Interim Results & Recovery Plans For Bhs

Storehouse PLC 18 November 1999 Interim results for 28 weeks ended 9 October 1999 STOREHOUSE REPORTS INTERIM RESULTS AND ANNOUNCES RECOVERY PLANS FOR Bhs AND MOTHERCARE * Group turnover £601.1 million (1998: £648.3 million) * Loss before tax and exceptional items of £15.7 million (1998: £38.7 million profit) * Launch of major recovery plans for Bhs and Mothercare * Significant change to Bhs format: - radical shift in clothing ranges and values - more space to home and gifts - reintroduction of food * Key features of Mothercare recovery: - increased focus on pre-school child - 40 more Mothercare World stores - aggressive development of new channels: Mothercare.com * Major restructuring leading to separation of the businesses Commenting today, Storehouse Chairman, Alan Smith, said: 'Following a wide ranging review, we are taking radical action to reposition Bhs and Mothercare. This represents a fundamental change to the way these businesses operate with new approaches to merchandise, formats, values and service. In addition, we have concluded that the current holding company structure no longer adds value and we intend to implement a major restructuring of the businesses to enable Bhs and Mothercare to operate as independent companies'. Enquiries to: Storehouse plc Alan Smith, Chairman 0171 339 2115 (alan.smith@bhs.co.uk) Chris Martin, Group finance director 0171 339 2152 (chris.martin@bhs.co.uk) Stephen Pain, Director of corporate 0171 339 2577 affairs(stephen.pain@bhs.co.uk) Brunswick Group Limited Susan Gilchrist/Victoria Sabin 0171 404 5959 1. Group results Group sales during the period were affected by two main factors: the overall decline in the clothing market and aggressive competition. As a result, group sales were £601.1 million compared with £648.3 million for the same period last year. Group gross margins were affected by intense price pressure and the increase in the level of markdown necessary to control stock levels. Group gross margins were 2.8 percentage points lower than last year. Costs, including the increase in depreciation as a result of new investment, increased as anticipated by 7.3 per cent. An exceptional charge of £6.9 million has been made for store disposals in Bhs and Mothercare and one-off costs. The performance of retail operations before the exceptional charge resulted in a loss of £11.6 million. Before the exceptional charge, the group made a pre-tax loss of £15.7 million compared with a pre-tax profit of £38.7 million for the previous year. Losses per share before the exceptional charge were 2.7p and after the exceptional charge were 4.1p. The board has decided that the payment of an interim dividend is inappropriate. A decision on the final dividend will depend on the performance of the business during the second half of the year. Capital investment for the half year amounted to £70.1 million (1998: £71.9 million) but the year as a whole will be significantly lower than last year. The group's balance sheet remains strong with continued tight control on working capital. Net debt at the end of the period was £118.2 million and gearing was 19.8 per cent. 2. Bhs Sales at Bhs were £370.7 million (1998: £400.4 million). This decline together with lower margins resulted in an operating loss for the period of £8.3 million compared with a profit of £28.9 million last year. UK sales at Bhs were £359.9 million (1998: £376.6 million), a reduction of 4.4 per cent, 9.2 per cent down on a like-for-like basis. The principal reason for this was the downturn in the market, particularly in clothing. Given the competitive nature of the market together with a slow start to the Autumn/Winter season, levels of markdown were much higher than anticipated. This impacted gross margins which were 2.1 percentage points down compared with last year. However, intake margins continued to improve. Sales of Bhs product to overseas franchisees were down by 54.8 per cent to £10.8 million (1998: £23.8 million). The continued weakness in the Middle East economy, the most important of Bhs' international markets, combined with the financial crises in Russia and the Far East were the main factors behind a disappointing performance. 