Half-Year Results - Part 1

RNS Number : 3917G

Home Retail Group Plc

22 October 2008

 



22 October 2008

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 30 August 2008.

Operating highlights

• The strength of the operating model and good cost control helped to mitigate the impact of a difficult sales environment
• The Group's sourcing scale and supply chain initiatives contributed to further successful gross margin management
• Another period of successful cash generation
• Ongoing developments to the overall customer offer, adapting to their changing needs in challenging times
• The latest Argos catalogue - celebrating its 35th year - expanded to 18,800 lines with stores now carrying up to 14,900 lines for immediate collection
• Further enhancements to multi-channel convenience saw the internet grow to 22% of Argos' sales and over 250,000 products a week sold via Check & Reserve
• Homebase's relaunch of 21 former Focus stores completed

Financial highlights

• Total sales held level at £2,736m (2007: £2,737m), with like-for-like sales down 3.0% at Argos and down 10.3% at Homebase
• Gross margin held approximately level in total, down by 75 basis points at Argos and ahead by 125 basis points at Homebase
• Operating expenses up 3%, driven by underlying inflation of approximately 4% at Argos and 3% at Homebase, with all other operating expenses held level
• Benchmark operating profit1 down 22% to £106m (2007: £136m), with a decline of 14% at Argos and 37% at Homebase
• Reported operating loss of £450m after exceptional charges including Homebase non-cash asset write downs and onerous lease provisions of £542m
• Benchmark profit before tax2 down 19% to £121m (2007: £150m); reported loss before tax of £437m
• Basic benchmark earnings per share3 down 18% to 9.6p (2007: 11.7p); reported basic loss per share of 51.3p
• Cash generation of £101m, benefiting principally from further improvement in working capital management
• Closing financing net cash position of £275m versus year-end of £174m
• Interim dividend maintained at 4.7p (2007: 4.7p)

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

'Against a backdrop of a difficult trading environment, we delivered an operating result for the half which demonstrated further success on both cost control and cash generation. The challenging conditions look set to remain for some time, and indeed have worsened in the turbulent recent weeks. If these conditions continue through our peak trading months of November and December, the profit outcome for the year would likely be around the bottom of current market expectations. The Group continues to adapt to this backdrop, and our operating model and financial strength will be key drivers of competitive advantage.'

1.    Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, store impairment charges, exceptional items and costs related to demerger incentive schemes.

2.    Benchmark profit before tax (benchmark PBT) is defined as profit before amortisation of acquisition intangibles, store impairment charges, exceptional items, costs related to demerger incentive schemes, financing fair value remeasurements, financing impact on retirement benefit balances 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 Home Retail Group shares held in its Employee Share Trust (EST)). 

Enquiries

Analysts and investors (Home Retail Group)

Richard Ashton              Finance Director                01908 600 291

Stuart Ford                   Head of Investor Relations

Media (Finsbury)

Rollo Head                                                             020 7251 3801

There will be a presentation today at 9.30 am to analysts and investors at the King Edward Hall, Merrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ. The presentation can be viewed 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 of 31 August 2008 to 3 January 2009, will be announced by Home Retail Group on 15 January 2009.

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	30 August 2008	1 September 2007
Argos	1,856.4	1,835.3
Homebase	829.3	853.9
Financial Services	50.5	47.3
Sales	2,736.2	2,736.5
Cost of sales	(1,775.7)	(1,770.3)
Gross profit	960.5	966.2
Net operating expenses before exceptional items and costs related to demerger incentive schemes	(854.5)	(830.1)
Argos	85.5	99.5
Homebase	29.5	47.0
Financial Services	3.1	2.7
Central Activities	(12.1)	(13.1)
Benchmark operating profit	106.0	136.1
Net interest income (see below)	17.0	14.0
Share of post-tax results of joint ventures and associates	(1.6)	(0.3)
Benchmark PBT	121.4	149.8
Exceptional items included in operating profit	(549.9)	20.2
Costs related to demerger incentive schemes	(5.9)	(5.9)
Financing fair value remeasurements	(8.3)	(1.2)
Financing impact on retirement benefit balances	5.7	6.4
(Loss)/profit before tax	(437.0)	169.3
Taxation	(9.8)	(54.8)
of which: taxation attributable to benchmark PBT	(38.1)	(48.0)
(Loss)/profit for the period	(446.8)	114.5
Basic benchmark EPS	9.6p	11.7p
Basic EPS	(51.3p)	13.2p
Number of shares for basic EPS	871.1m	868.2m
Net interest reconciliation:
Third party net interest income	9.7	5.3
Financing costs charged to Financial Services	8.6	9.6
Unwinding of discounts on benchmark items	(1.3)	(0.9)
Net interest income	17.0	14.0
Financing fair value remeasurements	(8.3)	(1.2)
Financing impact on retirement benefit balances	5.7	6.4
Income statement net financing income	14.4	19.2

The above tables and those throughout this announcement have been prepared in accordance with Note 1 to the Financial Information on page 25.  

