Half Year Results - Part 1

RNS Number : 8921C

Home Retail Group Plc

21 October 2015

 

                                                                                                             21 October 2015

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 29 August 2015.  

Operating highlights

§ Argos Transformation Plan progress:

-     Substantially completed development and testing of new digital propositions - Fast Track Collection and Fast Track Delivery - which launched early in the second half of FY16

-     Opened 86 digital concessions, bringing total digital stores to 148

-     Internet penetration accounted for 45% of total sales including mobile commerce which grew 13% to represent 25% of total sales

§ Homebase Productivity Plan progress:

-     A further 25 store closures completed

-     Infrastructure cost reduction programme accelerated

-     43% digital sales growth to 10% of total sales

Financial highlights

§ Sales down 2% to £2,629m  

§ Cash gross margin down 1% to £973m

§ Operating and distribution costs decreased by £10m to £941m, Homebase costs decreased by £26m, Argos costs increased by £14m

§ Benchmark profit before tax² increased by £3.2m or 10% to £34.1m, Homebase increased by £6.5m, Argos decreased by £5.6m

§ Basic benchmark earnings per share³ increased by 13% to 3.4p

§ Reported profit before tax increased by 73% to £23.4m; reported basic earnings per share of 2.3p

§ Cash utilisation in the period of £116m with closing net cash of £193m

§ Interim dividend of 1.0p (H1 FY15: 1.0p)

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

"While Group benchmark profit before tax increased slightly during the first half, performance overall was mixed.  Homebase delivered a good first half, with like-for-like sales growth and an improvement in operating profit.  It also made good progress with its Productivity Plan and the store closure plan in particular, which helped Homebase to achieve further cost reductions.

"Argos' first half sales and profit were negatively impacted by declines in both electrical and seasonal product categories.  Argos continued to make good progress with its Transformation Plan, delivering strongly against its digital store opening programme.  Argos also substantially completed the technology and operational steps necessary to launch 'Fast Track' - its new home delivery and store collection propositions.  Argos is investing significantly in the launch of Fast Track and although the rate of customer take-up cannot be certain, we are confident that customers will increasingly embrace this market leading service over time. 

"We look forward to an improved sales performance for both Argos and the Group in the second half.  However, as I have previously stated, trading at Argos during this year's important Christmas season seems less predictable than usual, as both retailers and customers determine whether to repeat last year's unusual Black Friday patterns.  The combination of this trading uncertainty, an increased level of investment in the launch of Fast Track and the underlying profit reduction from Argos' challenging first half, mean that at this stage of the financial year we expect the Group's full-year benchmark profit before tax to be slightly below the bottom end of the current range of market expectations of £115m to £140m."

1.  Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, post-employment benefit scheme administration costs, store impairment and onerous lease charges or releases and costs or income associated with store closures and exceptional items.

2.  Benchmark profit before tax (benchmark PBT) is defined as profit before amortisation of acquisition intangibles, post-employment benefit scheme administration costs, store impairment and onerous lease charges or releases and costs or income associated with store closures, exceptional items, financing fair value remeasurements, financing impact on post-employment 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 the Home Retail Group share trust net of vested but unexercised share awards).

Enquiries

Analysts and investors (Home Retail Group)

Richard Ashton                Finance Director                                  01908 600 291

Mark Willis                       Director of Investor Relations

Media (RLM Finsbury)

Rollo Head                                                                                020 7251 3801

There will be a presentation today at 9.30am to analysts and investors at the Auditorium, Merrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ.  The presentation can be viewed 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.

A Trading Statement, covering the 18 weeks from 30 August 2015 to 2 January 2016, will be published on Thursday 14 January 2016.

