Full Year Results - Part 1

RNS Number : 6151L

Home Retail Group Plc

29 April 2015

 

29 April 2015

Home Retail Group plc

Full-Year Results

Home Retail Group, the UK's leading home and general merchandise retailer, today announces its results for the 52 weeks to 28 February 2015.  

Operating highlights

§ A good overall performance, with a second year of like-for-like sales growth at both Argos and Homebase.

§ Argos Transformation Plan progress:

-     Completed the national roll-out of the 'hub & spoke' distribution network enabling same day collection of c.20,000 products

-     60 digital stores now trading across three different store formats

-     Internet penetration accounted for 46% of total sales including mobile commerce which grew by 38% to represent 25% of total sales

-     Added a further c.11,000 products and 29 aspirational brands

§ Homebase Productivity Plan progress:

-     Completed a comprehensive review of the Homebase business, and announced the Productivity Plan in October 2014

-     Good progress achieved in reducing the size of the store estate by 27 stores to 296 stores in a cash generative manner

-     Argos concessions now in 20 stores and Habitat concessions in 35 stores

Financial highlights

§ Sales increased by 1% to £5,710m; like-for-like sales up 0.6% at Argos, and up 2.3% at Homebase  

§ Cash gross margin broadly flat at £2,037m

§ Operating and distribution costs decreased by £14m to £1,908m

§ Benchmark profit before tax increased by 14% to £132.1m

§ Basic benchmark earnings per share increased by 25% to 13.0p

§ Reported profit before tax increased by 32% to £93.8m; reported basic earnings per share of 9.4p

§ Year-end cash balance of £309m

§ Full-year dividend up 15% at 3.8p (FY14: 3.3p); final dividend of 2.8p recommended

John Coombe, Chairman of Home Retail Group, commented:

"The Group has completed another year of good financial performance, delivering both like-for-like sales and profit growth, together with a strong year-end cash balance of over £300m.  Our focus on managing costs and gross margin together with our ongoing cash management were all critical in delivering this good overall financial performance.  We are recommending an increase of 15% to the full-year dividend."

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

"The Group performed well in FY15 and ahead of consensus profit expectations, achieving 14% growth in benchmark profit before tax and 25% growth in benchmark EPS.  Both Argos and Homebase contributed positive like-for-like sales and profit growth for the second successive year.  I believe the strategic plans we are pursuing across the Group will enable us to innovate and lead in a rapidly changing retail market."

Enquiries

Analysts and investors (Home Retail Group)

Richard Ashton                 Finance Director                                   01908 600 291

Mark Willis                        Director of Investor Relations

Media (Finsbury)

Rollo Head                                                                                 020 7251 3801

There will be a presentation today at 9.15am to analysts and investors at the King Edward Hall, Merrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ.  The presentation can be viewed as a live webcast on the Home Retail Group website www.homeretailgroup.com.  The supporting slides and an indexed replay will also be available on the website later in the day.

An Interim Management Statement, covering the 13 weeks from 1 March 2015 to

30 May 2015, will be published on 11 June 2015.

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

FINANCIAL SUMMARY

£m	52 weeks to 28 Feb 2015	52 weeks to 1 March 2014
Argos	4,096.0	4,051.1
Homebase	1,479.3	1,489.2
Financial Services	135.1	122.7
Sales	5,710.4	5,663.0
Cost of goods	(3,673.3)	(3,628.7)
Gross margin	2,037.1	2,034.3
Operating and distribution costs	(1,907.6)	(1,921.3)
Argos	129.2	112.3
Homebase	19.8	18.9
Financial Services	7.0	6.0
Central Activities	(26.5)	(24.2)
Benchmark operating profit	129.5	113.0
Net interest income	2.6	2.4
Benchmark PBT	132.1	115.4
Amortisation of acquisition intangibles	(1.8)	(1.8)
Post-employment benefit scheme administration costs	(1.9)	(1.9)
Adjustments in respect of store impairment and property provisions	0.1	2.1
Exceptional items	(35.5)	(41.4)
Financing fair value remeasurements	(1.0)	9.0
Financing impact on post-employment benefit obligations	(3.0)	(3.3)
Discount unwind on non-benchmark items	(6.7)	(6.9)
Balance sheet review	11.5	-
Profit before tax	93.8	71.2
Taxation	(22.2)	(17.2)
of which: taxation attributable to benchmark PBT	(33.0)	(32.5)
Benchmark effective tax rate	25.0%	28.2%
Profit for the year	71.6	54.0
Basic benchmark EPS	13.0p	10.4p
Basic EPS	9.4p	6.8p
Weighted average number of shares for basic EPS	764.3m	795.0m
Full-year dividend	3.8p	3.3p
Year-end cash balance	309.3	331.0

The above tables and those throughout this announcement have been prepared in accordance with Note 1 to the Financial Information on page 27. 

 

CHIEF EXECUTIVE'S STATEMENT

The Group delivered a good overall performance in FY15, achieving like-for-like sales growth in both businesses for a second consecutive year, benchmark profit before tax growth of 14% to £132.1m, and benchmark EPS growth of 25% to 13.0p. 

The digital revolution continues to dramatically alter the way consumers communicate, learn, shop and are entertained.  Retailing in particular is experiencing disruption and change.  Many retailers are increasing their investments in an attempt to keep up with consumers, and some are innovating and adopting new ways of working to reflect a faster-paced and more technologically-driven competitive environment.  Home Retail Group believes that it has an opportunity to build a leadership position as the market becomes more digital, by developing capabilities and multi-channel customer experiences that anticipate a digital future.

The Argos Transformation Plan will continue to be the Group's principal source of shareholder value over the medium term.  This Plan was introduced in October 2012 after several years of eroding performance at Argos, declining advantage in its offer and operating model, and in a market context of growing digital trends - transparency of product ranges and prices, innovation across digital shopping channels, and emerging competition for faster and cheaper product fulfilment.  We believed that Argos had several assets that could be leveraged to build potential competitive advantage in this context, and we introduced an ambitious Transformation Plan to 'reinvent Argos as a digital retail leader'. 

