate changes (1.6) 0.2 - - - (0.1) (1.5) Charged/(credited) to the income statement (0.8) (0.1) - - 0.2 0.1 (0.6) Charged to equity - - - 0.1 - - 0.1 --------------------- ------ ------ ------ ------ ------ ------ ------ As at 31 March 2007 13.6 (1.7) - 0.1 (0.5) (2.7) 8.8 --------------------- ------ ------ ------ ------ ------ ------ ------ 12 Deferred taxation (continued) Deferred tax assets Accelerated Unrealised Share schemes Derivative Unused tax Other Total capital stock profit instruments losses allowances and other stock provisions Â£m Â£m Â£m Â£m Â£m Â£m Â£m --------------------- ------ ------ ------ ------ ------ ------ ------ As at 31 March 2005 0.1 6.4 8.1 - 0.2 1.9 16.7 Impact of adopting IAS 32 and IAS 39 - - - (1.6) - - (1.6) Effect of foreign exchange rate changes - 0.4 - - - - 0.4 (Charged)/credited to the income statement 0.6 0.5 (1.2) (0.2) - 1.7 1.4 (Charged)/credited to equity - - 2.0 1.8 - (0.2) 3.6 Other movements (0.6) 0.7 - - (0.2) (3.5) (3.6) --------------------- ------ ------ ------ ------ ------ ------ ------ As at 31 March 2006 0.1 8.0 8.9 - - (0.1) 16.9 --------------------- ------ ------ ------ ------ ------ ------ ------ Effect of foreign exchange rate changes (0.1) (0.6) - - - (0.5) (1.2) (Charged)/credited to the income statement 0.9 (0.6) 2.6 0.2 0.1 0.8 4.0 (Charged)/credited to equity - - 4.4 (1.1) - 0.2 3.5 Other movements - - (3.2) - - 3.2 - --------------------- ------ ------ ------ ------ ------ ------ ------ As at 31 March 2007 0.9 6.8 12.7 (0.9) 0.1 3.6 23.2 --------------------- ------ ------ ------ ------ ------ ------ ------ Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related benefit through the future taxable profits is probable. The Group did not recognise deferred tax assets of Â£6.7m (2006: Â£5.8m) in respect of losses amounting to Â£18.6m (2006: Â£25.2m) that can be carried forward against the future taxable income. These losses have no set expiry date. Other deferred tax assets of Â£0.1m (2006: Â£0.1m) were not recognised in respect of temporary differences totalling Â£0.1m (2006: Â£0.1m), as it was not probable that there will be future taxable profits against which these assets can be offset. Deferred tax has not been recognised in respect of temporary differences of Â£85.1m (2006: Â£70.6m) relating to the unremitted earnings of subsidiaries on the grounds that no remittance of profits retained at 31 March 2007 is required or intended in such a way that incremental tax would arise. 13 Trade and other receivables As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Non-current Deposits and prepayments 5.1 4.2 ----------------------------------------- ------ ------ Total non-current trade and other receivables 5.1 4.2 ----------------------------------------- ------ ------ Current Trade receivables 114.7 93.6 Provision for doubtful debts (3.5) (4.2) ----------------------------------------- ------ ------ Net trade receivables 111.2 89.4 Other receivables 9.4 3.1 Prepayments and accrued income 16.6 15.5 ----------------------------------------- ------ ------ Total current trade and other receivables 137.2 108.0 ----------------------------------------- ------ ------ Total trade receivables 142.3 112.2 ----------------------------------------- ------ ------ The principal non-current receivable of Â£2.1m is due within five years from the balance sheet date, with the remainder due at various stages after this. All of the non-current receivables are non-interest bearing. 14 Stock As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Raw materials 17.7 15.6 Work in progress 5.9 6.4 Finished goods 126.2 102.2 ----------------------------------------- ------ ------ Total stock 149.8 124.2 ----------------------------------------- ------ ------ ----------------------------------------- ------ ------ Year to Year to 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Cost of stock recognised as an expense during the year 333.5 298.9 Stock physically destroyed in the year 1.1 1.3 Reversal during the year of previous write downs of stock (5.6) (3.4) ----------------------------------------- ------ ------ Total cost of sales 329.0 296.8 ----------------------------------------- ------ ------ The reversal during the year of the previous write down of stock was considered appropriate as a result of the changes in market conditions. 15 Derivative financial instruments The Group Income Statement is affected by transactions denominated in foreign currency. To reduce exposure to currency fluctuations, the Group has a policy of hedging foreign currency denominated transactions by entering into forward exchange contracts. These can be analysed into two categories. Cash flow hedges Burberry Group's principal foreign currency denominated transactions arise from royalty income and the sale and purchase of overseas sourced products. In the UK, the Group manages these exposures by the use of Yen and Euro forward exchange contracts for a period of 12 months in advance. In addition, the Group's overseas subsidiaries hedge the foreign currency element of their product purchases on a seasonal basis. This hedging activity involves the use of spot and forward currency instruments. Fair