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	29 August 2015	30 August 2014
Argos	1,743.1	1,769.1
Homebase	816.4	834.5
Financial Services	69.0	65.0
Sales	2,628.5	2,668.6
Cost of goods	(1,655.3)	(1,687.9)
Gross margin	973.2	980.7
Operating and distribution costs	(940.7)	(950.8)
Argos	6.4	12.0
Homebase	34.3	27.8
Financial Services	3.5	3.1
Central Activities	(11.7)	(13.0)
Benchmark operating profit	32.5	29.9
Net interest income	1.6	1.0
Benchmark PBT	34.1	30.9
Amortisation of acquisition intangibles	(0.9)	(0.9)
Post-employment benefit scheme administration costs	(0.9)	(0.7)
Adjustments in respect of store impairment and property provisions	0.7	0.7
Exceptional items	(4.4)	(11.8)
Financing fair value remeasurements	(0.1)	0.3
Financing impact on post-employment benefit obligations	(1.9)	(1.6)
Discount unwind on non-benchmark items	(3.2)	(3.4)
Profit before tax	23.4	13.5
Taxation	(6.1)	(4.0)
of which: taxation attributable to benchmark PBT	(8.2)	(7.9)
Benchmark effective tax % rate	24.0%	25.5%
Profit for the period	17.3	9.5
Basic benchmark EPS	3.4p	3.0p
Basic EPS	2.3p	1.2p
Weighted average number of shares for basic EPS	763.7m	773.1m
Interim dividend	1.0p	1.0p
Closing net cash position	193.1	333.1

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

OPERATING COMPANY REVIEWS

Argos

26 weeks to £m	29 August 2015	30 August 2014
Sales	1,743.1	1,769.1
Benchmark operating profit	6.4	12.0
Benchmark operating margin	0.4%	0.7%
Like-for-like sales change	(3.4%)	2.9%
Net space sales change	1.9%	0.1%
Total sales change	(1.5%)	3.0%
Gross margin rate movement	Up c.100bps	c.0bps
Benchmark operating profit change	(47%)	57%
Number of stores at period-end	840	747
Of which are digital format	148	32

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

There are four key strategic elements to the Transformation Plan:

1.  Provide more product choice, available to customers faster - Fulfilment remains highly competitive amongst retailers.  Argos is uniquely positioned through its store estate and supply chain to provide market leading fulfilment options to customers on a national scale.

2.  Reposition Argos' channels for a digital future - Growth in digital channels is expected to outpace the market generally.  By focussing on and leading in these channels Argos believes it can secure future growth.  Stores remain a strategic advantage for Argos as local points of collection and customer service, however their role is being adapted to support a digital offer. 

3.  Develop a customer offer that has universal appeal - Historically Argos' offering has been biased towards less affluent customers.  By providing products, pricing, marketing programmes and customer experiences that are more appealing across the range of our customers, we have a significant opportunity to grow the business.

4.  Operate a lean and flexible cost base - Stores are one of Argos' biggest costs.  Historically lease terms are long and inflexible, yet customer usage of stores is changing and space requirements are less predictable.  Reducing the lease terms across the estate will provide flexibility to adjust the estate as required.

Operational review

Digital fulfilment propositions

In the past two years Argos has been building on the systems and operations underlying its product fulfilment, including improving its real-time stock visibility and stock picking systems, and implementing its 'hub & spoke' distribution network on a national scale.  In the first half of FY16, Argos further evolved 'hub & spoke' to improve stock availability, through both better stock allocation systems and increased investment in stock.  In the first half Argos also substantially completed the systems, operational and marketing preparations for the launch of new propositions - Fast Track Collection and Fast Track Delivery - both of which were successfully introduced shortly after the half-year.

Both Fast Track Collection and Fast Track Delivery offer customers Argos' most popular general merchandise products, stocked locally and flagged online with a Fast Track logo.  These propositions have been introduced nationally after extensive operational testing, which began early in 2015, and included several weeks of market testing in a pilot region.  Both offers require customers to pay for their Fast Track products online, which is a capability new to Argos and which was introduced nationally in the first half.  Online payment allows customers to store credit card details for future purchases and will improve store collection rates.  In addition to systems, operational and marketing testing, the new propositions have required substantial improvements to digital navigation, features and performance, for example improved payment options, increased delivery slots with better options, more relevant search on store browsers and improved page load speeds.

Fast Track Collection enables customers to choose from c.20,000 products, pay online and collect their products from their local store on the same day, from a dedicated Fast Track counter, in as little as 60 seconds.  The service is free of charge.