3. Mothercare Mothercare reported a loss of £3.3 million compared with a profit of £12.3 million last year on sales which were down by 7.1 per cent to £230.4 million (1998: £247.9 million). Sales in the UK declined by 2.9 per cent, a reduction of 1.2 per cent like-for-like, to £212.7 million (1998: £219.0 million) and although intake margins were held, gross margins fell by 4.8 percentage points compared with last year. Sales of transport and nursery equipment were strong but the market for children's clothing became ever more challenging with high levels of markdown necessary to clear stocks ahead of the Autumn/Winter season. In May, the decision was taken to develop Mothercare in three formats; Mothercare World stores (more than 10,000 sq ft), Mothercare stores (up to 10,000 sq ft) and Mothercare Direct, the home shopping operation. As a result, it was announced in May that 68 of the smaller Mothercare stores were to close whilst the programme to transform the largest, 30,000 sq ft stores into 'world class' stores would be accelerated. Substantial progress has been made on both the closure programme and the refurbishments. Currently, 47 of the 68 stores have been sold and a further 14 identified for closure. During the period, the refurbishment of eight new format Mothercare World stores was completed making a total of 11 to date. The Mothercare World format is performing well. Sales to Mothercare's overseas franchisees were £17.7 million (1998: £28.9 million), a reduction of 38.7 per cent. 4. Current trading Bhs sales in the UK for the first five weeks of the second half of the year to 13 November were 3.0 per cent down - 6.4 per cent down like-for- like. Margins were reduced by 0.4 percentage points. Mothercare's total UK sales were 4.9 per cent lower - down 2.3 per cent like-for-like - with margins which were 2.5 percentage points down. Sales for the ongoing stores, after excluding the stores which are being closed, increased by 5.1 per cent, 0.6 per cent on a like-for-like basis. Margins declined by 1.5 percentage points. 5. Strategic restructuring Since June, the board has been conducting a fundamental review of the group, its businesses and the markets in which they operate. The review also considered options and proposals for the corporate structure including sale or merger. The review concluded that shareholders' interests will be best served by restructuring and repositioning Bhs and Mothercare to operate in the future as separate, independent companies. At that time, Storehouse plc will be dissolved and, until that time, Alan Smith will continue as Executive Chairman. Therefore, the current search for a chief executive has now been terminated. The management challenges presented by these plans are substantial. Both businesses will strengthen their existing teams and acquire new skills to affect these changes with speed and determination. 6. Bhs turnaround plan Bhs aims to be the value retailer on the high street. The Bhs turnaround plan is based on radically improving sales densities on the 4.5 million sq. ft. of prime high street space. Following trials this Autumn, which eliminated underperforming ranges and increased space for new categories of merchandise, Bhs will: * Radically shift clothing ranges and values * Allocate more space to home and gifts * Reintroduce food retailing and extend food services 6.1. Clothing Bhs will reduce underperforming ranges, duplication and complexity to give increased emphasis to casualwear. Next Spring, Bhs will have 15 per cent less options in its range. This more focused product range will be bought in depth to improve value, increase availability and release space for new merchandise. Branded merchandise will become part of the Bhs offer and trials will begin next Spring. Bhs will reduce selling prices on core merchandise significantly. Next Spring, Bhs clothing prices on like-for-like merchandise will be 15 per cent less than last year. A supply chain project is underway to increase direct buying and reduce costs. The savings to be made are substantial. 6.2. Home and gifts The space allocated to homewares and gifts, which are destination divisions at Bhs, will be increased. The Bath Homestore format introduced authoritative new ranges in furnishings, lighting and decorative products on substantially extended space. This provides the blueprint for the chain. New ranges are being introduced which will be displayed on increased space in all stores. Bhs' Christmas gift business delivers the highest trading density and profit per square foot of all product groups. A year-round gift range is being developed on these strong foundations. 