Half Year Results - Part 1

RNS Number : 4246Q

Home Retail Group Plc

19 October 2011

 



19 October 2011

Home Retail Group plc

Half-Year Results

Home Retail Group, the UK's leading home and general merchandise retailer, today announces its results for the 26 weeks to 27 August 2011.

Operating highlights

§ Continued leadership in multi-channel retailing, driven by further investment initiatives in both businesses and the continued growth of internet penetration supported by Check & Reserve

§ Investment plans progressing at Argos:

- Store refurbishment delivering sales uplifts ahead of plan

- Launch of the Argos TV shopping channel

- Range extension into children's books, children's and adult clothing and gifting

§ Homebase gained market share and further developed its home enhancement proposition:

- Expanding exclusive product brand strategy

- Developing ranges across big ticket categories

- Award winning installation services with customer recommendation rate in excess of 90%

§ Acquired the exclusive use of the Habitat brand

§ Joint venture to commence multi-channel retail operation in China separately announced today

Financial highlights

§ Sales down 6% to £2,568m

§ Cash gross margin down 7% to £970m

§ Operating and distribution costs were broadly flat at £944m, reflecting further cost savings offsetting the impact of both underlying cost inflation pressures and the investment in new initiatives

§ Benchmark operating profit¹ down 72% to £27m; Group operating margin of 1.0%

§ Benchmark profit before tax² down 70% to £28m

§ Basic benchmark earnings per share³ down 68% to 2.5p

§ Reported profit before tax of £29m; reported basic earnings per share of 2.6p

§ Closing net cash position of £200m

§ Interim dividend maintained at 4.7p

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

"Homebase delivered another robust performance in its peak trading period.  Core customers at Argos have continued to be under greater pressure and there were ongoing challenging conditions across several product categories, most notably consumer electronics. 

"As we now enter our busiest trading period market conditions remain both weak and volatile, and in these early weeks of the second half we have not seen the improvement in sales that we had anticipated.  We are well positioned operationally and we will continue to shape the future of shopping for our customers, ensuring we bring unrivalled convenience and value to customers' every day lives, whether shopping at home or on the move."

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

2.  Benchmark profit before tax (benchmark PBT) is defined as profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items, financing fair value remeasurements, financing impact on retirement benefit obligations, the discount unwind on non-benchmark items and taxation.

3.  Basic benchmark earnings per share (benchmark EPS) is defined as benchmark PBT less taxation attributable to benchmark PBT, divided by the weighted average number of shares in issue (excluding shares held in Home Retail Group's share trusts net of vested but unexercised share awards).

Enquiries

Analysts and investors (Home Retail Group)

Richard Ashton                Finance Director                                  01908 600 291

Don Davis                       Director of Investor Relations

Media (Finsbury)

Rollo Head                                                                                020 7251 3801

There will be a presentation today at 9.30am to analysts and investors at the UBS Presentation Suite, 1 Finsbury Avenue, London EC2M 2PA.  The presentation can be viewed live on the Home Retail Group website www.homeretailgroup.com.  The supporting slides and an indexed replay will also be available on the website later in the day.

An Interim Management Statement, covering the 18 weeks from 28 August 2011 to

31 December 2011, will be announced by Home Retail Group on Thursday 12 January 2012.

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

FINANCIAL SUMMARY

26 weeks to £m	27 August 2011	28 August 2010
Argos	1,675.7	1,812.8
Homebase	839.6	855.3
Financial Services	52.2	52.2
Sales	2,567.5	2,720.3
Cost of goods	(1,597.2)	(1,680.1)
Gross margin	970.3	1,040.2
Group gross margin % rate	37.8%	38.2%
Operating and distribution costs	(943.8)	(947.0)
Argos	3.4	54.4
Homebase	29.9	46.2
Financial Services	3.0	2.5
Central Activities	(9.8)	(9.9)
Benchmark operating profit	26.5	93.2
Group operating margin % rate	1.0%	3.4%
Net interest income (see below)	1.8	1.5
Share of post-tax results of joint ventures and associates	-	-
Benchmark PBT	28.3	94.7
Financing fair value remeasurements	2.3	9.2
Financing impact on retirement benefit obligations	2.2	2.3
Discount unwind on non-benchmark items	(3.4)	(3.2)
Profit before tax	29.4	103.0
Taxation	(9.0)	(28.3)
of which: taxation attributable to benchmark PBT	(8.4)	(28.9)
Benchmark effective tax % rate	29.7%	30.5%
Profit for the period	20.4	74.7
Basic benchmark EPS	2.5p	7.7p
Basic EPS	2.6p	8.8p
Weighted average number of shares for basic EPS	799.0m	849.3m
Interim dividend	4.7p	4.7p
Closing net cash position	200.5	326.9
Net interest reconciliation:
Bank deposits and other interest	1.0	1.3
Financing costs charged to Financial Services	1.7	1.6
Discount unwind on benchmark items	(0.9)	(1.4)
Net interest income	1.8	1.5
Financing fair value remeasurements	2.3	9.2
Financing impact on retirement benefit balances	2.2	2.3
Discount unwind on non-benchmark items	(3.4)	(3.2)
Income statement net financing income	2.9	9.8