FINANCIAL SUMMARY (continued)

Total sales level at £2,736m, reflecting total growth of 1.1% at Argos and a decline of 2.9% at Homebase. Like-for-like sales were down 3.0% at Argos and down 10.3% at Homebase, while the net new space contribution was 4.1% at Argos and 7.4% at Homebase.

Gross margin approximately flat at Group level, with Argos' gross margin being down 75 basis points reflecting the product mix, while Homebase achieved a 125 basis point increase led by further sourcing and supply chain gains.

Operating expense growth contained at a 3% total increase, with a 1% total cost increase at Argos and 4% at Homebase. Within this, underlying cost inflation was 4% at Argos and 3% at Homebase, demonstrating further strong management of all areas of the cost base.

Benchmark operating profit down 22% to £106m, with the £30m reduction comprising a £14m or 14% decline at Argos, a £17m or 37% decline at Homebase and a £1m cost reduction of Central Activities.

Benchmark PBT down 19% to £121m, which includes the £3m improvement in net interest income as a result of further strong cash generation.

An effective tax rate based on benchmark PBT of 31.0%, with the reduction from 32.0% in the first half last year reflecting the lowering in the standard UK corporation tax rate, partially offset by the absolute level of disallowable expenditure increasing slightly on a declining level of profits.

Basic benchmark EPS down 18% to 9.6p.

Interim dividend maintained at 4.7p per share.

Net cash of £275m at 30 August 2008, with the cash generation of £101m in the half benefiting from further improvements in working capital management and a reduced level of capital expenditure.

STRATEGIC OUTLOOK

The majority of the product markets in which the Group operates have seen sales turn down over the last 12 months. However, the core DIY market was already in a more protracted period of decline, and there are areas of consumer electronics where new product technology has continued to provide growth in demand.

The economic environment has seen a shift from growth to decline in the level of household discretionary spending. There has been significant price inflation in basic necessities such as food, fuel and other household bills, along with the impact of higher consumer borrowing costs. In addition, consumer confidence has been negatively affected by the weakening of the housing market, unemployment and recessionary fears, together with the overall global financial crisis.

The worsening in the outlook for the economic environment suggests that, for consumer spending in Home Retail Group's product markets, calendar 2009 is likely to be at least as challenging as 2008. In addition to the impact of falling consumer demand, there are also likely to be further retail industry-specific pressures on both the cost of goods and on operating costs.

Against this backdrop, Home Retail Group, as the UK's leading home and general merchandise retailer, continues to pursue a strategy to further its competitive advantage. This is being achieved through its:

• broad product offerings, drawing demand from a wide base of footfall and customer appeal;
• multi-channel strength, with ongoing developments to provide further enhanced customer convenience;
• gross margin management that will be appropriate to deal with inflationary pressures on the cost of goods;
• sourcing advantage through leveraging scale and infrastructure, which will support the ability to continue providing strong customer value;
• cost base management to reflect lower volumes and to achieve efficiency gains; and
• strong focus on cash generation, including a reduced level of future capital investment.

Broad product offerings

Argos and Homebase are both strong retail brands and household names, benefiting from the breadth of their product offerings and relatively high purchase frequency. Both businesses are also able to flex their offering towards more attractive areas as they change over time, as well as converting customer traffic across categories. Product offerings will continue to be strengthened to maximise opportunities during the consumer slowdown, and to target further share gains in large product markets.

Multi-channel strength

In differentiating the shopping experience for customers, leadership in multi-channel convenience remains key.  Argos and Homebase will continue to develop their internet offerings, which benefit from integrating the strengths of the store portfolios and the scale efficiencies of the shared home delivery infrastructure.

Gross margin management

The Group remains committed to delivering customer value while trading through the consumer slowdown. Given the market will likely see further pressures from product cost inflation and adverse currency movements, the ability to lower customer prices is likely to be increasingly difficult in most categories. However, the Group's highly competitive scale advantage will continue to see it well positioned relative to most other retailers operating in the same product markets. 

Sourcing advantage

As well as large purchasing scale, the Group's skills and infrastructure in all areas of sourcing provide a highly advantaged supply base. There will be further progress on growing the proportion of products directly sourced from overseas manufacturers, as well as additional benefits from value chain projects, supplier base management, and targeting additional synergies in purchasing goods or services that are not for resale.

Cost base management

In an environment of likely declines in sales coupled with further inflationary pressures on the operating cost base, there will be an increased need to improve efficiencies across all parts of the Group. Given the inherent benefits in its cost model, Argos has a strong track record of achieving positive cost productivity - the measure whereby total operating cost growth is managed to a lower level than the combined change in sales and underlying cost inflation. While further action will still be required at Argos, there will be a greater emphasis at Homebase given its higher proportion of operating costs and its greater challenge to align costs with volumes.