6.3. Food Food retailing is returning to the high street. This trend is being driven by the increasing customer demand for frequently purchased fresh food available in conveniently located shops. The reintroduction of food at Bhs could transform store economics. The first Food Hall, in partnership with Iceland, opened on 2 November in Bhs' Birmingham store. The early results have been positive and, in addition, non-food sales have improved despite reduced footage. Plans are in place to introduce the Food Hall to a further 10 stores before the end of the current financial year. It will be possible to reintroduce food into over 100 Bhs stores. The food services business continues to grow profitably in all three formats, Restaurant, Sandwich Shop and Cafe Gio. Food services will be extended from the present 100 stores to all stores. 7. Mothercare recovery plan Mothers-to-be and parents of small children expect Mothercare to be the complete destination store for all their product needs. This expectation is met in the Mothercare World format and the ranges of children's transport, home products and pre-school toys. It is not met consistently in clothing and in the service and standards provided in many stores. The Mothercare recovery plan will deliver: * A destination range of clothing, hardware and toys for the pre-school child * A rapid improvement in store operating standards * An aggressive development of new channels: Mothercare World; Mothercare Catalogue and Mothercare.com 7.1. Merchandise range Mothers-to-be and parents of young children from all socio-economic groups expect Mothercare to provide for all their product needs. The range of children's transport and home products is a combination of Mothercare own label goods and selected brands. It is the best in the UK, the market leader and is growing sales. In toys, a pre-school own label toy range has been developed successfully which, in combination with leading brands, is growing well. This range will be developed to destination status for the needs of the pre-school child. The Mothercare clothing range is stretched over too many age groups. The range is being repositioned to provide depth and authority in maternitywear and clothing for baby and the pre-school child. In order to achieve full destination store status in this category, Mothercare will, as in hardware and toys, introduce leading national and international brands. 7.2. Stores The highest operational priority in the business is to improve store standards. A programme is underway which includes increased staffing and service training, improved availability and clearer layouts. Stores already in this programme are showing higher customer satisfaction ratings and increased sales. There will be two store formats, Mothercare World - over 10,000 sq. ft. both out of town and on larger high streets, and Mothercare - 5-10,000 sq. ft. on smaller high streets. Forty new Mothercare World stores are planned to open during the next three to four years, both as new locations and re-sites. The Mothercare World stores will carry the full merchandise range and, in future, will provide new services offering advice and support to mothers of young children. The Mothercare stores will be tailored to their local market with a full range of clothing and an edited range of hardware and toys. 8. Mothercare direct The potential for the Mothercare business presented by the growth of e- commerce is big and exciting. In the US, web-sites devoted to the needs of mothers-to-be and parents of young children have grown rapidly over the past two or three years. Mothercare is uniquely positioned to deliver an internet service in the UK specialising in this high-spending customer group. The site will be launched in the Spring of 2000. It will be a transactional vertical portal with the full Mothercare product range, an extensive information service, specialist advice, 'chat rooms' and bulletin boards. The development has started and is being carried out in partnership with a team experienced in building new e-commerce businesses end-to-end. Mothercare.com will be a separate subsidiary managed by a specialist team. The Mothercare catalogue was relaunched in the Spring of this year since when it has been trading at 50 per cent above last year's levels. 9. International The Bhs turnaround plan and Mothercare recovery plan provide a sound foundation for the future development of the international businesses. A new international management team is now in place committed to developing the key partnerships which already exist with Bhs and Mothercare franchisees. 