The above tables and those throughout this announcement have been prepared in accordance with Note 1 to the Financial Information on page 23.

CHIEF EXECUTIVE'S STATEMENT

Spending in our markets continues to decline with many consumers facing pressures which affect the amount of household cash flow they have available for the purchase of discretionary goods.  Argos' core customer demographic has tended to benefit less from the current low interest rate environment, which taken together with the fact that they have a relatively high proportion of their take-home pay consumed by non-discretionary expenditure, has resulted in them having been more adversely impacted by the prevailing economic conditions.  While we have had success in areas such as homewares and seasonal products, this has been more than offset by the weakness in other product categories, most notably consumer electronics which has seen the market decline by about 20% in the period, the net result of which is a marginal loss of market share in the period.  Homebase's market share gain reflects a robust performance in a difficult trading environment and while the big ticket category remains challenging, we have seen good growth in bedroom furniture, benefiting from the rollout of new fitted ranges into stores together with installation services, and also a good performance in bathrooms.

The Group's strong positioning continues to be derived from the following:

1.  Multi-channel expertise and leadership - maintaining a clear market-leading position as consumers continue to use the power of the internet and mobile devices together with the convenience of immediate product collection via our store networks

2.  Highly competitive customer offering - ensuring the customer continues to receive excellent value and choice by maximising the buying scale and sourcing skills of the Group

3.  Expansion of product ranges and related services - such as Argos' ability to extend its ranges into new categories like clothing and books as well as growing product ranges online.  While Homebase extends installation services to enhance its big ticket offering and continues its significant range changes in home enhancement products

4.  Efficient cost base - where further cost reductions have been achieved to mitigate underlying cost inflation and the investment in new initiatives, while maintaining or improving operational standards

5.  Financial strength - with a significant cash balance that supports investment in new initiatives and a sizeable debt free receivables loan book

Argos and Homebase continue to strengthen their customer propositions with investment in multi-channel initiatives, expanding choice, developing ranges and services, and improving product presentation in-store, in catalogues, on TV and online.  Argos and Homebase also continue to help the customer through ongoing 'WOW', 'Value' and 'Best Buy' offers, supported by a range of in-house provided credit offers.

The Group acquired the exclusive use of the Habitat brand, its brand designs and intellectual property in the UK and the Republic of Ireland together with the UK website and three of its London stores for £24.5m.

In a separate announcement today, Home Retail Group has stated that it has agreed to launch a joint venture company to develop a multi-channel, general merchandise retail business in China with Haier Group, one of the world's leading home appliance manufacturers.  The Argos branded joint venture operation will launch in 2012 targeted at the Shanghai region.

BUSINESS REVIEWS

Argos

26 weeks to £m	27 August 2011	28 August 2010
Sales	1,675.7	1,812.8
Benchmark operating profit	3.4	54.4
Benchmark operating margin	0.2%	3.0%
Like-for-like change in sales	(9.1%)	(6.5%)
New space contribution to sales change	1.5%	2.5%
Total sales change	(7.6%)	(4.0%)
Gross margin movement	Down c.75bps	Down c.150bps
Benchmark operating profit change	(94%)	(32%)
Number of stores at period-end	754	749

As the UK's leading general merchandise retailer, Argos provides a unique offer of choice, value and convenience.

Operational review

Multi-channel leadership

Multi-channel sales have continued to grow and now represent £770m or 46% of Argos' total sales.  The fastest growing channel continues to be online Check & Reserve, which grew to represent 22% of all sales.  Approximately half of these sales are reserved and collected from stores the same day, with the remainder collected the following day.  The store network provides the certainty and immediacy of stock availability that customers require.

Total internet orders, including Check & Reserve grew to comprise 33% of Argos' total sales, with the remaining 13% of multi-channel sales being products ordered in-store for home delivery or by telephone.  Argos continues to be the second largest internet retailer in the UK, with over 180 million website visits in the period, an increase of 11% over the same period last year.