We are now two years into the Argos Transformation Plan.  As at the outset, the factors most critical to the successful achievement of the Plan continue to be:

·     The ability for Argos to execute successfully the quantity and pace of change required across many critical areas of its operations;

·     Technology development, which over the Plan term is replacing an out-dated and complex infrastructure with a comprehensive digital architecture, and installing an agile capability for developing customer experiences across digital devices; and

·     Consumer take-up of new Argos propositions amid improving competitive offerings.

Argos has progressed well on its Plan.  In fact, as I reflect on how far the business has come in only two years, I am pleased with how much has been achieved.  Our team has accomplished a great deal, and is now operating in a faster-paced and more innovative manner.  As expected in a five-year strategy with high complexity and ambition, the Plan has not unfolded exactly as we originally envisioned - with minor delays and temporary customer disruption balanced with positive new opportunities such as digital stores in small formats enabled by 'hub & spoke' distribution, and partnerships with eBay and Sainsbury's.  Overall the Transformation Plan is broadly on track, and we continue to believe we can reach our ambitious operating and financial goals.  Most importantly, independent of when the goals are reached, the strategic opportunity for Argos to be a retail leader in a digital future, with access to even greater long-term growth opportunity, remains compelling and achievable.  FY16 will be an important year as Argos will for the first time introduce to the market several new customer propositions, enabled by new digital capabilities. 

In the course of the Argos Transformation Plan, Home Retail Group is building leading capabilities that can ultimately be leveraged for the benefit of Homebase.  This was an important consideration as the Group undertook a strategic review of Homebase during FY15.  The review concluded that Homebase, while having several strengths to build from, also faced several challenges including:

·     Inconsistent store operating standards such as merchandising, stock availability and customer service;

·     An over-sized store estate in light of home improvement market trends and Homebase sales volumes;

·     Product pricing that was not competitive in certain categories when considering the effectiveness of promotional programmes;

·     Inconsistent performance of new propositions across reformatted stores; and

·     A need to accelerate its digital and fulfilment capabilities.

On the basis of the review, in October 2014 we introduced the Homebase Productivity Plan.  The key elements of the Productivity Plan include:

·     Raise store operating and customer service standards;

·     A 25% reduction in the Homebase store estate;

·     Improvements to Homebase propositions including more Argos and Habitat concessions, and more competitive product pricing; and

·     An upgraded Homebase digital offer that leverages the investments being made in Argos. 

The Productivity Plan, covering the three years to FY18, will result in Homebase being a stronger business with better financial ratios, a solid foundation of store operations and customer service, improved offers and proven new customer propositions.  As Argos approaches the end of its Transformation Plan in FY18, Homebase should also be well positioned for investment in its long-term growth as a digital and multi-channel leader in the home improvement sector. 

Building capabilities for a digital future

During FY15 Home Retail Group made good progress in building strategic capabilities that will form the foundation of its digital and multi-channel business, particularly in the areas of technology infrastructure, digital development, and product fulfilment.  As these capabilities are built first for Argos, they can later be leveraged into Homebase, Habitat, and potentially other businesses or partnerships to achieve long-term growth for the Group.

Replacing the technology infrastructure supporting Argos remains the largest element of our future investments, and the most complex challenge of the Argos Transformation Plan.  Our teams have made good progress introducing new systems such as real-time stock visibility across our 'hub & spoke' store network and new online payment and content management systems.  Several critical components of the infrastructure remain to be developed and introduced over the Plan term.  In addition to new applications, our team has faced unanticipated pressure on the resilience and scalability of existing systems due to extreme online volumes and volatility during the FY15 peak trading period.  Overall, although the journey so far has been more challenging than originally envisioned, our team is adapting well and the end state of the Group's technology infrastructure will be a unique advantage.

Argos made good progress with its digital capabilities during FY15, expanding the number of teams working at our London digital hub in order to become increasingly agile in the way we develop customer shopping experiences.  Through the hub, Argos introduced a number of innovative digital features during the year such as its Christmas gift finder, kids Christmas app and further developments in augmented reality through Argos Scan.  Argos' internet sales continued to grow during the year, such that they now represent 46% of total Argos sales, up from 44% in the prior year.  Mobile commerce was up 38% to 25% of total Argos sales.

Digital capabilities are also of increasing importance to Homebase, as the role of the internet in DIY and home enhancement continues to grow.  Homebase's multi-channel sales grew 10% during FY15 to account for 8% of total sales. 

I am particularly pleased with our progress on product fulfilment.  The speed and cost of providing customers with the products they purchase is increasingly important.  With our complement of distribution centres, a national network of stores, frequent stock replenishment and economies of scale, we believe we have an opportunity to build a competitive advantage in product fulfilment.  In FY15 Argos added to our capabilities by scaling its unique 'hub & spoke' distribution model nationally.  This enables us to stock extended product ranges in c.150 larger 'hub' stores, and make them available for faster fulfilment in local markets.  Argos also began to trial express overnight delivery on larger items, and 'hub to home' delivery which will extend our 'hub & spoke' capability with an Argos-operated local delivery network.  We have more to learn about stock optimisation across this new network, as well as the operating challenges of local delivery, but we are excited by the potential of these capabilities.

Convenient multi-channel offer

On the basis of strengthening digital capabilities, Home Retail Group's retail brands endeavour to offer leading multi-channel convenience to our customers.  In a digital world, convenience is being redefined to mean the ability for customers to obtain the products they desire at the location and time appropriate for each particular occasion or shopping mission.

Home Retail Group offers over 90,000 unique products across Argos, Homebase and Habitat, including a substantial element of exclusive and own brand lines.  The Group attempts to meet customer needs for product choice and value by building partnerships with strong brands, and maximising its buying scale and sourcing capabilities particularly via direct import and direct sourcing of product.

