Final Results - Year Ended 31 March 2000, Part 1

Great Universal Stores PLC 8 June 2000 PART 1 PRELIMINARY RESULTS FOR YEAR ENDED 31 MARCH 2000 The Great Universal Stores P.L.C. ('GUS') today announces its preliminary results for the year ended 31 March 2000 and the formation of its Multi Channel Retailing Division Highlights * Profit before goodwill, exceptionals and tax: £448m (1999: £514m) - Impacted by weakness in agency home shopping - Argos strong performance following initiatives. Underlying profits up 13%, with 10% growth in like-for-like sales in H2 - Experian strong performance in UK, while US held back by Metromail integration - Burberry profits doubled, renegotiation of Japanese licence to add £35m to profits by 2006 * Formation of Multi Channel Retailing Division - Argos and GUS Home Shopping to be combined - optimising GUS' leading position in remote shopping market - £80m cost savings over 3 years expected - National roll out of Argos Additions and launch of credit cards in Autumn 2000 * Earnings per share before goodwill and exceptionals: 34.5p (1999: 38.8p) * Unchanged final dividend of 14.4p, giving unchanged total dividend for the year of 20.6p John Peace, Chief Executive of GUS, said: 'This has been a year of transition for GUS, during which we have realigned our assets into growth markets. While conditions in the agency home shopping market have been very testing, our other businesses have performed well. Following the restructuring, the Group is now much better positioned to deliver growth.' Enquiries GUS 020 7495 0070 Finsbury 020 7251 3801 John Peace, Chief Executive Rupert Younger David Tyler, Finance Director Timothy Grey Fay Dodds, Investor Relations Announcement also available on GUS website: www.gusplc.co.uk 1. GROUP RESULTS AND CURRENT TRADING In the year to 31 March 2000, Group profit before amortisation of goodwill, exceptional items and taxation amounted to £448m. The reduction, compared with the equivalent figure for the previous year of £514m, arises largely because of the previously indicated significant fall in trading profit in our UK Home Shopping Division, which amounted to £85m. Results improved strongly elsewhere in the Group. Argos' trading profit rose by £15m in underlying terms, aided by like-for-like sales growth of 10% in the second half of the year. Experian's profit, before accounting for profits on sale of investments of £11m, grew by £7m to £201m. The sharpest improvement was at Burberry, where profit doubled to £22m in response to the changed strategy and brand-repositioning developed over the last two years. Profit before taxation £m 2000 1999 Experian 200.6 193.7 Argos* 137.4 117.0 Home Shopping: UK & Ireland 21.0 106.3 Continental Europe 25.1 29.5 Burberry 21.7 10.7 South African Retailing 46.0 43.1 Finance Division 33.1 34.8 Property 33.9 31.9 Central Costs (6.9) (4.8) ---------- -------- 511.9 562.2 Interest expense (64.0) (48.6) ---------- -------- Profit before amortisation of goodwill, exceptional items and taxation 447.9 513.6 ---------- -------- Gain on sales of Experian investments 11.1 - ---------- -------- Profit before amortisation of goodwill, other exceptional items and taxation 459.0 513.6 ---------- -------- *12 months in 2000; 11 months in 1999 The Group's effective tax rate this year was 22.8%. Earnings per share before goodwill amortisation and exceptionals amounted to 34.5p compared to last year's equivalent of 38.8p. It is proposed that a final dividend of 14.4p per Ordinary share be paid on 31 August 2000, giving an unchanged total dividend for the year of 20.6p. The dividend is covered 1.7 times by earnings before goodwill amortisation and exceptionals (1999: 1.9 times). Current Trading Argos has had a strong start to the new financial year with sales in April and May growing by 18% (14% like-for-like). UK Home Shopping sales declined by 7% in the same period due to the continued weakness in demand for clothing and a planned reduction in customer recruitment expenditure. Revenues in Experian North America were above those of last year with its marketing solutions business showing early signs of improvement. Experian UK and Rest of World continue to show good growth. Burberry has had a strong start to the year with both wholesale and retail operations enjoying double-digit percentage sales growth. A further update on trading will be given on 26 July at the AGM. 2. GROUP STRATEGY Since December we have undertaken a strategic review of all our activities. We have acted quickly to focus the Group on three key business areas in growth markets. These three inter-related businesses are: * Global information services through Experian * Third party services through Reality * Multi channel retailing through Argos, Kays, GUS and other brands Global Information Services Experian is firmly established as a leader in the global information market place where prospects for future growth are further enhanced by the development of e-commerce. While