Fast Track Delivery offers customers the same c.20,000 products for same day home delivery, with the choice of four time slots per day.  Orders can be placed until 6pm for same day delivery by 10pm, 7 days per week, at a standard cost of £3.95.  To make this offer available to customers throughout the UK, Argos has recruited and trained c.2,300 new colleagues as customer fulfilment drivers for its dedicated fleet of c.800 vans, and expects to increase this to c.3,300 drivers over its peak Christmas period.

Fast Track Collection was introduced nationally in September and Fast Track Delivery was launched nationally in October.  The media plan for the launch of these new propositions is significant and includes a standalone Fast Track TV campaign, display campaigns across digital channels, increased advertising in store at both point of sale and on TV screens, promotion in the Christmas gift guide and investment in delivery vans with Fast Track liveries.  These new digital propositions represent for many customers, the most significant output of the Argos transformation to date.  Although Argos expects customers to be receptive to the offers, the take-up rate is likely to build over time as customers become familiar with them.

Argos has also been improving its delivery offer for larger, 'two man' products.  The market for large item delivery has been particularly competitive for white goods, where next day delivery is now common.  For other product categories, delivery standards are longer - days or even weeks.  Home Retail Group has one of the biggest large item delivery networks in the UK, which can be used to greater advantage.  During the first half of FY16, Argos progressed the systems and operational capabilities supporting large item delivery.  During the second half of FY16 it will introduce express next day delivery for its most popular large products, 7 days per week, with new evening slots, and expanded routes and capacity.

Digital stores

Convenient local product collection, supported by good customer service, continues to be of increasing value to customers.  Argos' store estate therefore remains a key point of competitive advantage and it is being adapted to support a more digital future.  Facilitated by the 'hub & spoke' distribution model, Argos continued to increase its number of collection points through its digital concession stores during the first half of FY16.

§ It opened a further 76 digital concessions within Homebase, taking the total number to 96. This is in line with previous guidance of a further 80 concessions during FY16 

§ 10 digital concessions within Sainsbury's were also opened during the first half of FY16; and 

§ One small format store was opened in London (Islington), which brings the total number to eight

In addition, Argos completed one conversion of an existing store to a digital format during the first half of FY16, which tested a new, lower cost version relative to the 33 conversions completed to date.  Around a further 50 digital conversions are planned for completion during the second half of FY16.  Overall, the investment in digital format stores to date, is on track to deliver a good return on investment and Argos remains on target to complete a cumulative total of 200 digital format stores by the end of FY16.

Products

Product strategies continue to be a focus for Argos, as it aims to provide strong choice across its breadth of customers.  During the first half of FY16, Argos added approximately 3,000 products to its range, and introduced another six aspirational brands including Nespresso coffee machines and Makita power tools.  Argos also improved its own brand portfolio.  For example, Chad Valley benefitted from both a range extension and a new visual identity across its packaging, catalogue, online and in-store execution whilst Bush has been given a brand refresh.  Furthermore, Cherokee, a new exclusive clothing brand to Argos, was launched during the first half of FY16 with a focus on children's clothing.  Heart of House, a furniture and home brand, has experienced an improving sales trend since its launch in mid-FY15.

Financial Review

Total sales in the 26 weeks to 29 August 2015 declined by 1.5% to £1,743m. Net space increased sales by 1.9% with the store estate increasing by a net 85 stores to 840.  Like-for-like sales declined by 3.4%.  As anticipated, sales of electrical products declined versus last year, driven principally by TVs, tablets and white goods.  These declines were partially offset by growth in mobiles and toys.

The gross margin rate increased by approximately 100 basis points.  This was principally driven by the anticipated impact of favourable currency and shipping costs, together with the timing benefit of a small number of other positive items, both of which are expected to reverse in the second half of FY16.  These increases were partially offset by an increased level of promotional sales.  In respect of the timing benefit of a small number of other positive items, this represented c.50 basis points of the first half gross margin improvement which, based on Argos' first half sales of £1.7bn, equates to approximately £8m of gross margin that benefitted the first half profit versus the comparable period last year.  This £8m timing benefit is expected to unwind in the second half of FY16.