The launch of the web platform for mobile devices and the app for Android phones, supported by the previously launched Apple iPhone app, is leading to rapid growth of mobile shopping.  At the end of the period the proportion of total sales from mobile shopping was around 4%.

Argos TV, the home shopping TV trial on the Sky digital television platform, launched on 15 June 2011 since which date it has aired over 600 live shows demonstrating 2,500 products.  There has been a good customer response and the trial will continue over the peak trading period.

Store network

The programme to refurbish the store network is progressing well.  Around 300 stores had been refurbished by 27 August 2011 and a further 50 stores will be completed in the second half.  Customers' response to the refurbished stores continues to be very positive and this is contributing to Argos' strong brand and store service reputation.  The financial performance of the refurbished stores continues to be encouraging with the average sales uplift being 2.5%, which is ahead of the business case sales uplift requirement of 1%.  Refurbishment costs are averaging approximately £100k per store and therefore the previously announced £70m cost to complete the programme is on track.

Argos has approximately 150 store lease renewals and 35 store lease break clauses over the next five years.  With this flexibility, Argos will focus on optimising its store network by relocating or closing some older stores and opening some new stores if attractive sites become available.  In the current financial year, it is expected there will be around 15 new store openings and a similar number of closures.

Improving choice

With around 22,000 lines, the Autumn/Winter 2011 catalogue has increased the choice compared with last year by around 1,000 lines.  This increase has been primarily in the new children's clothing category and also in homewares. 

Argos has leveraged its market-leading toy and gift licence relationships to extend into children's and adult clothing and gifting.  Around 500 clothing lines were launched in the Autumn/Winter 2011 catalogue.  In children's clothing, the range builds on Argos' existing strength with major toy licences, such as Disney characters, to provide a wide range of additional merchandise, such as pyjamas, t-shirts and bedding, brought together in 'character shops' within both the catalogue and online.  The range also includes adult clothing, such as London 2012 apparel.

Argos is also trialling a new route to range extension whereby third party products are embedded within the Argos web shopping experience.  This offer allows Argos to sell third party products on a fully integrated basis through its website and earn a commission on the sales.  The first trial was in the books category with around 5,000 titles being displayed on the internet.  This has now been extended to video game software and technology accessories. 

Own brands continue to offer excellent value and further choice with Chad Valley, Alba, Bush, Hygena and Schreiber having over 1,500 product lines in the Autumn/Winter 2011 catalogue; and the 'Colourmatch' homeware collection, launched in the Spring/Summer 2011 catalogue, has been very successful and has been expanded to over 500 lines.

In technology, Argos increased the in-store display of televisions, cameras and laptops.  The Apple iPad 2 is now also available in 250 stores and via nationwide home delivery.

Improving value

Argos is a leading value retailer and remains highly price competitive, supported by the Group's sourcing scale and infrastructure advantages, together with the benefit of Argos' low-cost operating model.  Argos continues to maintain a competitive price position overall which is measured weekly using internet price comparisons.  It maintains a price position better than the competition on its highest sales volume lines.

Financial review

Sales in the period declined by 7.6% in total.  Net new space contributed 1.5% with seven new stores opened, four closed and a further three being relocated, taking the store portfolio to 754.  Like-for-like sales declined by 9.1%.  The consumer electronics market, in particular televisions and video games systems, has been weak and accounted for the majority of the reduction in Argos' sales.  Laptops continued to show good growth.

The gross margin rate was down by approximately 75 basis points.  Around 100 basis points was driven by the anticipated net impact of adverse currency and shipping rates together with around 50 basis points from an increased level of stock clearance activity.  This was partially offset by a benefit from the sales mix.

Total operating and distribution costs were reduced by £9m or 2% with further cost savings offsetting the impact of both underlying cost inflation pressures and the investment in new initiatives.  Benchmark operating profit was £3.4m, a £51.0m or 94% decline on the comparable period last year.

Homebase

26 weeks to £m		27 August 2011	28 August 2010
Sales		839.6	855.3
Benchmark operating profit		29.9	46.2
Benchmark operating margin		3.6%	5.4%
Like-for-like change in sales		(0.6%)	(0.8%)
New space contribution to sales change		(1.2%)	(0.4%)
Total sales change		(1.8%)	(1.2%)
Gross margin movement		Down c.25bps	Down c.100bps
Benchmark operating profit change		(35%)	(6%)
Number of stores at period-end		342	345
Of which contain a mezzanine floor		187	188
Store selling space at period-end (million sq ft)		15.6	15.8
Of which	- garden centre area	3.6	3.7
	- mezzanine floor area	1.8	1.9

Homebase continues to be well positioned as a leading home enhancement retailer.