10. Restructuring The restructuring plans now underway will result in substantial one-off costs which will be taken at the end of the current financial year. It is too early to determine precisely the costs for the restructuring of Bhs. However, costs for the restructuring of Mothercare are expected to be in the range of £25m to £30m with a further £3m to £5m for the development of Mothercare.com. Creating two independent businesses will lead to the dissolution of Storehouse plc as the holding company. The method by which the holding company is dissolved will be decided by the board, at the appropriate time, to deliver the greatest value to shareholders. The process will be carried out by the Storehouse team to avoid any distractions in the operating businesses and is not expected to be complete before 2001. INTERIM RESULTS For the 28 weeks ended 9 October 1999 (1998 - 28 weeks ended 10 October) Notes 28 28 weeks 28 28 52 weeks ended weeks weeks weeks ended 9.10.99 ended ended ended 9.10.99 9.10.99 10.10.98 27.3.99 Pre- excepti Exceptio Total onal nal £m £m £m £m £m TURNOVER 1 601.1 - 601.1 648.3 1,328.6 ______ _______ _______ _______ _______ (LOSS)/PROFIT FROM 2 RETAIL OPERATIONS (11.6) (7.5) (19.1) 41.2 98.1 Profit/(loss) on 3 disposal of stores - 0.6 0.6 - (12.1) Interest (4.1) - (4.1) (2.5) (5.7) ______ _______ _______ _______ _______ (LOSS)/PROFIT 4 BEFORE (15.7) (6.9) (22.6) 38.7 80.3 TAXATION Taxation 4.4 1.2 5.6 (10.8) (26.5) ______ _______ _______ _______ _______ (LOSS)/PROFIT AFTER 5 TAXATION (11.3) (5.7) (17.0) 27.9 53.8 Dividends - - - (15.8) (38.6) ______ _______ _______ _______ _______ RETAINED (LOSS)/ 6 PROFIT FOR THE PERIOD (11.3) (5.7) (17.0) 12.1 15.2 ______ _______ _______ _______ _______ (LOSS) EARNINGS PER 7 SHARE - PRE EXCEPTIONAL (2.7)p 6.6p 16.8p (LOSS) EARNINGS PER 7 SHARE (4.1)p 6.6p 12.7p (LOSS) EARNINGS PER 7 SHARE diluted (2.7)p (4.1)p 6.6p 12.6p DIVIDENDS PER SHARE 6 Nil 3.7p 9.1p GROUP NET ASSETS As at 9 October 1999 (1998 - 10 October) 9 10 27 October October March Notes 1999 1998 1999 £m £m £m FIXED ASSETS Tangible fixed assets 661.5 646.9 658.7 Investments 3.1 2.9 6.5 ______ ______ ______ 664.6 649.8 665.2 ______ ______ ______ CURRENT ASSETS Stocks 194.8 216.2 185.2 Debtors 71.4 109.1 98.4 Cash at bank and in hand and time deposits 45.6 53.2 48.8 CREDITORS: amounts falling due 8 within one year (323.3) (370.7) (323.6) ______ ______ ______ NET CURRENT (LIABILITIES)/ASSETS (11.5) 7.8 8.8 ______ ______ ______ Creditors: amounts falling due after one year (18.2) (27.7) (27.3) Provisions for liabilities and 9 charges (36.6) (17.6) (31.4) ______ ______ ______ 598.3 612.3 615.3 ______ ______ ______ NET GEARING/EQUITY % 19.8 18.2 14.8 GROUP CASH FLOW For the 28 weeks ended 9 October 1999 (1998 - 28 weeks ended 10 October) 28 weeks 28 weeks 52 weeks ended ended ended 9.10.99 10.10.98 27.3.99 £m £m £m (Loss)/profit from retail operations before exceptional items (11.6) 41.2 104.3 Depreciation 35.3 30.7 63.2 Working capital 11.8 (30.1) 0.4 Exceptional costs/other (2.1) (0.7) (1.0) ______ ______ ______ Net cashflow from operations 33.4 41.1 166.9 Returns on investments and servicing of finance (4.1) (2.5) (5.7) Taxation 2.7 (4.4) (31.2) Capital expenditure Purchase of tangible fixed assets (70.1) (71.9) (140.2) Sale of tangible fixed assets 33.9 - 12.3 Acquisitions and disposals - (0.9) (4.7) Equity dividends paid (22.8) (22.8) (38.5) Other - 1.7 1.6 ______ ______ ______ Movement in net debt in the period (27.0) (59.7) (39.5) Net debt at the beginning of the period (91.2) (51.7) (51.7) ______ ______ ______ Net debt at the end of the period (118.2) (111.4) (91.2) ====== ====== ====== NOTES These interim results have been prepared under the historical cost convention and using accounting policies consistent with previous years except that all freeholds are being depreciated in accordance with FRS 15. 28 weeks 28 weeks 52 weeks ended ended ended 9.10.99 10.10.98 27.3.99 £m £m £m 1. TURNOVER - continuing businesses Bhs 370.7 400.4 856.2 Mothercare 230.4 247.9 472.4 ______ ______ ______ 601.1 648.3 1,328.6 ______ ______ ______ 2. RETAIL (LOSS)/PROFIT - continuing businesses before exceptional items Bhs (8.3) 28.9 86.4 Mothercare (3.3) 12.3 17.9 ______ ______ ______ (11.6) 41.2 104.3 ______ ______ ______ 3. EXCEPTIONAL ITEMS Store closures and other one-off costs charged to the loss from retail operations Additional provision has been made for the redundancies and other related costs arising from the store closure programme announced at the year end at Mothercare in accordance with FRS 12. In addition, the group has incurred various one-off costs including the cost of the strategic review; the compensation paid to two directors for loss of office in accordance with their service contracts and the write down of the shares held by the Storehouse Employee Share Trusts in accordance with UITF 13 and FRS 11. In total, £7.5m has been charged