Argos continued to expand its ranges during FY15 with the addition of a net c.11,000 new lines, and now offers over 53,000 general merchandise products.  We made further progress in making our offer more universally appealing by extending lines of more fully featured products and aspirational brands.  Argos also launched Heart of House in FY15, its new exclusive brand for better quality and value in the home categories.  Homebase maintains a strong product offer as well, with over 49,000 products including a strong portfolio of exclusive brands such as Habitat, Odina, Schreiber, Hygena and Qualcast.

The presence of a local store remains important for many customers, either to meet their traditional shopping needs or as locations from which to 'click & collect' items previously ordered online.  Argos remains a market leader in 'click & collect', with its c.750 convenient locations and efficient local stocking.  Through its new 'hub & spoke' distribution network, which operates routes between larger 'hubs' and neighbouring 'spoke' stores, Argos enables stores of all sizes and stock holding capacities to offer the same broad range of around 20,000 products to customers on a same day basis. 

The unique 'hub & spoke' model also enabled Argos to trial successfully several new store formats during FY15, including Argos digital concessions within Homebase stores, and a variety of small format digital stores such as Westfield Stratford City and Cannon Street tube station, thereby accessing locations and catchments that were not previously feasible.  During FY15 Argos also expanded the number of existing stores converted to our exciting new digital format.  At the end of FY15 we were trading from 60 digital stores across three different formats, and during FY16 we expect to further increase new locations and convert additional stores in the existing estate.

Although store-based collection is a growing method for fulfilling digital orders, home delivery is also a critical channel for customers and one in which Home Retail Group has generally under-participated.  We expect that our successful trial of 'hub to home' delivery will conclude in FY16, and enable Argos to offer a market-leading home delivery service - more convenient delivery times, at a lower cost. 

Homebase has been enhancing its fulfilment options along with its digital offer.  During FY15 it further expanded the range of products available for named or next day express delivery.  As Homebase progresses its Productivity Plan, it will increasingly draw on the innovative fulfilment options developed by the Group including express large item delivery, 'click & collect' of Homebase products via the Argos store estate, and eventually utilising the 'hub & spoke' model for fulfilling extended lines in store or through 'hub to home' delivery. 

Outlook

Economic conditions showed signs of improvement during FY15, with low levels of inflation, increases in employment and the first signs of real wage growth for a number of years.  We are hopeful that as the uncertainty of the general election passes, businesses and consumers will become more confident in the economic environment for the balance of the year.  Home Retail Group will however continue to plan conservatively and assume only low levels of market-driven growth.

FY16 will be another important year in the transformation of Home Retail Group.  Our sales performance in the first half is likely to be more challenging, as Argos focuses on improving its technology and customer experiences, and we anniversary both strong Argos sales in certain slowing technology categories and strong seasonal performances in both businesses.  The second half should improve as we look forward to introducing new Argos digital offers in time for peak trading. 

The Argos Transformation Plan and the Homebase Productivity Plan are important strategic plans for the Group as we seek to innovate and lead in a rapidly changing and increasingly competitive market, and to secure long-term business growth for our colleagues, communities and shareholders.  I am pleased with our progress, our strong financial position which provides us capacity to invest, and our strategic direction which assumes a digital future that consumers increasingly seem ready to embrace.

I would like to thank our team of 47,000 Home Retail Group colleagues, especially those working in our stores, home delivery fleet, distribution and contact centres and the digital hub, who are fundamental to how our customers experience our brands.  As consumers increasingly use digital technology in their interactions with us, our colleagues become even more important in providing differentiated service and as the human, local face of our business.  I am proud to work with each one of them.

Sincerely,

John Walden

Chief Executive

 

OPERATING COMPANY REVIEWS

Argos

52 weeks to £m	28 February 2015	1 March 2014
Sales	4,096.0	4,051.1
Benchmark operating profit	129.2	112.3
Benchmark operating margin	3.2%	2.8%
Like-for-like sales change	0.6%	3.3%
Net space sales change	0.5%	(0.3%)
Total sales change	1.1%	3.0%
Gross margin rate movement	Up c.25bps	Down c.50bps
Benchmark operating profit change	15%	12%
Number of stores at year-end	755	734
Of which are digital format	60	6

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

There are four key elements to the Transformation Plan:

1.  Reposition Argos' channels for a digital future;

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

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

4.  Operate a leaner and more flexible cost base.

Operational review

Reposition Argos' channels for a digital future

Market growth in digital channels is expected to continue to outpace the retail market generally. By focussing on and leading in these channels, Argos believes it can secure future growth. 

Argos has made significant progress in developing its digital offer in order to take advantage of a permanent shift in market trends.  During FY15 it has introduced features such as a new website search engine, additional checkout functionality including stored payment cards, and an improved visibility of delivery slot options.  Visits to Argos' digital channels have increased by 23% to over 900 million in FY15 and sales via the internet continued to grow such that they now represent 46% of total Argos sales.  Within this, sales from mobile and tablet devices grew by 38% to account for 25% of total Argos sales.  It is anticipated that these channels will continue to grow and the improvements made will position Argos to enhance further its competitive advantage in this market.

Argos introduced several innovations to its digital catalogue offer over the FY15 peak Christmas trading period, including the kids app which proved to be a big success with over 70,000 'wish lists' created.  An innovative Christmas gift finder was used over one million times in the run up to Christmas, presenting customers with a wide range of products and helping them with their Christmas gift ideas.

Convenient local product collection supported by good customer service are of increasing value to customers, and Argos' store estate therefore remains a key point of competitive advantage.  Argos made progress during FY15 with its three digital store formats.

§ It converted a further 27 existing stores to a digital format, taking the total number of digital conversions to 33.  These stores average c.15,000 square feet.

§ 20 digital concessions within Homebase stores were opened, offering a convenient fulfilment proposition to customers of these stores.  These concessions operate from a footprint of c.1,000 square feet.

§ Seven new small format stores were opened, including a store within the Cannon Street tube station, which is designed to allow commuters to reserve their products during the day for same-day collection on their way home.  These small format stores operate on a footprint of c.1,000-3,000 square feet.