Operational review

Extending multi-channel

Internet sales account for 4% of Homebase's total sales and the value of 'Reserve & Collect' collections in store increased by 55% against the comparable period last year.  Visitor growth to www.homebase.co.uk remains strong driven by continued improvements to the customer journey and a refreshed 'Help & Advice' section that now includes video content. 

The number of online exclusives grew by 1,400 lines to 12,700 lines during the period and a white label site was launched for made to measure blinds and curtains.

Developing the store portfolio

One store was opened in the period, taking the portfolio to 342.  Homebase will continue to examine the opportunity for new store openings and in addition a small number of closures, relocations or downsizes will continue to be sought as part of the ongoing management of the store portfolio.

Homebase successfully delivered its first new home enhancement proposition store.  There is a clear sense of transformation within the decorating categories to deliver Homebase's aim of being '1st for decorating' while room-set displays and recipe cards offer ideas and inspiration to customers.  Amongst other developments this new store also benefits from an improved garden centre layout and a new garden advice centre where colleagues offer practical ideas and advice including plant finder tools.

The low-cost 'midi refit' programme continues successfully to address stores in which a mezzanine cannot be installed.  Three midi refits were completed during the period with a further seven to be completed in the second half.  The refitted Orpington store with an improved proposition on the mezzanine level for kitchens, bathrooms, bedrooms and furniture continues to perform strongly.

Developing ranges

Homebase continues to offer differentiated ranges and stylish products to customers with more ideas and inspiration through a programme of range reviews.  During the period Homebase's exclusive brand strategy continued with the expansion of the Jamie Oliver and Qualcast ranges within the seasonal categories.  The 'Home of Style' brand was successfully launched as part of the interior range review with over 900 new lines.

Homebase has introduced significant range changes in home enhancement, premium paint brands and bathroom accessories amongst others.  It also continues to develop its ranges in big ticket, with the Odina kitchen trial in seven stores performing ahead of expectations.  The trial will be extended to a further 12 stores in the second half.  A big ticket upgrade programme covering kitchens, bathrooms and fitted bedrooms continues to remove discontinued display ranges from the showrooms and replace them with more of our best sellers and to date 96 stores have been completed.

Expanding installation services

Homebase's installation services support the big ticket offer and provide the customer with a complete home enhancement solution.  Kitchen and bathroom installation is available in all stores and fitted bedroom installation is offered in 200 stores.  Homebase's market-leading service enjoys a recommendation rate from customers in excess of 90%.

Value credentials

Homebase has maintained its range of over 500 'Value' lines, offering essential products at low prices across DIY, decorating and homewares categories.  During the period over 500 'Best Buy' lines were launched store-wide encompassing 'Best Buy - WOWs', and more stylised interior products across textiles, lighting and bedding which offer on-trend items at very competitive prices.  Homebase continues to offer competitive pricing on larger purchase quantities within DIY with around 400 bulk buy deals.  The Nectar loyalty card and a programme of promotional offers continue to provide value for customers.

Financial review

Sales in the period declined by 1.8% in total.  Net closed space due to the closures in the second half of the previous financial year and only one store opening in the first half of the current financial year reduced sales by 1.2%.  Like-for-like sales declined by 0.6%.  Big ticket sales were lower overall reflecting a challenging market, although fitted bedroom furniture continued to perform well benefiting from the rollout of the installation service and in-store displays.  Bathrooms also performed well.  Seasonal sales were in line with last year, with sales for the remaining categories slightly lower overall.

The gross margin rate was down by approximately 25 basis points driven principally by the anticipated net impact of adverse currency and shipping rates.

Total operating and distribution costs increased by £6m or 2% driven by the impact of underlying cost inflation pressures and the investment in new initiatives partially offset by further cost savings.  Benchmark operating profit was £29.9m, a £16.3m or 35% decline on the comparable period last year.

Financial Services

26 weeks to £m		27 August 2011	28 August 2010
Sales		52.2	52.2
Benchmark operating profit before financing costs		4.7	4.1
Financing costs		(1.7)	(1.6)
Benchmark operating profit		3.0	2.5
As at	27 August 2011	26 February 2011	28 August 2010
Store card gross receivables	501	530	476
Provision	(74)	(74)	(69)
Store card net receivables	427	456	407
Provision % of gross receivables	14.8%	14.0%	14.6%

Financial Services works in conjunction with Argos and Homebase to provide their customers with the most appropriate credit offers to drive product sales, and to maximise the total profit from the transaction for Home Retail Group.