Experian North America has been affected by a combination of internal and external factors in the year under review, the business is considerably strengthened now the Metromail integration is complete. Third Party Services In May, we announced the formation of Reality. By combining the web- design skills of the recently acquired Reality e-commerce business with customer management services sourced from Experian and many of the infrastructure assets of our business - call centres, warehouses and White Arrow home delivery - we have created the leading third party logistics and customer care organisation in the UK with proforma sales last year of nearly £400 million. Led by a strong, separate management team, we have every confidence that Reality will build rapidly on its current position. It is currently in discussions with a large number of potential clients. Multi Channel Retailing Today we are announcing plans to combine our retailing operations into one business, establishing a major multi channel retailing organisation. It will sell a wide range of merchandise to consumers through its retail stores and home shopping catalogues, as well as through the internet, interactive TV and other channels. Key priorities for the business are to continue building on the strong momentum achieved at Argos; stabilise UK agency home shopping profits by reducing costs and concentrating on profitable customers and build market share in direct home shopping, particularly through Argos Additions. We also plan to strengthen further our financial services offering through the launch of credit cards. gusco.com. In May we announced the launch of gusco.com to support our three key businesses. It will fund and oversee the development of GUS' e-commerce investments. Managed as a separate unit and with dedicated teams, gusco.com works in close collaboration with each of the Group's other businesses. It also gives the Group greater access to new technologies, customers and related markets. MyPoints Europe, a web-based loyalty scheme being launched this summer, is among the first of these ventures. gusco.com has also recently signed a letter of intent with uBid.com, a leading business-to-consumer on-line auction site for surplus and end-of season merchandise in the US. Under the terms of this agreement, GUS will take a minority stake in uBid Europe and participate in the roll-out of the European offer. Other Businesses We are also committed to the maximisation of value for shareholders from our other four businesses. Burberry. This is a world class luxury goods business which is on a strong recovery path, as its doubling of profits in the last year indicates. Burberry now has excellent growth prospects, building on the platform we have already established. Additionally, it will benefit greatly from the recently signed Japanese license agreements which are expected, at current exchange rates, to add some £35m pa to profits by 2006. South African retailing. With 450 outlets, Lewis Stores is one of the largest and best known retailers in South Africa. The business has been extremely well run for many years, consistently out-performing its competitors in sales growth and in profit margins. Its reported profit figures in Sterling, however, are affected by the Rand/Sterling exchange rate. Property investment. The Group is now roughly half way through a seven year arrangement with The British Land Company PLC in which the latter company purchased a 50% stake in GUS' property portfolio and took responsibility for its management. This arrangement has been very successful, with the great bulk of GUS' former retail property assets - largely in the high street - having been sold and the cash reinvested mainly in out-of-town shopping centres. The disposal programme is continuing, but funds realised are now being used to repay debt and to return cash to the two shareholders. Motor related financial services. A decision has been taken to dispose of General Guarantee Finance and Highway Vehicle Management. This process is under way and more information on its progress will be made available as soon as possible. 3. MULTI CHANNEL RETAILING Strategy Following the business review initiated earlier this year, we announce today a restructuring plan for our catalogue retailing businesses. The new strategy is designed to reposition the business, optimising GUS' leading position in the catalogue and remote shopping market and addressing the decline in the UK agency market. The objectives are: * to combine effectively the skills and assets of Argos and Home Shopping into one business; * to establish a growth platform for initiatives in direct catalogues, in new channels and in consumer financial services. The combined business, whose Chief Executive is Terry Duddy, will now be called the Argos Retail Group. It will have four core operating divisions: - Argos - GUS Home Shopping UK and Ireland - GUS Home Shopping Continental Europe - GUS Financial