Total operating and distribution costs increased by £14m principally driven by cost increases as a result of the Transformation Plan's strategic initiatives, such as the net 93 stores added since the first half of FY15 and the commencement of the hiring of vehicles and drivers for Argos' new Fast Track delivery capabilities, together with the impact of an increased level of depreciation and underlying cost inflation.

Benchmark operating profit declined by £5.6m, or 47% to £6.4m (H1 FY15: £12.0m).

Homebase

26 weeks to £m		29 August 2015	30 August 2014
Sales		816.4	834.5
Benchmark operating profit		34.3	27.8
Benchmark operating margin		4.2%	3.3%
Like-for-like sales change		5.6%	4.1%
Net space sales change		(7.8%)	(2.6%)
Total sales change		(2.2%)	1.5%
Gross margin rate movement		Down c.125bps	Down c.75bps
Benchmark operating profit change		23%	2%
Number of stores at period-end		271	316
Store selling space at period-end (million sq. ft.)		12.5	14.6
Of which	- garden centre area	3.0	3.4
	- mezzanine floor area	1.7	1.8

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

1.  Right-size the store estate

2.  Strengthen customer standards and propositions; and

3.  Digital enhancements

These elements focus on improving Homebase's store and digital foundations, including its operational efficiency, in order to position the business for successful future investment and growth.

Operational review

Right-size the store estate

There were 25 store closures in the first half of FY16, reducing the store estate to 271.   Homebase expects to close around 10 further stores in the second half of FY16.  This means that combined with the 30 closures in FY15, Homebase has made significant progress towards its FY18 goal of a reduction of c.25% from the 323 stores as at the end of FY14.

As previously communicated, an agreement has been reached for the sale of the Battersea freehold site to a residential property developer for £57m.  A £30m deposit was received in FY15, with the remaining £27m being due on completion in the second half of FY16.  We still anticipate therefore that the cumulative store closure programme to date will be cash positive at the end of FY16.

With the ongoing reduction in the store estate, Homebase has also accelerated the associated cost reduction programme to reduce both head office support costs and infrastructure costs.  A restructure programme to reduce head office support costs was concluded in the first half of FY16 while the closure of a distribution centre, which will take effect in the second half of FY16, will contribute towards more efficient and effective operations.

Strengthen customer standards and propositions

During the first half of FY16, Homebase has continued to focus on improving in-store customer experiences and consistency of store operating standards.  This has included some system optimisation to improve stock availability to customers, and simplified stockroom and replenishment processes to improve store productivity.

Strengthening the customer propositions through efficient promotional programmes and more competitive product pricing remains key to the achievement of Homebase's Productivity Plan.  The first half of FY16 has seen a change in promotional activity towards more focused and effective programmes.  Two blanket promotional events towards the end of the first half of FY16 were removed and replaced by more targeted and seasonally relevant promotions, while pricing investment trials across some of our key categories continued.

The performance of exclusive brands such as Habitat, Odina, Schreiber, Hygena and Qualcast continues to be of key importance to Homebase.  The rebranding of the Kitchen Essentials range to Simply Hygena emphasises the good quality, reliability and stylish selection of kitchens.  The Simply Hygena brand has delivered strong sales growth when compared to the same period in FY15.  Homebase made key developments in other categories, extending its plants range in-store and online, and adding the Ideal Standards premium bathroom range which will be rolled out to more stores in the second half of FY16.

The Habitat brand continues to deliver greater choice around premium quality to the Homebase customer.  Sales of Habitat products in Homebase, including concessions, grew by over 30% compared to the same period last year.  There are now 68 Habitat concessions, an increase from 35 concessions at the end of FY15.  Argos opened 76 digital concessions in Homebase during the first half of FY16, taking the total number of Argos digital concessions in Homebase to 96.