Operational review

In-house store card credit sales reduced by 1% to £275m (2010: £278m) and represented 9.4% (2010: 9.1%) of Group retail sales.  The proportion of promotional credit sales continued to represent 76% of all sales placed on the store cards, with the Buy Now Pay Later product offer remaining a key credit enabler of sales in big ticket categories.  In addition to credit sales placed on the Group's own store cards, credit offers for purchases at Homebase, typically greater than £3,000, are provided through product loans from a third party provider.  Including these product loans, total credit sales penetration increased to 10.5% (2010: 10.0%) of Group retail sales. 

The stable level of credit sales and increased penetration is a result of additional credit offers in specific product categories such as furniture and white goods.  The number of applications, the acceptance rate, and therefore the number of new accounts have all remained broadly flat year-on-year.  Customer use of the online account management tools continues to grow with over 300,000 registered customers.

Financial review

Store card net receivables grew by £20m versus a year ago to £427m, as a result of the mix towards longer-term credit plans.  The Group finances these receivables balances internally with no third party debt being required.  Delinquency rates improved versus the comparable period last year, resulting in a reduced bad debt charge.  Financing costs were broadly flat versus last year, with this internal recharge being based upon UK base rates with a corresponding credit being recognised in Group net interest income.

The benchmark operating profit for the period of £3.0m (2010: £2.5m) reflects the financial return on the revolving (i.e. interest-bearing) element of receivables, as promotional credit products are recharged to Argos and Homebase at cost.  The cost advantage of this internal arrangement versus a third-party provider is a benefit within both the Argos and Homebase benchmark operating profits.

GROUP FINANCIAL REVIEW

Sales and benchmark operating profit

Group sales were 6% lower at £2,567.5m (2010: £2,720.3m) while Group benchmark operating profit declined 72% to £26.5m (2010: £93.2m).  The drivers of the Argos, Homebase and Financial Services performance have been analysed as part of the preceding business reviews.

Central Activities represents the cost of central corporate functions and the investment costs of new development opportunities.  Costs for the period were 1% lower at £9.8m (2010: £9.9m), with deal-related costs attributable to the Habitat acquisition being offset by the continued control of central corporate costs.

Net interest income

Net interest income was £1.8m (2010: £1.5m).  Within this, third party interest income for the period reduced to £1.0m (2010: £1.3m) as a consequence of the completion of the £150m share buy-back programme during the previous financial year which resulted in a lower average cash balance being held by the Group during the period.

Financing costs charged within Financial Services' benchmark operating profit saw the corresponding credit within net interest income increase to £1.7m (2010: £1.6m).  This non-cash internal recharge is based upon UK base rates.

The charge within net interest income in relation to the discount unwind on benchmark items was £0.9m (2010: £1.4m).  This arises from the accounting treatment whereby provisions for expected future liabilities are required to be discounted back to their current value.  As settlement of the liability moves closer to the present day, additional non-cash charges to unwind the discount are incurred; this will result in the absolute level of provision eventually matching the liability in the accounting period that it becomes due.

Benchmark PBT

Benchmark PBT declined 70% to £28.3m (2010: £94.7m) driven by the factors discussed above.

Financing fair value remeasurements

Certain foreign exchange movements as well as changes in the fair value of certain financial instruments are recognised in the income statement within net financing income.  These amounted to a net gain of £2.3m (2010: £9.2m), which arises principally as a result of translation differences on overseas subsidiary cash balances.  The reduction in the gain reflects a lower level of cash balances held overseas and a relative narrowing in the exchange rate range experienced during the period.  Equal and opposite adjustments to these translation differences are recognised as part of the movements in reserves.  As required by accounting standards, the net nil exchange adjustment is therefore split between the income statement and the statement of comprehensive income.

Financing impact on retirement benefit obligations

The credit through net financing income in respect of the expected return on retirement benefit assets net of the interest expense on retirement benefit liabilities was £2.2m (2010: £2.3m).  The current service cost, which the Group considers a fairer reflection of the cost of providing retirement benefits, is already reflected in benchmark operating profit.