Services Each of the UK businesses will be supported by combined IT, finance and human resources operations, and will, where appropriate, use the services of Reality for warehousing, distribution and call centres. The business will be centred in Milton Keynes, with a number of important activities remaining in Manchester. Cost Reduction Programme The UK agency business will be smaller and profitable. Costs are expected to be reduced by at least £80m pa over the next three years in four main areas: * integrating the buying and support functions with Argos (£15m pa saving) * reducing customer recruitment spend by nearly half (£30m pa saving) * cutting logistics and customer service costs (£15m pa saving) * improving the supply chain by increasing direct imports further and through supplier consolidation (£20m pa saving) The one-off costs of achieving these savings in the Argos Retail Group and Reality are expected to amount to approximately £65m in the next two years, of which at least half will fall in the current year. Immediate initiatives With the prospective growth in the UK remote shopping market in the years ahead, the combined business is in a strong position to expand. A number of initiatives are under way: Building on Argos' momentum * Management action since acquiring Argos has injected considerable momentum into the business. This is reflected by Argos' strong performance, particularly in recent months, when like-for-like sales growth has been in double figures. * After the successful test last year, Argos will roll out its latest store format to a further 48 stores in the current year and open around 20 new stores. Focusing on profitable agency customers * Leveraging on GUS' considerable agency customer base, the business will focus on the needs of loyal and more profitable customers. Price points in the clothing range are being reduced further to provide a more competitive offer. Expanding successful Argos Additions catalogue * In August 1999, we began testing Argos Additions, the value-for-money fashion clothing, footwear and home furnishings catalogue. Customer acceptance of the product is high, recruitment costs are low and credit penetration high. We therefore plan to extend Argos Additions into over 200 stores in August 2000 and the full chain during 2001. Further developing other direct offers * Development of our other direct home shopping catalogue propositions and testing of new concepts will continue. For example, a trial of a Kays-branded 'unbundled' offer will take place this autumn. Extending multi channel offer * Argos is relaunching its website at the end of July, to include all product lines and a real time stock check facility. Further, during the summer, Argos will continue to expand its presence on digital TV by moving on to NTL and Telewest platforms. Argos' sales over the internet and interactive TV totalled £2m in 2000 and are expected to grow very substantially in the current year. GUS Internet Home Shopping sales were £8m in 2000. Broadening financial services offer - new credit cards * While agency home shopping has suffered from reduced demand for the bundled offer, GUS is well positioned to meet the significant, broader credit requirements of less affluent consumers. Aided by Experian's customer identification and targeting tools, a Visa card will be test marketed from the autumn in a 50/50 joint venture with a major credit card provider. Our objectives are to help retain agency customers, to raise merchandise sales per customer and to build a profitable credit card business which widens our relationships with our customers. * In addition, a new Argos store card, usable across all Argos sales channels, will be test marketed this autumn. This card will provide a more competitive and innovative credit offer to Argos customers and include a Premier Collection Points collection scheme. Through the provision of a quality database, it is expected to generate incremental sales using targeted offers for both merchandise and financial services. * We anticipate that we will incur net costs of about £10m in the current year and a similar figure next year to build the two credit card businesses. As volume grows, we expect a substantial return. 