The digital stores have produced encouraging results.  Sales at the later iterations of digital conversion stores outperformed the rest of the store estate, having incorporated early insights from the first trial stores such as the effectiveness of the new in-store tablet based browsers, and the impact of product displays, catalogues and paper-based promotions.  The Argos digital concessions in Homebase stores have also performed well and based on their trading performance so far, are expected to deliver good returns on their relatively low investment cost.  The small format digital stores have also shown good early performance.  

During FY16 a further c.80 Argos digital concessions within Homebase are planned, together with the recently announced addition of 10 digital concessions within Sainsbury's stores, which will allow Argos to access an even wider customer base.  In addition, Argos expects to convert at least 50 existing stores to digital formats.

Provide more product choice, available to customers faster

Fulfilment remains highly competitive amongst leading retailers. Argos is uniquely positioned, through its store estate and supply chain, to provide market leading fulfilment options to customers on a national scale.

The 'hub & spoke' distribution model was rolled-out across the estate during FY15.  This model allows c.20,000 products to be available in all Argos stores for same day collection, enabling stores of any size and stock holding capacity to offer customers the same compelling product range.  Access to a wider range of products has resulted in sales in 'spoke' stores outperforming the estate overall.  However, as 'spoke' store demand increased, there was an adverse impact on 'hub' store product availability and thereby sales.  During FY16 Argos will refine its stockholding policy and analytics in order to optimise working capital and maximise the sales potential of this new model.

Argos also trialled an express next day home delivery proposition for larger, two man items during FY15 with encouraging results.  Further development of the system capability to extend this offer beyond the trial will be completed in FY16.  In addition, a trial of a 'hub to home' distribution model commenced during FY15, utilising the 'hub & spoke' fulfilment infrastructure to offer home delivery on a same day or next day basis.   Argos expects to complete systems and operational development in FY16 enabling it to begin a national roll-out.

Argos believes that other retailers could benefit from its unique, cost advantaged, national distribution and store network for 'click & collect' fulfilment.  During FY15 Argos announced the extension of its agreement with eBay, which allows their merchants the option to offer product collection via an Argos store.  During the year the service was extended to over 160,000 eBay sellers, and provided collection of over one million parcels, generating substantial additional footfall into Argos stores.  Argos believes that it will be able to generate additional sales over the long-term through the additional footfall that this partnership creates.

Develop a customer offer that has universal appeal 

Historically Argos' customer offer, meaning its products, pricing, marketing communications and customer experiences, has been biased towards less affluent customers. Argos believes that by providing an offer that is more appealing across the range of its customers, it has significant opportunity to grow its business.

A key component of creating a universally appealing offer is brand positioning and communications.  During FY15 Argos launched its new brand campaign 'Get Set, Go Argos' across its customer media including traditional advertising, digital channels, catalogue and in-store marketing.  This new campaign has thus far received a positive response with the measure of a consumer's likelihood to shop at Argos increasing to its highest level in three years.  Customers' attitudes towards products, breadth of range and quality have all improved as a result.

Product strategies remain an important element of the Argos Transformation Plan and during FY15 a further net c.11,000 products were added to the range.  In addition, Argos has continued to make good progress in its plans to fill gaps in its product ranges, and a further 29 aspirational brands such as KitchenAid kitchen appliances, Bose sound systems and Royal Worcester kitchenware were added during FY15.  During FY15 Argos also launched the Heart of House brand and re-launched Chad Valley as part of its ambition to create a number of more impactful own-brands.  Heart of House now offers over 1,600 traditional and contemporary furniture and homewares products.

Customers are increasingly utilising price comparison via the internet and demanding competitive pricing, as recently evidenced by Black Friday.  During FY15, Argos completed its new price-optimisation tool that has enabled faster and more data driven pricing decisions to be made across its product range, helping Argos to maintain its competitive pricing position.

Financial Review

Total sales in the 52 weeks to 28 February 2015 increased by 1.1% to £4,096m. Net space increased sales by 0.5% with the store estate increasing by 21 stores to 755. Like-for-like sales increased by 0.6%.  Electrical products continued to deliver sales growth driven by strong growth in VGS, TVs and mobiles, partially offset by market-driven declines in sales of tablets.  This growth in electrical products, together with strong sales of seasonal products during the first half of the year, more than offset small sales declines in furniture, homewares and jewellery.

The gross margin rate increased by approximately 25 basis points. This was principally driven by a reduced level of promotional activity together with the anticipated impact of favourable currency and shipping costs, partially offset by an adverse sales mix impact from the growth in margin dilutive electrical products.

Total operating and distribution costs increased by £7m as a result of increased sales and underlying cost inflation, together with an increased level of depreciation and revenue investment as a result of the Transformation Plan strategic initiatives.  These increases were partially offset by further cost saving initiatives.  

Benchmark operating profit increased by £17m, or 15% to £129.2m (FY14: £112.3m).

 

Homebase

52 weeks to £m		28 February 2015	1 March 2014
Sales		1,479.3	1,489.2
Benchmark operating profit		19.8	18.9
Benchmark operating margin		1.3%	1.3%
Like-for-like sales change		2.3%	5.9%
Net space sales change		(3.0%)	(1.8%)
Total sales change		(0.7%)	4.1%
Gross margin rate movement		Down c.100bps	Down c.100bps
Benchmark operating profit change		5%	71%
Number of stores at year-end		296	323
Store selling space at year-end (million sq. ft.)		13.5	14.9
Of which	- garden centre area	3.2	3.4
	- mezzanine floor area	1.8	1.8
Sales per square foot		109	100

In October 2014 Homebase outlined an ambitious three-year Productivity Plan to position itself for long-term growth. There are three key elements to the Productivity Plan:

1.  Improve store operating standards and down-size the store estate;

2.  Strengthen the customer propositions; and

3.  Accelerate digital capabilities, leveraging Argos' investments.

These elements give focus to Homebase's store and digital foundations and will enhance operational efficiency in order to position the business for successful future investment programmes.