Discount unwind on non‑benchmark items

An expense of £3.4m (2010: £3.2m) within net financing income relates to the discount unwind on onerous lease provisions.  As these provisions were items previously excluded from benchmark PBT, the discount unwind has also been excluded from benchmark PBT.  As set out within the net interest income review above, these non-cash charges arise from the accounting treatment whereby provisions for expected future liabilities are discounted back to their current value.

Profit before tax

The reported profit before tax for the period was £29.4m (2010: £103.0m).

Taxation

Taxation attributable to benchmark PBT was £8.4m (2010: £28.9m), representing an estimated effective tax rate for the full financial year of 29.7% (52 weeks to 26 February 2011: 30.5%).  The lower effective tax rate reflects two opposing elements: a reduction in the UK corporation tax rate of 2% to 26% partially offset by the impact of a fixed level of disallowable expenditure in comparison to a reduced level of profits.

Taxation attributable to non-benchmark items amounted to a debit of £0.6m (2010: credit of £0.6m).  The total tax expense for the period was therefore £9.0m (2010: £28.3m).

Number of shares and earnings per share

The number of shares for the purpose of calculating basic earnings per share (EPS) was 799.0m (2010: 849.3m).  The weighted average number of issued ordinary shares reduced by 46.2m to 813.4m (2010: 859.6m), reflecting the weighted impact of the Group's share buy-back programme during the previous financial year.  The adjustment for shares held in Group share trusts net of vested but unexercised share awards was 14.4m (2010: 10.3m).

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 3.9m (2010: 4.5m) to 802.9m (2010: 853.8m).

Basic benchmark EPS is 2.5p (2010: 7.7p), with diluted benchmark EPS of 2.5p (2010: 7.7p).  Reported basic EPS is 2.6p (2010: 8.8p), with reported diluted EPS being 2.5p (2010: 8.7p).

Dividends

An interim dividend of 4.7p is being announced today.  This will be paid on 18 January 2012 to shareholders on the register at the close of business on 11 November 2011 (an ex-dividend date of 9 November 2011).

The final dividend for the financial year ending 3 March 2012 which is payable on 25 July 2012 will be assessed in the light of the full year trading outcome together with the outlook for the following financial year.

Cash flow and closing net cash position

26 weeks to £m	27 August 2011	28 August 2010
Benchmark operating profit	26.5	93.2
Depreciation and amortisation	60.6	64.6
Movement in working capital	61.8	36.0
Financing costs charged to Financial Services	1.7	1.6
Cash flow impact of FY 09 restructuring charge	(3.9)	(4.2)
Other operating items	(3.7)	(7.6)
Cash flows from operating activities	143.0	183.6
Net capital expenditure	(60.2)	(65.2)
Acquisition of business	(23.6)	-
Taxation	(38.5)	(3.8)
Net interest	1.3	1.6
Net movement of term deposits	100.0	-
Loans granted to joint ventures and associates	(1.2)	(0.4)
Cash inflow before financing activities	120.8	115.8
Dividends paid	(79.9)	(85.8)
Share buy-back programme	-	(109.1)
Purchase of own shares for Employee Share Trust	-	(4.5)
Other financing activities	-	0.2
Net increase/(decrease) in cash and cash equivalents	40.9	(83.4)
Add back: net movement of term deposits	(100.0)	-
Effect of foreign exchange rate changes	0.3	(3.7)
Decrease in financing net cash	(58.8)	(87.1)
Opening financing net cash	259.3	414.0
Closing financing net cash	200.5	326.9

Cash flows from operating activities were £143.0m (2010: £183.6m).  This £40.6m reduction was attributable to a reduced level of operating profit partially offset by an increased working capital inflow.

Net capital expenditure was £60.2m (2010: £65.2m), reflecting ongoing investment across the Group in the existing store chains and further multi-channel initiatives.  The acquisition of the Habitat brand, including the UK website and three of its London stores, for a total consideration of £24.5m was made up of a cash payment in the period of £23.6m and deferred consideration of £0.9m.  Tax paid was £38.5m (2010: £3.8m), with the increase principally being attributable to the non repeat of certain tax benefits received in the previous financial year in relation to the successful completion of a number of tax efficiency projects.  Dividends paid to shareholders amounted to £79.9m (2010: £85.8m) with the reduction of £5.9m reflecting the impact of the share buy-back programme which was completed in the previous financial year.

The Group's financing net cash position at 27 August 2011 was £200.5m, a decrease of £58.8m in the period.