Digital enhancements

In the first half of FY16 Homebase implemented some key digital developments, with particular focus on aligning and improving content across all digital channels.  The launch of a new product information system has facilitated the enhancement of product descriptions and content on the website, which provides customers with better information to support researching and buying choices.  Further to this, product recommendations have been added across the digital channels to enable customers to view more related products in one place.  Digital sales in the period grew by 43% year-on-year, and now represent c.10% of total sales.

Financial review

Total sales in the 26 weeks to 29 August 2015 declined by 2.2% to £816m. Homebase closed 25 stores during the period reducing its store estate to 271 stores, with net space reducing sales by 7.8%.  Like-for-like sales increased by 5.6% with growth broadly across all product categories, but particularly in big ticket kitchen, bathroom and furniture products.   This growth continued to be partially supported by both the trade transfer and the stock clearance sales benefits attributable to the previously announced store closure programme and distribution centre closure.

The gross margin rate was down by approximately 125 basis points, principally driven by an increased level of stock clearance in respect of the store closure programme and distribution centre closure, together with an adverse sales mix impact from the growth in margin dilutive big ticket products, partially offset by the anticipated impact of favourable currency and shipping costs.

Total operating and distribution costs decreased by £26m, 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 £6.5m, or 23%, to £34.3m (H1 FY15: £27.8m).

Financial Services

26 weeks to £m		29 August 2015	30 August 2014
Sales		69.0	65.0
Benchmark operating profit before financing costs		5.5	4.8
Financing costs		(2.0)	(1.7)
Benchmark operating profit		3.5	3.1
As at	29 August 2015	28 February  2015	30 August 2014
Store card gross receivables	611.6	644.1	584.6
Provision	(62.0)	(64.6)	(68.4)
Store card net receivables	549.6	579.5	516.2
Provision % of gross receivables	10.1%	10.0%	11.7%

Financial Services works in conjunction with Argos and Homebase to provide their customers with the most appropriate credit offers to drive both retail sales and ensure appropriate customer outcomes.  In doing so, it aims to achieve a return on equity on the revolving element of its loan book that is typical of the financial service industry norm and in addition, to recover its costs on the promotional element of its loan book.  The profit earned by Financial Services over and above this amount accrues to the retail companies, which is where both the transactions and the customer relationships originate.

Operational & financial review       

Consistent with the wider consumer credit industry, Financial Services is currently managing the change in regulation of consumer credit activity from the Office of Fair Trading to the Financial Conduct Authority.  The appropriate applications have been made and the business is engaged in a wide programme of compliance activity.

In the first half of FY16 in-house store card credit sales were 1% lower at £318m (H1 FY15: £321m) and represented 10.6% (H1 FY15: 10.5%) of Group retail sales.  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 were down 1% at £367m (H1 FY15: £372m) and represented 12.2% (H1 FY15: 12.1%) of Group retail sales. 

Store card net receivables grew by £33m versus a year ago to £550m, principally as a result of the increased level of in-house credit sales in the second half of FY15.  The Group finances these receivables internally with no third party debt being required. 

Total sales in the 26 weeks to 29 August 2015 increased by 6% to £69m.  Delinquency rates continue their downward trend of the last few years resulting in a small reduction in the bad debt cost.  Financing costs were marginally higher than last year due to the year-on-year 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 performance in sales and the reduced bad debt cost were partially offset by a small increase in operating costs which is partly attributable to the previously discussed change in the regulatory environment.  Benchmark operating profit increased 13% to £3.5m (H1 FY15: £3.1m).

GROUP FINANCIAL REVIEW

Sales and benchmark operating profit

Group sales were 2% lower at £2,629m (H1 FY15: £2,669m) while Group benchmark operating profit increased 9% to £32.5m (H1 FY15: £29.9m).  The drivers of the Argos, Homebase and Financial Services performances have been analysed as part of the preceding business reviews.  Central Activities, which represents the cost of central corporate functions, were well controlled in the first half of FY16 and decreased by 10% to £11.7m (H1 FY15: £13.0m), with underlying cost inflation being more than offset by cost saving initiatives.

Benchmark net interest income

Net interest income within benchmark PBT increased by 60% to £1.6m (H1 FY15: £1.0m). 