value hedges Certain intercompany loan balances are hedged using forward exchange contracts to offset any volatility in foreign currency movements and tax arising thereon. The balances are hedged up to the date of repayment. As at 31 March 2007 and 2006 there were no forward exchange contract balances outstanding designated in a fair value hedging relationship. Derivative financial assets As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Forward foreign exchange contracts - cash flow hedges at beginning of year 1.7 - Impact of adopting IAS 32 and IAS 39 - 5.8 Effect of foreign exchange rate changes (0.1) 0.2 Arising during the year and taken directly to equity 9.7 2.4 Released from equity to the income statement during the year (8.1) (6.7) ----------------------------------------- ------ ------ Forward foreign exchange contracts - cash flow hedges at end of year 3.2 1.7 Forward foreign exchange contracts - held for trading 0.8 0.6 Equity swap contracts - held for trading 1.3 0.5 ----------------------------------------- ------ ------ Total current position 5.3 2.8 ----------------------------------------- ------ ------ Cash flow hedge gains expected to be recognised in the following 12 months 3.2 1.7 ----------------------------------------- ------ ------ 15 Derivative financial instruments (continued) Derivative financial liabilities As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Forward foreign exchange contracts - cash flow hedges at beginning of year (2.0) - Impact of adopting IAS 32 and IAS 39 - (1.6) Effect of foreign exchange rate changes 0.2 (0.2) Arising during the year and taken directly to equity (0.6) (4.7) Released from equity to the income statement during the year 2.2 4.5 ----------------------------------------- ------ ------ Forward foreign exchange contracts - cash flow hedges at end of year (0.2) (2.0) Forward foreign exchange contracts - held for trading (0.3) (0.1) ----------------------------------------- ------ ------ Total current position (0.5) (2.1) ----------------------------------------- ------ ------ Cash flow hedge losses expected to be recognised in the following 12 months (0.2) (2.1) ----------------------------------------- ------ ------ As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Notional principal amounts of the outstanding forward foreign exchange contracts 190.1 120.4 Notional principal amounts of the outstanding equity swap contracts 2.3 3.7 Movement on the non-designated hedges for the year recognised within net finance income in the income statement 0.9 0.6 Movement on the non-designated hedges for the year recognised within the foreign currency translation reserve - (0.1) ----------------------------------------- ------ ------ Gains and losses on cash flow hedges recognised directly to the hedging reserve within equity ----------------------------------------- ------ ------ Gains / (losses) deferred in equity 9.1 (3.8) Transferred from equity to the income statement (5.9) (0.7) Tax impact (1.2) 1.7 ----------------------------------------- ------ ------ Movement in hedging reserve for the year (refer to note 22) 2.0 (2.8) ----------------------------------------- ------ ------ The current portion of the financial instruments matures at various dates within one month to one year from the balance sheet date. 16 Cash and cash equivalents As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Cash at bank and in hand 72.0 70.2 Short term deposits 59.4 43.5 ----------------------------------------- ------ ------ Total 131.4 113.7 ----------------------------------------- ------ ------ The effective interest rate on short term deposits was 3.6% (2006: 3.4%). These deposits have an average maturity of 28 days (2006: 9 days). The effective interest rate is the weighted average annual interest rate for the Group based on local market rates on short term deposits. 17 Long term liabilities As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Unsecured: Other creditors, accruals and deferred income 10.4 9.6 Deferred consideration for acquisition - 5.0 ----------------------------------------- ------ ------ Total 10.4 14.6 ----------------------------------------- ------ ------ Deferred consideration due after more than one year arose from the acquisition of the trade and certain assets of the Burberry business in Korea. This is payable within the next financial year and has been included within current trade and other payables, refer to note 21. 17 Long term liabilities (continued) The maturity of long term liabilities, all of which do not bear interest, is as follows: As at As at 31 March 31 March 2007 2006 Â£m Â£m ----------------------------------------- ------ ------ Between one and two years 1.9 5.9 Between two and three years 1.0 1.4 Between three and four years 0.9 1.2 Between four and five years 0.8 0.9 Over five years 5.8 5.2 ----------------------------------------- ------ ------ Total 10.4 14.6 ----------------------------------------- ------ ------ This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW FR GGGDUCDDGGRS

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Burberry Group (BRBY)

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