Balance sheet

As at £m	27 August 2011	26 February 2011	28 August 2010
Goodwill	1,543.9	1,541.0	1,541.0
Other intangible assets	135.8	107.8	92.0
Property, plant and equipment	515.2	523.4	523.9
Inventories	1,013.9	1,016.8	1,013.5
Instalment receivables	427.0	456.1	407.4
Other assets	174.8	181.7	169.1
	3,810.6	3,826.8	3,746.9
Trade and other payables	(1,132.9)	(1,106.2)	(1,184.2)
Other liabilities	(209.4)	(207.8)	(216.3)
	(1,342.3)	(1,314.0)	(1,400.5)
Invested capital	2,468.3	2,512.8	2,346.4
Retirement benefit obligations	(81.8)	(7.5)	(71.4)
Net tax assets	52.9	4.6	57.4
Forward foreign exchange contracts	(14.6)	(28.0)	(3.0)
Financing net cash	200.5	259.3	326.9
Net assets	2,625.3	2,741.2	2,656.3

Net assets as at 27 August 2011 were £2,625.3m, equivalent to 329p (2010: 325p) per share excluding shares held in Group share trusts.  The reduction in invested capital versus the 26 February 2011 year-end balance sheet was £44.5m, driven by a reduction in the Financial Services loan book together with an increase in trade and other payables partly offset by the increase in other intangible assets attributable to the Habitat acquisition. 

The reduction in net assets of £115.9m versus the balance sheet as at 26 February 2011 was driven by the reduction in invested capital discussed above, together with the £74.3m increase in retirement benefit obligations and the £58.8m reduction in financing net cash, partially offset by the £48.3m increase in net tax assets and the £13.4m movement in forward foreign exchange contracts.

Retirement benefit obligations - pensioner buy-in

On 27 May 2011 the Trustees of the Group's defined benefit pension scheme signed an agreement with Prudential Retirement Income Limited (PRIL), a subsidiary of Prudential plc, for a bulk annuity policy covering existing pensioners in payment.  The agreement entered into is generally referred to as a pensioner 'buy-in'.

Buy-ins of this nature are a common de-risking practice for defined benefit pension schemes.  They eliminate the existing financial risks related to pensioners covered by the annuity policy, including exposure to investment, inflation and mortality risk.  These risks are replaced with a continuing obligation from the insurer to meet the cash flows associated with all future payments to pensioners covered by the buy-in agreement. 

To assume these risks PRIL has been paid cash and assets equivalent to £278m from the assets of the pension scheme.  This amount was equal to the scheme's actuarially assessed value of the pensioner obligations and therefore the buy-in was financially neutral for both the pension scheme and the Group.

Retirement benefit obligations - IAS 19

The Group's pension arrangements are operated principally through the Home Retail Group Pension Scheme, a defined benefit scheme, together with the Home Retail Group Stakeholder Pension Scheme, a defined contribution scheme.

The IAS 19 valuation as at 27 August 2011 for the defined benefit pension schemes was a net deficit of £81.8m (26 February 2011: £7.5m).  Scheme assets decreased to £703.0m (26 February 2011: £748.8m).  The present value of scheme liabilities increased to £784.8m (26 February 2011: £756.3m), driven principally by a reduction in the assumed discount rate to 5.5% (26 February 2011: 5.7%).

The IAS 19 asset value has been reduced by approximately £45m as a result of the pensioner buy-in.  This contrasts with the financially neutral impact assessed under the actuarial method, as described above, because of the different methods of valuing the annuity contract required by accounting standards.  There will be no impact on the Group's benchmark profitability or cash flow arising from the pensioner buy-in. 

Liquidity and funding

The Group maintains liquidity by arranging funding ahead of requirements and through access to committed bank facilities.  At 27 August 2011, the Group had £700m of undrawn, committed borrowing facilities, £685m of which does not expire until 2013.  These facilities are in place to enable the Group to finance its working capital requirements and for general corporate purposes.  The Group's net cash position is however expected to continue to be sufficient to meet its financing needs for the foreseeable future.

Group financing arrangements

The Group finances its operations through a combination of retained profits, property leases and borrowing facilities where necessary.  The Group's net cash balances averaged approximately £300m over the period; the Group did not draw upon its committed borrowing facilities at any point during the period.

The Group has significant liabilities through its obligations to pay rents under operating leases; the operating lease charge for the last 12 months amounted to £366.0m (2010: £376.6m).  Based upon an eight times multiple of the operating lease charge the capitalised value of these liabilities is £2,928m (2010: £3,013m).  Alternatively based upon the discounted cash flows of the expected future operating lease charges the capitalised value of these liabilities is £2,954m (2010: £3,130m) utilising a discount rate of 2.9% (2010: 3.2%).  In common with credit rating agencies and lenders, the Group treats its lease liabilities as debt when evaluating financial risk.