4. DIVISIONAL RESULTS 4.1 Multi Channel Retailing Argos 2000 1999 underlying change Sales £m 2057.0 1812.1 +7% Trading Profit £m 137.4 117.0 +13% Trading Margin 6.7% 6.5% Sales were 7.2% ahead of the previous 12 months, of which new space contributed 2.5% and like-for-like growth 4.7%. The latter accelerated sharply during the year, being 3.5% down in the first six months but 10.5% up in the second half, including the crucial Christmas period. The launch of the single catalogue in August 1999 was the main driver behind this improvement, enabling customers in our 350 smaller stores to access nearly 30% more product lines. Sales growth was also underpinned by competitive pricing, more effective promotions and improved customer service. Furniture and mobile telephone sales were particularly buoyant. Twenty stores were refurbished in the year, providing a more modern, more customer friendly environment, which boosted sales in these stores. Argos also benefited from a significant growth in demand for home delivered sales, branded Argos Direct. Helped by a strong furniture market, a wider range and improved service, Argos Direct sales exceeded £200m - 10% of total turnover. Trading profit for the year was £15.4m above that of the equivalent period last year driven by the growth in sales. Joint buying with our Home Shopping business and better product mix enabled us both to give better value to customers and to raise gross margins slightly. The trading profit was affected by the costs of a number of projects designed to strengthen the business in future, including the development of e- commerce systems, the re-equipment of stores with better tills, refurbishment of many stores and the costs of a substantial profit- related bonus for the staff. Some of these costs will continue in the current year. Home Shopping - UK and Ireland 2000 1999 change Sales £m 1684.2 1787.5 -6% Trading Profit £m 21.0 106.3 -80% Trading Margin 1.2% 5.9% The results for the division showed a reduction in trading profit of £85m, arising mainly from the weakness of sales (6% down in the full year) and resulting markdowns. Sales of fashion items were 11% down in the year, while sales of hard goods remained firm. The reasons for the decline in agency sales are well understood - notably the availability of cheaper clothing at discount retailers and the availability of alternative forms of credit, mainly through credit card providers. Trading profit was also adversely affected by pressures on gross margin, by higher costs reflecting increased distribution expenditure and by £12m of redundancy and restructuring costs, marking the beginning of the cost reduction programme. Bad debt costs were slightly higher for the year as a whole, but there has been a marked improving trend in recent months. The division generated £99m cashflow, partly because of a £56m reduction in the debtor book arising from the contraction in sales. Stock levels are below those of last year. As stated earlier, significant steps are being taken now to transform this business to meet the demands of today's market. Most of the revenue and costs of the new Reality division are included within the UK Home Shopping division in these results. The results for Reality will be separately identified in future announcements. Home Shopping - Continental Europe 2000 1999 change Sales £m 336.5 373.7 -10% Trading Profit £m 25.1 29.5 -15% Trading Margin 7.5% 7.9% Profit reduced by £4.4m in the year, reflecting weak demand in the Autumn/Winter season and the drop in value of the Euro (£1.3m translation effect). Wehkamp remains the clear market leader in home shopping in the Netherlands, with a 30% share, although the business faces increasing competitive pressures. As well as improving the offer to its traditional catalogue customers through better value and service, Wehkamp is moving rapidly into e-commerce. In the year, over 2% of Wehkamp's total sales came through its web site (and this figure rose to 4% in the last quarter). About 18% of internet customers are new to Wehkamp and are younger than typical customers. Our Swedish business achieved a sound result in the year, expanding into other Scandinavian and Baltic countries, but our operations in Austria and Switzerland continue to trade in very competitive markets. 4.2 Experian 2000 1999 underlying change Sales £m 955.9 898.5 +6% Trading Profit £m 200.6 193.7 +8% Gain on sale of investments £m 11.1 - n/a -------- ------- Total £m 211.7 193.7 Trading Margin 21.0% 21.6% At constant exchange rates, sales for Experian as a whole rose 6%, while underlying trading profit rose 8%. Experian UK had another very good year, with underlying sales growing by 20% and profits by 30%. In Experian International, sales growth was strong but profits were held back by investments in new international credit bureaux. In Experian North America, as previously indicated, sales growth slowed due to a combination of factors. Profit there was also adversely affected by a £10m decline in profit from its 20% holding in FARES, its US real estate joint venture. This arose from a slowdown in the mortgage refinancing market. Sales £m Trading Profit £m 2000 1999 2000 1999 North America 617.0 600.5 144.7 148.7 UK 193.6 169.9 48.2 36.7 Rest of World 145.3 128.1 7.7 8.3 -------------------- -------------------- 955.9 898.5 200.6 193.7 -------------------- -------------------- Experian made a profit of £11m from the sale of listed e-commerce investments. Even though this profit has been excluded from the trading profit line above, it should not be seen simply as a one-off gain. These kinds of profits are expected to reoccur, particularly within Experian and gusco.com. Experian North America 2000 