Operational review

Improve store operating standards and down-size the store estate

A central aim of the Homebase Productivity Plan is to improve in-store customer experiences by raising and ensuring consistency of store operating standards.  This includes standards for product availability, presentation, signage, and importantly a culture of both efficiency and great customer service among store colleagues.  In support of this, during FY15 Homebase started to test in select stores different ways of improving both store operations and the customer experience.  Early indications are positive and the current plan is to expand these trials over the course of FY16 and introduce improvements into the broader store estate over time.

There were 30 store closures and three store openings in the year, reducing the store estate by 27 stores to 296.  Homebase expects to close around 35 additional stores in FY16, with the intention to reduce the number of Homebase stores by c.25% by the end of FY18, from the 323 as at the end of FY14.

In addition to Homebase's plans to reduce its store estate, an agreement has been reached for the sale of the Battersea freehold site to a residential property developer for £57m, of which a £30m deposit was received in FY15, with the remaining £27m being due on completion during FY16.  As a result of this sale, we now anticipate that the cumulative store closure programme will be cash positive at the end of FY16.

With the store closure programme running ahead of the original plans, Homebase is now accelerating the associated cost reduction programme, which will reduce both head office support costs and infrastructure.  This reaffirms the commitment to create a stronger business with a more efficient and productive operating structure.

Strengthen the customer propositions

Another key element of the Productivity Plan is to strengthen the customer proposition across the store and digital network.  This includes developing more efficient promotional programmes and more competitive product pricing.  Progress in FY15 was largely exploratory, with the intention to assess further pricing reductions across a wider range of products during FY16.

Homebase continues to build a strong portfolio of exclusive brands such as Habitat, Odina, Schreiber, Hygena and Qualcast and expand their presence across the store estate. Homebase's premium Odina kitchen range has now been rolled out to 73 stores, up from 49 stores at the end of FY14.  The Schreiber kitchen range is now available in all stores, with the Schreiber bedroom range available in 233 stores.  In addition, the popular Kitchen Essentials range offers customers more choice on kitchens and continues to be successful, delivering strong sales growth versus FY14.  Homebase also continued to enhance its product ranges to support sales growth, completing significant changes such as product extensions, replacements and re-merchandising in a number of key categories such as bathrooms, paint, flooring and kitchens.

Furthermore, the Habitat brand gives the Homebase customer greater choice around premium quality and contemporary styling, as well as some bestselling iconic designs.  Sales of Habitat products in Homebase, including concessions, grew by over 30% compared to FY14.  There are now 35 Habitat concessions, an increase from 15 concessions at the end of FY14.  A further c.50 Habitat concessions are due to open in FY16.  In addition, 20 Argos digital concessions opened during FY15, with a plan for a further c.80 digital concessions in FY16.

Accelerate digital capabilities, leveraging Argos' investments

FY15 has been a foundation year for the progression of Homebase's digital business.  It introduced several basic elements including a more modern look and feel to the website, simplified navigation for product categories, a new mCommerce site, along with new mobile and tablet apps for both iOS and android operating systems.  Digital sales have grown by 10% year-on-year, and now represent approximately 8% of total sales.

Financial review

Total sales in the 52 weeks to 28 February 2015 declined by 0.7% to £1,479m.  Homebase closed a net 27 stores during FY15 reducing its store estate to 296 stores, with net space reducing sales by 3.0%.  Like-for-like sales increased by 2.3% principally driven by growth in seasonal products during the first half of FY15 together with further growth in sales of big ticket products.  Sales across the remaining product categories were broadly flat.

The gross margin rate was down by approximately 100 basis points, principally driven by an increased level of stock clearance in respect of store closures, together with an adverse sales mix impact from the growth in margin dilutive seasonal products, partially offset by the anticipated impact of favourable currency and shipping costs.

Total operating and distribution costs decreased by £21m, with increases from the impact of underlying cost inflation and cost investment in strategic initiatives being more than offset by further cost savings, principally driven by the reduction in the store estate. 

Benchmark operating profit increased by £0.9m, or 5%, to £19.8m (FY14: £18.9m).

 

Financial Services

52 weeks to £m	28 February 2015	1 March 2014
Sales	135.1	122.7
Benchmark operating profit before financing costs	10.9	9.3
Financing costs	(3.9)	(3.3)
Benchmark operating profit	7.0	6.0
Store card gross receivables	644.1	594.2
Provisions	(64.6)	(70.1)
Store card net receivables	579.5	524.1
Provisions % of gross receivables	10.0%	11.8%

Financial Services works in conjunction with Argos and Homebase to provide their customers with the most appropriate credit offers to drive retail sales and ensure fair customer outcomes.

Operational & financial review

In-house store card credit sales increased by 4% to £711m and represented 10.7% (FY14: 10.4%) of Group retail sales.  This increased level of both credit sales and credit penetration is principally as a result of a retail sales mix into higher credit attachment products such as video gaming hardware and TVs.  In addition to credit sales on the Group's own store cards, credit offers for purchases at Homebase, which are greater than £1,000, are principally provided through product loans from a third party provider.  Including these product loans, total credit sales increased by 6% to £800m resulting in total credit sales penetration increasing to 12.1% (FY14: 11.6%) of Group retail sales. 

Store card net receivables grew by £55m versus FY14 to £580m, principally as a result of the increase in in-house credit sales.  The Group finances these receivables internally with no third party debt being required. 

Total sales in the 52 weeks to 28 February 2015 increased by 10% to £135m.  Delinquency rates continued their downward trend of the last few years resulting in a further reduction in the bad debt cost.  Financing costs were slightly higher than last year, principally due to the growth in the loan book, with a corresponding credit for this internal financing cost recharge being recognised in Group net interest income. 

Overall, the improved sales performance and the reduced bad debt cost were partially offset by an increase in operating costs.  Benchmark operating profit increased by 17% to £7.0m (FY14: £6.0m).