Benchmark PBT

Benchmark PBT increased by 10% to £34.1m (H1 FY15: £30.9m) driven by the factors previously discussed.

Amortisation of acquisition intangibles

A charge of £0.9m was incurred (H1 FY15: £0.9m), 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 £0.9m was incurred (H1 FY15: £0.7m), in respect of the administration costs of the Home Retail Group Pension Scheme. 

Adjustments in respect of store impairment and property provisions

A net credit of £0.7m (H1 FY15: £0.7m) was recorded.  The net credit reflects a £3.4m reversal in respect of previous property provisions that are no longer required, partially offset by a charge of £2.7m relating to store closures.

Exceptional items

The exceptional charge incurred was £4.4m (H1 FY15: £11.8m).  This charge relates to the ongoing programme to transform Argos into a digital retail leader and forms part of the total charge announced at the time of the Argos Transformation Plan of c.£50m over the first three years of the Plan to FY16. 

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 £0.1m (H1 FY15: net gain of £0.3m), which arose principally as a result of translation differences on overseas subsidiary currency balances.  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 £1.9m (H1 FY15: £1.6m). 

Discount unwind on non‑benchmark items

A charge of £3.2m (H1 FY15: £3.4m) 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. 

Net interest reconciliation

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

	29 August 2015	30 August 2014
Net interest income within benchmark PBT	1.6	1.0
Financing fair value remeasurements	(0.1)	0.3
Financing impact on post-employment benefit obligations	(1.9)	(1.6)
Discount unwind on non-benchmark items	(3.2)	(3.4)
Income statement net financing charge	(3.6)	(3.7)

Profit before tax

Profit before tax increased by 73% to £23.4m (H1 FY15: £13.5m).

Taxation

Taxation attributable to benchmark PBT was £8.2m (H1 FY15: £7.9m), representing an estimated effective tax rate for the period of 24.0% (H1 FY15: 25.5%).  The lower effective tax rate principally reflects the 1% reduction in the UK corporation tax rate.

Taxation attributable to non-benchmark items amounted to a credit of £2.1m (H1 FY15: £3.9m).  The total tax expense was therefore £6.1m (H1 FY15: £4.0m).

Number of shares and earnings per share

The number of shares for the purpose of calculating basic earnings per share (EPS) was 763.7m (H1 FY15: 773.1m), representing the weighted average number of issued ordinary shares of 813.4m (H1 FY15: 813.4m), less an adjustment of 49.7m (H1 FY15: 40.3m) representing shares held in the Group share trust 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 28.7m (H1 FY15: 28.3m) to 792.4m (H1 FY15: 801.4m).  Basic benchmark EPS is 3.4p (H1 FY15: 3.0p), with diluted benchmark EPS of 3.3p (H1 FY15: 2.9p).  Reported basic EPS is 2.3p (H1 FY15: 1.2p), with reported diluted EPS being 2.2p (H1 FY15: 1.2p).

Dividends

At this stage of the financial year, as we approach Argos' peak trading period, the Board announces an interim dividend of 1.0p.  This is consistent with the Group's previous practice that, to reflect the weighting of the Group's earnings profile to the second half of the financial year, the interim dividend would be held at 1.0p, with any changes to the full year dividend being made to the final dividend.  The dividend will be paid on 21 January 2016 to shareholders on the register at the close of business on 13 November 2015.

Balance sheet

As at £m	29 August 2015	28 February 2015	30 August 2014
Goodwill	1,543.9	1,543.9	1,543.9
Intangible assets	246.7	235.5	210.8
Property, plant and equipment	411.3	412.9	444.3
Inventories	988.8	963.0	930.1
Financial Services loan book	549.6	579.5	516.2
Other assets	263.6	240.8	187.4
	4,003.9	3,975.6	3,832.7
Trade and other payables	(1,271.8)	(1,329.5)	(1,252.2)
Provisions	(191.2)	(221.9)	(227.6)
	(1,463.0)	(1,551.4)	(1,479.8)
Invested capital	2,540.9	2,424.2	2,352.9
Post-employment benefit obligations	(100.5)	(114.4)	(104.9)
Net tax assets	29.0	26.7	38.4
Forward foreign exchange contracts	0.6	27.1	(0.6)
Net cash	193.1	309.3	333.1
Net assets	2,663.1	2,672.9	2,618.9

Net assets as at 29 August 2015 were £2,663m, equivalent to 347p (H1 FY15: 348p) per share excluding shares held in the Group share trust.  Invested capital as at 29 August 2015 was £2,541m, an increase of £117m versus the balance sheet as at 28 February 2015. 