Accounting standards and use of non-GAAP measures

The Group has prepared its consolidated financial statements based on International Financial Reporting Standards for the 26 weeks ended 27 August 2011.  The basis of preparation is outlined in Note 1 to the Financial Information on page 23.

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 24.

Principal risks and uncertainties

The Group set out in its 2011 Annual Report and Financial Statements the principal risks and uncertainties which could impact its performance; these remain unchanged since its publication.  The Group operates a structured risk management process which identifies and evaluates risks and uncertainties and reviews mitigation activity.

On a short-term forward-looking basis over the remainder of the financial year, the main area of potential risk and uncertainty centres on the impact on sales volumes and thereby profitability in relation to economic conditions and overall consumer demand.  Other potential risks and uncertainties around sales and/or profit growth include the cost of goods and services to the Group, competitor activity, seasonal weather patterns, failure to execute the strategy, currency exposures, the regulatory environment, product supply and other operational processes, infrastructure development, product safety, reliance on key personnel and business interruption.  These risks, together with examples of mitigating activity, are set out in more detail in the 2011 Annual Report and Financial Statements on pages 32 and 33.

 Appendix 1.  Trading statement information as reported

Financial year 2010/11							Financial year 2011/12
	Q1 13 weeks to 29 May 2010						Q1 13 weeks to 28 May 2011
Argos
Sales	£889m						£817m
Like-for-like change in sales	(8.1%)						(9.6%)
Net new space contribution	2.9%						1.5%
Total sales change	(5.2%)						(8.1%)
Gross margin movement	Down c.150bps						Down c.75bps
Homebase
Sales	£459m						£458m
Like-for-like change in sales	(1.4%)						1.6%
Net new space contribution	0.0%						(1.7%)
Total sales change	(1.4%)						(0.1%)
Gross margin movement	Down c.150bps						Down c.50bps
	Q2 13 weeks to 28 Aug 2010		H1 26 weeks to 29 Aug 2009				Q2 13 weeks to 27 Aug 2011		H1 26 weeks to 27 Aug 2011
Argos
Sales	£924m		£1,813m				£859m		£1,676m
Like-for-like change in sales	(5.0%)		(6.5%)				(8.6)%		(9.1)%
Net new space contribution	2.2%		2.5%				1.5%		1.5%
Total sales change	(2.8%)		(4.0%)				(7.1)%		(7.6)%
Gross margin movement	Down c.125bps		Down c.150bps				Down c.100bps		Down c.75bps
Homebase
Sales	£396m		£855m				£382m		£840m
Like-for-like change in sales	0.0%		(0.8%)				(3.1)%		(0.6)%
Net new space contribution	(1.1%)		(0.4%)				(0.7)%		(1.2)%
Total sales change	(1.1%)		(1.2%)				(3.8)%		(1.8)%
Gross margin movement	Down c.75bps		Down c.100bps				c.0bps		Down c.25bps
	Q3 18 weeks to 1 Jan 2011		YTD 44 weeks to 2 Jan 2010
Argos
Sales	£1,861m		£3,674m
Like-for-like change in sales	(4.9%)		(5.7%)
Net new space contribution	1.7%		2.1%
Total sales change	(3.2%)		(3.6%)
Gross margin movement	Down  c.25bps		Down c.75bps
Homebase
Sales	£487m		£1,342m
Like-for-like change in sales	(1.2%)		(1.0%)
Net new space contribution	(1.6%)		(0.8%)
Total sales change	(2.8%)		(1.8%)
Gross margin movement	Up c.75bps		Down c.25bps
	Q4 8 weeks to 26 Feb 2011		H2 26 weeks to 26 Feb 2011		FY 52 weeks to 26 Feb 2011
Argos
Sales	£520m		£2,381m		£4,194m
Like-for-like change in sales	(4.6%)		(4.8%)		(5.6%)
Net new space contribution	1.5%		1.7%		2.1%
Total sales change	(3.1%)		(3.1%)		(3.5%)
Gross margin movement	Down c.150bps		Down c.50bps		Down c.100bps
Homebase
Sales	£208m		£695m		£1,551m
Like-for-like change in sales	3.8%		0.2%		(0.3%)
Net new space contribution	(2.0%)		(1.7%)		(1.1%)
Total sales change	1.8%		(1.5%)		(1.4%)
Gross margin movement	Up c.300bps		Up c.150bps		c.0bps

 

END

 

 

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