 

GROUP FINANCIAL REVIEW

Sales and benchmark operating profit

Group sales were up 1% at £5,710m (FY14: £5,663m) while Group benchmark operating profit increased 15% to £129.5m (FY14: £113.0m).  The drivers of the Argos, Homebase and Financial Services performances have been analysed as part of the preceding business reviews.  Central Activities represents the cost of central corporate functions.  Costs for the year increased by 10% to £26.5m (FY14: £24.2m), with the increase driven principally by additional costs to support the Group's various strategic initiatives.

Benchmark net interest income

Net interest income within benchmark PBT increased 8% to £2.6m (FY14: £2.4m). 

Benchmark PBT

Benchmark PBT for the year increased 14% to £132.1m (FY14: £115.4m) driven by the factors previously discussed.

Amortisation of acquisition intangibles

A charge of £1.8m (FY14: £1.8m) was recorded in the year, relating to the amortisation of the value of the brand which arose on the Habitat UK acquisition. 

Post-employment benefit scheme administration costs

A charge of £1.9m (FY14: £1.9m) was recorded, in respect of the administration costs incurred by the Home Retail Group Pension Scheme. 

Adjustments in respect of store impairment and property provisions

A net credit of £0.1m (FY14: £2.1m) was recorded in the year, relating to store impairment and property provisions.  The net credit principally reflects a charge of £15.8m (FY14: credit of £3.0m) for impairment provisions arising on the Homebase store estate, partially offset by a £15.9m credit (FY14: charge of £0.9m) principally in respect of the release of surplus property provisions that are now no longer required following the achievement of better than anticipated deals to exit certain stores in the Homebase store estate.

Exceptional items

The exceptional charge recorded in the year was £35.5m (FY14: £41.4m).  This includes a charge of £12.2m relating to the ongoing programme to transform Argos into a digital retail leader and which forms part of the previously announced c.£50m of costs expected to be incurred over the first three years of the Plan to FY16.  In addition, there was a charge of £6.2m relating to a head-office restructure charge together with the planned closure of a distribution centre both of which are part of the cost reduction programme associated with Homebase's store estate reduction.  There was also a Group restructuring charge of £13.0m principally relating to the previously announced costs associated with the outsourcing of the management of the Group's information systems, infrastructure and associated services.  Finally, there was a charge of £4.1m principally relating to an anticipated increase in operational costs expected to be incurred in respect of administering future payment protection insurance customer redress payments. 

Financing fair value remeasurements

Certain foreign exchange movements are recognised in the income statement within net financing income.  These amounted to a net charge of £1.0m (FY14: credit of £9.0m), which arose principally as a result of translation differences on overseas subsidiary currency balances and the recycling of fair value gains on the sale of assets previously classified as available for sale.  Equal and opposite adjustments to the translation differences are recognised as part of the movements in reserves.  As required by accounting standards, the net nil exchange adjustment is split between the income statement and the statement of comprehensive income.

Financing impact on post-employment benefit obligations

The financing impact on post-employment benefit obligations is a net charge of £3.0m (FY14: £3.3m). 

Discount unwind on non‑benchmark items

A charge of £6.7m (FY14: £6.9m) within net financing income relates to the discount unwind on property provisions.  As these provisions were items previously excluded from benchmark PBT, the discount unwind has also been excluded from benchmark PBT. 

Net interest reconciliation

The following table illustrates both the benchmark and non-benchmark impact of net financing items within the income statement.

Net interest income within benchmark PBT	2.6	2.4
Financing fair value remeasurements	(1.0)	9.0
Financing impact on post-employment benefit obligations	(3.0)	(3.3)
Discount unwind on non-benchmark items	(6.7)	(6.9)
Income statement net financing (charge) / income	(8.1)	1.2

Balance sheet review

During the first half of FY15 management commenced a review of certain higher risk areas within the Argos balance sheet.  Subsequent to this and following the well-publicised accounting issues in the retail sector and the recently published FRC guidance in respect of complex supplier arrangements, the review was broadened to encompass a review of the Group's balance sheet.  This review resulted in a net credit of £11.5m being recognised as a one-off non-benchmark item in the current year.  This amount comprises a credit of £11.3m in respect of changes to a small number of accounting estimates together with a net credit of £0.2m in respect of a small number of historic accounting errors that relate principally to trade and other payables. These adjustments all relate to Argos.

Profit before tax

The profit before tax for the year was £93.8m (FY14: £71.2m).

Taxation

Taxation attributable to benchmark PBT was £33.0m (FY14: £32.5m), representing an effective tax rate of 25.0% (FY14: 28.2%). The lower effective tax rate principally reflects two elements: a 2% reduction in the UK corporation tax rate together with the favourable impact of a relatively fixed level of disallowable expenditure for tax purposes in comparison to the Group's higher level of profits in FY15.  Taxation attributable to non-benchmark items amounted to a credit of £10.8m (FY14: £15.3m).  The total tax expense for the year was therefore £22.2m (FY14: £17.2m).

Number of shares and earnings per share

The number of shares for the purpose of calculating basic earnings per share (EPS) was 764.3m (FY14: 795.0m), representing the weighted average number of issued ordinary shares of 813.4m (FY14: 813.4m), less an adjustment of 49.1m (FY14: 18.4m) representing shares held in Group share trusts net of vested but unexercised share awards.  The calculation of diluted EPS reflects the potential dilutive effect of employee share incentive schemes.  This increases the number of shares for diluted EPS purposes by 36.0m (FY14: 26.4m) to 800.3m (FY14: 821.4m).  Basic benchmark EPS is 13.0p (FY14: 10.4p), with diluted benchmark EPS of 12.4p (FY14: 10.1p).  Reported basic EPS is 9.4p (FY14: 6.8p), with reported diluted EPS being 8.9p (FY14: 6.6p).

Dividends

While the Board remains mindful of the investment needs of the Group, this is balanced with the importance of the dividend to our shareholders and as a financial discipline in itself, and after careful consideration by the Board, it is recommending a final dividend of 2.8p.  This takes the full-year dividend to 3.8p (FY14: 3.3p), which is a 15% increase in the full-year dividend.  The final dividend, subject to approval by shareholders at the AGM, will be paid on 23 July 2015 to shareholders on the register at the close of business on 21 May 2015.  As the Group's earnings profile remains heavily weighted to the seasonal Christmas trading at Argos and hence the second half of the Group's financial year, it continues to be the Board's intention to hold the interim dividend for the year ending 27 February 2016 at 1.0p. 