1999 underlying change Sales £m 617.0 600.5 +1% Trading Profit: Managed businesses £m 137.2 131.7 +2% FARES £m 7.5 17.0 -------- -------- Total £m 144.7 148.7 Trading Margin (pre FARES) 22.2% 21.9% As previously reported, North American sales were affected by the short- term impact of relocating Metromail staff within the Chicago area and the development of the new Insource marketing data warehouse. Two former Metromail businesses, NDA and CIC, were moved into two joint ventures during the second half. These businesses contributed sales of $28m ($36m last year). Underlying sales growth excluding these divested businesses was 1% for the year. The rate of price deflation in consumer credit reports, which account for approximately a quarter of Experian's North American revenues, slowed to 7%, while unit volumes continued to rise. This resulted in an increase of 2% in revenues for this service. Revenues also benefited from continued development of value added services around the core consumer credit and marketing databases. The underlying profit growth of 2% was slower than in recent years, reflecting the sales performance. It was also affected by launch costs and start-up losses for new projects which, it is believed, will enhance future earnings. These projects include a new automotive information database and a number of e-commerce related products. Other products coming on stream in Experian North America include a number of global value-added products for application processing and fraud prevention, PIN-based integrated outsourcing solutions and an integrated business information and business marketing database. Experian UK underlying 2000 1999 change Sales £m 193.6 169.9 +20% Trading Profit £m 48.2 36.7 +30% Trading Margin 24.9% 21.6% Consumer demand for credit in the UK has remained buoyant, generating strong growth in all product areas, helped by new value-added services and by cross-selling of existing services. Underlying sales growth was 20%, excluding acquired businesses and the closure of some surveys acquired with Metromail. Underlying trading profit was up 30% to £48.2m. Among the developments contributing to the high growth rate achieved in the UK was the launch of a new account processing system, which was instrumental in winning major new contracts requiring integrated solutions capabilities. These included Morgan Stanley Dean Witter, which chose Experian to provide a complete end-to-end card processing solution for its first European credit card. Prospect targeting achieved a significant turnround in profits as a result of more refined survey programmes. The acquisitions of ChoicePoint UK, (operator of the Claims Underwriting Exchange, a household and motor claims database for reducing insurance fraud) and Vehicle Mileage Check, (the UK's premier vehicle mileage checking service) helped the insurance information and automotive businesses to achieve strong growth. These developments, together with the launch of the e-series suite of products, which web-enable many of Experian's existing and new databases in the UK, the launch of the new Intravue CRM system and a number of new interactive marketing products, present Experian in the UK with significant opportunities for continued growth in the current year. Experian Rest of World 2000 1999 growth at constant exchange rates Sales £m 145.3 128.1 +20% Trading Profit £m 7.7 8.3 - Trading Margin 5.3% 6.5% Sales outside the UK and North America grew by 20% at constant exchange rates. Operating profit was impacted by the investment required to start up new credit bureaux in Spain, Germany and Holland, bringing the total to eight, and by one-off restructuring charges linked to a consolidation of cheque processing centres in France. The new bureaux are central to Experian's strategy to build a global business serving the financial services and consumer marketing industries. Credit bureaux also generate incremental demand for value- added services, such as decision support and target marketing tools. New credit bureaux in Poland, Kuwait and Saudi Arabia are under development with third parties and are planned to open during 2000. Further opportunities exist to extend Experian's risk management products and services into new markets, including Hong Kong, Japan and Brazil. 