This increase in invested capital was principally driven by the following factors;

-     A £26m increase in inventories, due to an increase at Argos, principally driven by the addition of a net 85 new stores during the first half of FY16, together with an investment in inventories to improve product availability as discussed in Argos' operating review.  The increase in inventories at Argos in the first half was slightly higher than planned, due to sales in Argos in the first half of FY16 being marginally below its original expectations.  The increase in inventories at Argos was partially offset by a reduction at Homebase, attributable to its previously discussed store and warehouse closure programme

-     A £30m reduction in the Financial Services loan book, which reflects the usual reduction experienced in the first half of the financial year as the loan book reduces from its post-Christmas peak

-     A £58m reduction in trade and other payables, principally as a result of the anticipated reversal of the FY15 timing benefit attributable to the earlier timing of Easter, together with the previously discussed slower sell-through of inventories in the first half at Argos; and

-     A reduction of £31m in provisions, principally relating to the utilisation of provisions held for both restructuring costs and in respect of PPI customer redress payments

The reduction in net assets of £10m versus the balance sheet as at 28 February 2015 was principally driven by reductions in both net cash and forward foreign exchange contracts partially offset by the previously discussed increase in invested capital.

Cash flow and net cash position

26 weeks to £m	29 August 2015	30 August 2014
Benchmark operating profit	32.5	29.9
Exceptional items	(4.4)	(11.8)
Post-employment benefit scheme administration costs	(0.9)	(0.7)
Amortisation of acquisition intangibles	(0.9)	(0.9)
Adjustments in respect of store impairment and property provisions	0.7	0.7
Statutory operating profit	27.0	17.2
Depreciation and amortisation	69.6	66.8
Movement in trade working capital	(94.8)	69.8
Movement in Financial Services loan book	29.9	7.9
Cash impact of restructuring charges	(14.3)	(13.0)
Pension scheme deficit recovery payments	(11.0)	(11.0)
Disposal of leasehold property	(5.8)	(5.0)
Cash impact of PPI customer redress payments	(17.7)	(2.7)
Financing costs charged to Financial Services	2.0	1.7
Movement in post-employment benefit obligations	0.5	0.3
Other operating items	8.7	14.9
Cash flows from operating activities	(5.9)	146.9
Net capital expenditure	(79.2)	(71.7)
Taxation	(7.3)	(6.0)
Net interest	(2.7)	0.3
Cash inflow before financing activities	(95.1)	69.5
Dividends paid	(21.2)	(17.8)
Cash flow in relation to Employee Share Trust	0.8	(49.7)
Net increase in cash and cash equivalents	(115.5)	2.0
Effect of foreign exchange rate changes	(0.7)	0.1
Increase in financing net cash	(116.2)	2.1
Opening financing net cash	309.3	331.0
Closing financing net cash	193.1	333.1

Cash flows from operating activities were an outflow of £6m (H1 FY15: inflow of £147m).  This decrease of £153m was principally attributable to a cash outflow from trade working capital discussed in more detail in the previously discussed review of the Balance Sheet.

Net capital expenditure was £79m (H1 FY15: £72m), representing the continued higher level of investment across the Group in the strategic initiatives of both retail businesses.  Tax paid was £7m (H1 FY15: £6m).  Dividends paid to shareholders amounted to £21m (H1 FY15: £18m).  A cash receipt of £1m was received in respect of the exercise of a small number of incentive scheme share options. 

The Group net cash position decreased to £193m with a net cash utilisation of £116m in the first half of FY16.