to the loss from retail operations. Profit/(loss) on disposal of stores During the half year the group has disposed of a number of stores arising from the Mothercare store disposal programme. In addition, the group's interests in the freehold of four Bhs stores have been sold. As a result, the group has generated a net profit on disposal of stores of £12.5m and generated cash of £33.9m. In addition, the group has provided for the cost of disposing of six Bhs stores. The provision for loss on disposal includes £5.0m to cover the future lease obligations and costs of £0.5m. The exceptional items can be summarised as follows: £m Exceptional items charged to the loss from retail operations (7.5) _____ Profit/(loss) on disposal of stores Profits realised on stores sold 16.8 Losses realised on stores sold (4.3) Provision for loss on disposal of Bhs stores (11.9) ______ 0.6 ______ Total exceptional items (6.9) ______ The tax effect of the exceptional items is a credit of £1.2m. 4. INTEREST Interest comprises: 28 weeks 28 weeks 52 weeks ended ended ended 9.10.99 10.10.98 27.3.99 £m £m £m Interest receivable 1.2 1.8 3.4 Interest payable (4.5) (3.4) (7.4) Obligations under finance leases (0.2) - (0.1) Obligations under property leases (0.6) (0.9) (1.6) ______ ______ ______ (4.1) (2.5) (5.7) ______ ______ ______ 5. TAX Tax is calculated at the estimated effective rate of tax on profit before exceptionals for the 53 weeks ending 1 April 2000. 6. DIVIDEND No interim dividend has been proposed. The cost of the prior year's interim dividend was £15.8 million and the applicable tax credit was £3.9 million. 7. EARNINGS PER SHARE 28 weeks 28 weeks 52 ended ended weeks 9.10.99 10.10.98 ended 27.3.99 Weighted average number of shares 420.2m 422.4m 423.5m in issue Dilution: Option schemes - 1.8m 0.6m LTIP schemes 0.8m 0.2m 0.2m _____ ______ ______ Diluted weighted average number of shares in issue 421.0m 424.4m 424.3m _____ ______ ______ (Loss)/profit after tax £(17.0)m £27.9m £53.8m (Loss)/profit after tax before exceptional items £(11.3)m £27.9m £71.0m Basic (loss)/earnings per share (4.1)p 6.6p 12.7p (Loss)/earnings per share before exceptional items (2.7)p 6.6p 16.8p Diluted (loss)/earnings per (4.1)p 6.6p 12.6p share 8. CREDITORS - amounts falling due within one year 9 10 27 October October March 1999 1998 1999 £m £m £m Bank overdrafts 25.3 21.0 22.7 Bills of exchange and bank loans 128.3 122.0 93.0 Obligations under finance leases 1.9 - 1.9 Obligations under property - 6.7 6.8 leases Trade creditors 78.3 90.7 81.0 Proposed dividend - 15.7 22.8 Current taxation including ACT payable 29.0 50.8 31.6 Payroll and other taxes, including social security 7.1 2.3 4.4 Accruals and deferred income 39.5 50.4 47.3 Landlords' contribution 8.5 7.4 10.4 Other creditors 5.4 3.7 1.7 ______ ______ ______ 323.3 370.7 323.6 9. PROVISIONS FOR LIABILITIES AND CHARGES Deferred Disposal Exceptional tax provisions provisions Total £m £m £m £m Opening balance 24.9 0.4 6.1 31.4 Utilised - (0.1) (2.0) (2.1) Exceptional items - - 7.3 7.3 (Note 3) ______ _______ ______ ______ Closing balance 24.9 0.3 11.4 36.6 ______ _______ ______ ______ 10. ANALYSIS OF NET DEBT 9 10 27 October October March 1999 1998 1999 £m £m £m Cash at bank 10.2 19.9 14.5 Time deposits 35.4 33.3 34.3 Bank overdrafts (25.3) (20.9) (22.7) Bills of exchange and bank loans (128.3) (122.0) (93.0) Bank loans over one year (5.8) - - Obligations under finance leases: short term (1.9) - (1.9) long term (2.5) - (3.9) Obligations under property leases short term - (6.7) (6.8) long term - (15.0) (11.7) ______ ______ ______ (118.2) (111.4) (91.2) ______ ______ ______ The obligations under property leases were redeemed early in September 1999 and replaced by bank loans on similar terms. 11. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS 28 weeks ended 9.10.99 £m Loss for the financial period and net decrease in shareholders' funds (17.0) Opening shareholders' funds 615.3 ______ Closing shareholders' funds 598.3 _______ These interim results were approved by the Directors on 18 November 1999. Results for the two half years have not been audited, but have been reviewed by Arthur Andersen. The financial information contained in the interim accounts does not constitute statutory accounts as defined in Section 240 of the Companies Act. The full year comparatives were extracted from the full Group Accounts which have been filed with the Registrar of Companies together with an unqualified auditors' report. All shareholders will receive a copy of the interim results.

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