4.3 Burberry 2000 1999 change Sales £m 229.8 206.9 +11% Trading Profit £m 21.7 10.7 +103% Trading Margin 9.4% 5.2% Burberry is an international luxury brand with very wide global recognition of its name, trademark check and signature trench coat. In early 1998, its new management team set out its strategy to reposition and revitalise the brand. This last year saw the beginning of the planned turnround for Burberry, with the business achieving much improved results. Sales growth, particularly strong in the second half of the year, has continued into the new financial year, aided by a number of initiatives as well as by the recovery in Asian markets. Worldwide sales of Burberry products at retail value exceeded £1.6 billion in the last year. The strategy has been built around design expertise, a new merchandising and marketing focus and the re-evaluation of distribution channels. Burberry has also invested heavily in management, systems and facilities; it has improved inventory management and successfully renewed the Japanese licensee arrangements. The renewed Japanese licensee arrangements are expected at current exchange rates to add approximately £10m to profits in 2001, with a further growth of £5m each year for the following five years. Hence, the profit contribution in 2006 from Japanese licensing is expected to be some £35m above that achieved in 2000. This agreement will also enhance Burberry's ability to work closely with its licensees who cover 18 different product areas from clothing to writing instruments. Marketing expenditure by the licensees will also increase. This will help Burberry to build further on its leading position in Japan. Annual sales at retail value in Japan, Burberry's largest market, amount to at least £800m, exceeding those of any other non-Japanese clothing brand. The current financial year will see the opening of the new Burberry flagship store in New Bond Street in London and the opening of the first free-standing Burberry store in Tokyo. The design of these stores will serve as the prototype for future new stores, renovations and shop-in- shops. Burberry has made considerable progress over the past two years and we have great confidence in its future as it continues to take advantage of the value of its brand in the luxury goods market. 4.4 South African Retailing 2000 1999 underlying change Sales £m 169.7 152.1 +15% Trading Profit £m 46.0 43.1 +10% Trading Margin 27.1% 28.3% The South African Retailing business delivered a strong performance under difficult trading conditions, particularly in the retail furniture market. Sales increased by 15% in Rands with like-for-like sales growth of 13%. Trading profit grew by 10% in Rands, despite an increase in bad debts and a fall in the margin earned on credit due to changes in legislation. With 19 stores opened during the year, we now have 450 stores, including 16 under the new Best Electric fascia. Sales of electrical goods through Best Electric have been very encouraging, assisted by competitive prices and the extension of credit. We plan to increase significantly the number of Best Electric stores this year. 4.5 Finance Division 2000 1999 change Trading Profit £m 33.1 34.8 -5% The operating profit of the Finance Division, net of funding costs, was £33.1m for the year, a reduction of £1.7m on the previous year. The prices of used cars fell some 5% year-on-year and demand slowed considerably in the second half of the year as consumers held back from purchasing new and second hand cars in the expectation of lower prices. Despite these difficult conditions, GGF advanced £862m during the year, an 8% rise on the previous year. Gross margins on new business written have also been under pressure and were affected, as were others in the industry, by a higher charge for bad debts and greater competition. Highway's results were adversely affected by a reduction in second hand car prices which has led to cars being sold at a loss at the end of their contract hire period. Insurance and banking profits were stable at £8m in the year. 4.6 Property 2000 1999 % change Trading Profit £m 33.9 31.9 +6 GUS' 50% share of trading profit for the year showed a 6% increase to £33.9m, helped by slightly higher property disposal gains. GUS has a net investment of £254m in BL Universal at 31 March 2000. The capital value of the total portfolio as at that date, excluding debt, was £1,044m, an increase over the year of 3% after adjusting for acquisitions and disposals. With a yield of 6%, the total return was 9%. The investment strategy of the property company since GUS placed the portfolio into a joint venture with The British Land Company PLC in February 1997, has been to dispose of low growth properties, mainly with a value of less than £1m, and reinvest the proceeds mostly in larger retail parks. There are now 304 properties in the portfolio, a drop of 90 over the year. Properties valued at £1m or less now only account for 4% of the total value of the portfolio. 4.7 Cash Flow and Balance Sheet During the year, the Group completed the restructuring of its balance sheet. There is a reduction of £1.1bn in bank borrowings which have been refinanced by the proceeds of two Eurobond issues (£646m) and by further securitisation of the General Guarantee debtor book (£478m). Cash flow improved markedly in the year. Before acquisitions, disposals and securitisation proceeds, the Group generated cash of £83m compared to an outflow of £182m last year. This improvement resulted mainly from lower tax payments and from reduced working capital needs in UK Home Shopping. MORE TO FOLLOW

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