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 29 August 2015 for the Group's defined benefit pension scheme was a net deficit of £100.5m (28 February 2015: £114.4m).  The decrease in the deficit is principally driven by the increase in the discount rate assumption to 3.8% (28 February 2015: 3.5%).

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 is currently underway, 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 committed bank facilities.  The Group's net cash balance averaged approximately £315m (H1 FY15: approximately £440m) over the period.  

The Group has a £250m committed unsecured borrowing facility, which is currently undrawn and which expires in March 2019.  In addition, as at 29 August 2015 the Group's Financial Services business held a net loan book balance of £550m (H1 FY15: £516m), against which there is no third party debt.

The Group has additional liabilities through its obligations to pay rents under operating leases; the operating lease charge for the last 12 months amounted to £324m (H1 FY15: £342m).  Total lease commitments stood at £2,181m at 29 August 2015 (H1 FY15: £2,502m), which is a £2,149m, or a 50% 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 £1,780m (H1 FY15: £1,994m) utilising a discount rate of 4.3% (H1 FY15: 4.6%).

National living wage

In July, the Government announced the introduction of the national living wage ("NLW") from April 2016.  It is anticipated that, without any actions to mitigate the increase in wages attributable to the new NLW, the associated FY17 Group cost increase would be around £15m.  Approximately one-third of this increase relates to a "normal level of wage inflation", which is already included in the Group's longer term financial forecasts.

As the Group completes its forthcoming annual budget and strategic planning process, it will further refine its approach to the implementation of this complex change and therefore the cost impact.  The Group will look at all opportunities to mitigate an element of this NLW cost increase through its existing operational excellence cost efficiency programmes.

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 29 August 2015.  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 23.

Principal risks and uncertainties

The Group set out in its 2015 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 mitigating activity.

On a short-term forward-looking basis over the remainder of the financial year, which includes Argos' peak Christmas trading period, the main areas of potential risk and uncertainty centre on the impact on sales volumes and thereby profitability in relation to both economic conditions and overall consumer demand.  Other potential risks and uncertainties around sales and/or profit growth include the cost of goods and services to the Group, competitor activity, seasonal weather patterns, failure to deliver the strategy, reliance on key personnel, failure to meet customer expectations, currency exposures, product supply and other operational processes, infrastructure development, product safety, the regulatory environment and business interruption.  These risks, together with examples of mitigating activity, are set out in more detail in the 2015 Annual Report and Financial Statements on pages 24 and 25.

Appendix 1.  Trading statement comparables

	Q1 13 weeks to  31 May 2014						Q1 13 weeks to 30 May 2015
Argos
Sales	£868m						£846m
Like-for-like sales change	4.9%						(3.9%)
Net space sales change	(0.1%)						1.3%
Total sales change	4.8%						(2.6%)
Gross margin movement	Down c.25bps						Up c.50bps
Homebase
Sales	£445m						£438m
Like-for-like sales change	7.9%						5.4%
Net space sales change	(2.4%)						(7.0%)
Total sales change	5.5%						(1.6%)
Gross margin movement	Down c.50bps						Down c.175bps
	Q2 13 weeks to 30 Aug 2014		H1 26 weeks to 30 Aug 2014				Q2 13 weeks to 29 Aug 2015		H1 26 weeks to 29 Aug 2015
Argos
Sales	£901m		£1,769m				£897m		£1,743m
Like-for-like sales change	1.2%		2.9%				(2.8%)		(3.4%)
Net space sales change	0.2%		0.1%				2.4%		1.9%
Total sales change	1.4%		3.0%				(0.4%)		(1.5%)
Gross margin movement	Up c.25bps		c.0bps				Up c.125bps		Up c.100bps
Homebase
Sales	£390m		£835m				£378m		£816m
Like-for-like sales change	0.1%		4.1%				5.9%		5.6%
Net space sales change	(2.9%)		(2.6%)				(8.7%)		(7.8%)
Total sales change	(2.8%)		1.5%				(2.8%)		(2.2%)
Gross margin movement	Down c.75bps		Down c.75bps				Down c.75bps		Down c.125bps
	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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