 

Balance sheet

As at £m	28 February 2015	1 March 2014
Goodwill	1,543.9	1,543.9
Intangible assets	235.5	193.6
Property, plant and equipment	412.9	456.7
Inventories	963.0	902.4
Financial Services loan book	579.5	524.1
Other assets	240.8	199.7
	3,975.6	3,820.4
Trade and other payables	(1,329.5)	(1,162.7)
Provisions	(221.9)	(236.1)
	(1,551.4)	(1,398.8)
Invested capital	2,424.2	2,421.6
Post-employment benefit obligations	(114.4)	(76.6)
Net tax assets	26.7	33.0
Forward foreign exchange contracts	27.1	(35.5)
Net cash	309.3	331.0
Net assets	2,672.9	2,673.5

Net assets as at 28 February 2015 were £2,672.9m, equivalent to 354p (FY14: 343p) per share excluding shares held in Group share trusts.  Invested capital as at 28 February 2015 was £2,424.2m, an increase of £2.6m versus the balance sheet as at 1 March 2014.  This increase in invested capital was mainly driven by a combination of an increased level of inventories principally due to the earlier timing of Easter in 2015 which required the Group to accelerate the in-take of seasonal stock, the previously discussed increase in the Financial Services loan book together with an increase in other assets principally driven by the reclassification of Homebase's Battersea freehold from property, plant and equipment into assets held for sale.  These increases were largely offset by an increase in trade and other payables, the key drivers of which were the previously discussed increased level of inventories together with the £30m deposit received in respect of the sale of Homebase's Battersea freehold store, which has been accounted for as deferred income as at 28 February 2015.

The increase in invested capital of £2.6m, together with an increase in forward foreign exchange contracts, was more than offset by the increase in post-employment benefit obligations, a reduction in net tax assets and a reduction in net cash.  The overall impact of these movements was a decrease in net assets of £0.6m. 

 

Cash flow and net cash position

£m	52 weeks to 28 February 2015	52 weeks to 1 March 2014
Benchmark operating profit	129.5	113.0
Amortisation of acquisition intangibles	(1.8)	(1.8)
Post-employment benefit scheme administration costs	(1.9)	(1.9)
Adjustments in respect of store impairment and property provisions	0.1	2.1
Exceptional items	(35.5)	(41.4)
Balance Sheet review	11.5	-
Statutory operating profit	101.9	70.0
Depreciation and amortisation	136.0	129.5
Movement in trade working capital	36.6	18.4
Movement in Financial Services loan book	(55.4)	(49.4)
Cash impact of restructuring charges	(22.8)	(28.2)
Pension scheme deficit recovery payments	(22.0)	(22.0)
Disposal of leasehold property	(9.0)	-
Cash impact of PPI customer redress payments	(8.8)	(3.6)
Financing costs charged to Financial Services	3.9	3.3
Movement in post-employment benefit obligations	1.2	(13.6)
Other operating items	41.2	56.6
Cash flows from operating activities	202.8	161.0
Net capital expenditure	(167.8)	(173.1)
Proceeds from freehold property disposal	30.0	-
Taxation	(12.1)	(17.6)
Net interest	0.7	0.6
Other investments	-	25.2
Cash inflow before financing activities	53.6	(3.9)
Dividends paid	(25.3)	(23.9)
Purchase of own shares for Employee Share Trust	(48.5)	(37.1)
Decrease in cash and cash equivalents	(20.2)	(64.9)
Effect of foreign exchange rate changes	(1.5)	(0.1)
Decrease in financing net cash	(21.7)	(65.0)
Opening financing net cash	331.0	396.0
Closing financing net cash	309.3	331.0

Cash flows from operating activities were £202.8m (FY14: £161.0m).  This £41.8m increase was principally attributable to an increased operating profit performance together with a cash inflow from trade working capital partially offset by the cost of exit associated with certain stores in the Homebase store estate.

Net capital expenditure was £167.8m (FY14: £173.1m), representing the continued higher level of investment across the Group in the strategic initiatives of both retail businesses.  Proceeds from a freehold property disposal were £30.0m (FY14: £nil), representing the deposit received in respect of the anticipated sale of the freehold relating to Homebase's Battersea store.  Tax paid was £12.1m (FY14: £17.6m).   The reduction to £nil in other investments (FY14: £25.2m) is a reflection of the non-repeat of cash received in the prior year relating to both the disposal of the Group's 33% shareholding in Ogalas Limited, which trades as 'home store + more' in the Republic of Ireland and the receipt of a loan repayment in respect of the Groups, now closed, Chinese joint venture.

Dividends paid to Shareholders amounted to £25.3m (FY14: £23.9m).  A payment of £50.0m (FY14: £37.4m) was made to the Home Retail Group Employee Share Trust to fund the purchase of 26.8m shares.  The shares are in addition to those already held by the Trust and are needed to satisfy obligations arising from various employee share schemes, a significant proportion of which relate to the save-as-you-earn plans offered to all the Group's colleagues.  This payment was partially offset by the cash receipt in respect of the exercise of a small number of share options resulting in a net cash out-flow of £48.5m (FY14: £37.1m)

The Group's financing net cash position at 28 February 2015 was £309.3m, a decrease of £21.7m over the year.

Group pension arrangements

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

The IAS 19 valuation as at 28 February 2015 for the defined benefit pension schemes was a net deficit of £114.4m (FY14: £76.6m).  The increase in the deficit of £37.8m was driven by an increase of £135.3m in the present value of scheme liabilities to £1,103.7m (FY14: £968.4m), partially offset by an increase of £97.5m in the scheme assets to £989.3m (FY14: £891.8m).  The increase in the scheme liabilities was driven principally by a decrease in the real discount rate to 0.5% (FY14: 1.1%).

A full actuarial valuation of the defined benefit pension scheme is carried out every three years with interim reviews in the intervening years.  The last full actuarial valuation of the scheme was carried out as at 31 March 2012 and resulted in a deficit of £158m.  The full actuarial valuation of the scheme as at 31 March 2015 has just commenced, with the results of this valuation expected around the time of the FY16 financial year end.

Group financing arrangements

The Group finances its operations through a combination of cash, property leases and access to committed bank facilities where necessary.  The Group's net cash balances averaged approximately £451m (FY14: approximately £516m) over the year.  

Post the year-end, on 26 March 2015, the Group agreed a new £250m committed unsecured borrowing facility, which is currently undrawn and which expires in March 2019.  This facility replaces the previous £165m facility which had been in place since March 2013 and had never been drawn.  In addition, as at 28 February 2015 the Group's Financial Services business held a net loan book balance of £580m (FY14: £524m).

The Group has additional liabilities through its obligations to pay rents under operating leases.  The operating lease charge for the year amounted to £333.4m (FY14: £347.9m).  Total lease commitments stood at £2,342m at 28 February 2015 (FY14: £2,627m), which is a £1,988m, or 46%, reduction from the peak total lease commitments of £4,330m held at 1 March 2008.  Based upon the discounted cash flows of these expected future operating lease charges, the capitalised value of these liabilities is £1,914m (FY14: £2,046m) utilising a discount rate of 4.1% (FY14: 5.0%).

Currency risk management

The Group's key objective is to minimise the effect of exchange rate volatility.  Transactional currency exposures that could significantly impact the income statement are hedged using forward purchase contracts.  Approximately one quarter of the Group's product costs are paid for in US dollars.  The hedged rates achieved during FY15 compared to FY14 are noted in the table below.

US dollar hedged rates	FY15	FY14	Change cents
First half	1.55	1.57	c.(2)
Second half	1.61	1.57	c.4
Full year	1.58	1.57	c.1

Share price and total shareholder return

The Group's share price ranged from a low of 159.5p to a high of 223.3p during FY15.  On 27 February 2015, the closing mid-market price was 202.4p, giving a market capitalisation of £1.6 billion.

Total shareholder return (the change in the value of a share including reinvested dividends) increased by 5% over the year.  This compares to an increase of 8% for the FTSE 350 General Retail index.

Accounting standards and use of non-GAAP measures

The Group has prepared its consolidated financial statements based on International Financial Reporting Standards for the 52 weeks ended 28 February 2015.  The basis of preparation is outlined in Note 1 to the Financial Information on page 27.

The Group has identified certain measures that it believes provide additional useful information on the underlying performance of the Group.  These measures are applied consistently but as they are not defined under GAAP they may not be directly comparable with other companies' adjusted measures.  The non-GAAP measures are outlined in Note 2 to the Financial Information on page 27.

Principal risks and uncertainties

The Group will set out the principal risks and uncertainties which could impact its performance, together with examples of mitigating activity, in its 2015 Annual Report and Financial Statements; an unedited full text excerpt will also be included in the Regulatory Information Service announcement accompanying the publication of the 2015 Annual Report.

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

Annual report and annual general meeting

The 2015 Annual Report and Financial Statements is expected to be available at www.homeretailgroup.com and posted to shareholders on or around 2 June 2015.  The Annual General Meeting will be held from 11.00am on Wednesday 1 July 2015 at the Holiday Inn Milton Keynes, 500 Saxon Gate West, Milton Keynes, MK9 2HQ.

 

Appendix 1.  Trading statement comparables

	Q1 13 weeks to 31 May 2014
Argos
Sales	£868m
Like-for-like sales change	4.9%
Net space sales change	(0.1%)
Total sales change	4.8%
Gross margin movement	Down c.25bps
Homebase
Sales	£445m
Like-for-like sales change	7.9%
Net space sales change	(2.4%)
Total sales change	5.5%
Gross margin movement	Down c.50bps
	Q2 13 weeks to 30 Aug 2014		H1 26 weeks to 30 Aug 2014
Argos
Sales	£901m		£1,769m
Like-for-like sales change	1.2%		2.9%
Net space sales change	0.2%		0.1%
Total sales change	1.4%		3.0%
Gross margin movement	Up c.25bps		c.0bps
Homebase
Sales	£390m		£835m
Like-for-like sales change	0.1%		4.1%
Net space sales change	(2.9%)		(2.6%)
Total sales change	(2.8%)		1.5%
Gross margin movement	Down c.75bps		Down c.75bps
	Q3 18 weeks to 3 Jan 2015		YTD 44 weeks to 3 Jan 2015
Argos
Sales	£1,822m		£3,591m
Like-for-like sales change	0.1%		1.5%
Net space sales change	0.7%		0.4%
Total sales change	0.8%		1.9%
Gross margin movement	Up c.25bps		c.0bps
Homebase
Sales	£451m		£1,286m
Like-for-like sales change	0.6%		2.9%
Net space sales change	(3.3%)		(2.9%)
Total sales change	(2.7%)		0.0%
Gross margin movement	Down c.100bps		Down c.75bps
	Q4 8 weeks to 28 Feb 2015		H2 26 weeks to 28 Feb 2015		FY 52 weeks to 28 Feb 2015
Argos
Sales	£505m		£2,327m		£4,096m
Like-for-like sales change	(5.0%)		(1.1%)		0.6%
Net space sales change	1.0%		0.8%		0.5%
Total sales change	(4.0%)		(0.3%)		1.1%
Gross margin movement	Up c.100bps		Up c.25bps		Up c.25bps
Homebase
Sales	£193m		£644m		£1,479m
Like-for-like sales change	(0.9%)		0.1%		2.3%
Net space sales change	(3.8%)		(3.4%)		(3.0%)
Total sales change	(4.7%)		(3.3%)		(0.7%)
Gross margin movement	Down c.225bps		Down c.150bps		Down c.100bps

 

END

 

 

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