Focus on cash generation

The Group will maintain its focus on cash, building upon the successes of the past two years. As part of this, capital expenditure for the Group will now be less than £175m in the current financial year and is likely to decrease further in the following year given, for example, a smaller new store opening programme at Homebase. The Group will still invest selectively in order to emerge from the consumer downturn strongly positioned.

CURRENT TRADING OUTLOOK

The difficult consumer environment experienced in the second quarter has been followed by tough and volatile trading in the Group's product markets since the period end. Like-for-like sales since 31 August 2008 at both Argos and Homebase have declined in percentage terms by high single digits. While profits for the financial year remain dependent on the key November and December trading periods, if sales rates were to remain as experienced in recent weeks throughout these months, the profit outcome for the year would be likely to be around the bottom of the current range of market expectations. On a benchmark profit before tax basis, the current range of published expectations is understood to be £327m to £370m, with a consensus of around £350m.

BUSINESS REVIEWS

Argos

26 weeks to £m	30 August 2008	1 September 2007
Sales	1,856.4	1,835.3
Benchmark operating profit	85.5	99.5
Benchmark operating margin	4.6%	5.4%
Like-for-like change in sales	(3.0%)	1.4%
New space contribution to sales change	4.1%	3.3%
Total sales change	1.1%	4.7%
Gross margin movement	Down c.75bps	Up c.125bps
Benchmark operating profit change	(14%)	50%
Number of stores at period-end	718	685
Of which Argos Extra fully stocked-in	296	252

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

Operational review

Gross margin management

In the period under review, Argos' gross margin reduced due to the change in product mix, driven in particular by the growth in lower margin consumer electronics products. As has historically been the case, underlying sourcing benefits, together with foreign exchange gains, were typically reinvested in lower prices; the average price reduction in the Spring/Summer catalogue was approximately 4%.

The current Autumn/Winter catalogue has, however, seen a move to a broadly price-neutral-position across the 8,000 reincluded lines from a year earlier. This has been the result of product cost inflation pressures offsetting other sourcing benefits, while at the same time the dollar rate for this catalogue moved to a neutral impact.

Going forward, given the market will likely see further pressures on product cost inflation and an adverse currency impact, the ability to lower customer prices in most categories will be increasingly difficult.  Argos will, however, remain competitively advantaged in its sourcing by its scale, skills and infrastructure. This will continue to underpin Argos' strong value credentials with customers.

Driving further cost efficiencies

Argos has a strong track record of positive cost productivity, the measure whereby total operating cost growth is less than the combined change in total sales and underlying cost inflation. 'Operational Excellence', a series of activities to reduce the cost base, has delivered significant levels of savings over a number of years. In the half, programmes such as reviewing distribution capacity and flexibility, as well as value chain activities in printing the catalogue and other marketing material, have helped drive further excellent cost efficiencies. The amount of future cost savings and therefore the level of achievable cost productivity will still in part be driven by the level of sales volume.

New store opening programme

Extent of chain analysis continues to support many years of further growth, and the returns on investment of new Argos stores continue to be very attractive. Around 25 new stores are expected to open this year, predominantly in additional out-of-town retail parks; there will still be some new locations in smaller towns as well as the trial of a smaller store format to test additional locations within larger cities.

Catalogue enhancements

The latest Argos catalogue was launched with an improved design and layout, and an overall presentation that is easier to understand and shop. Some 20 percent of the catalogue has had creative redevelopment, while sections such as technology and nursery have undergone a complete review to make selection easier. Customer feedback on the new catalogue has been very positive.

The separate Argos 'Home' catalogue has been redesigned to be published seasonally. The Autumn launch was 100 pages, and while retaining a quality feel to encourage trade-up, it also contains strong value offers and messaging.

Product category developments

Across Argos' core product categories, entry price points have been strengthened along with greater emphasis of the 'Argos Value Range' which now has double the number of lines in this catalogue than previously. Ongoing range development has also provided clearer step-up lines and new brands. In furniture and homewares, stronger good/better/best ranging has been employed and a new 'Premium Collection' has been added in addition to last year's successful launch of the 'Inspire Collection' ranges. Improvements have also been made in areas such as 'Eco' products and children's furniture ranges, while there has been successful expansion in nursery brands and sports/leisure clothing, and significant enhancements to jewellery ranging.

To strengthen Argos' presence across the technology areas that have driven significant growth and share gains in recent years, a range of laptops and PCs has been introduced. There are over 30 hardware options in the catalogue, with further options available online. Building on the strong relationship with Apple, the range includes the popular iMac and MacBook products; other brands include Fujitsu Siemens, HP, Samsung, Sony and Toshiba. While it is still early days in the development of this new category for Argos, customer reaction has been extremely positive.

Additional range expansion opportunities

At 18,800 lines, the main Argos catalogue grew by 4% or 700 lines on last year. The stocked-in range of immediately available lines in stores is 14,900, with the remaining 3,900 lines being for home delivery-only.

To grow product choice beyond the main catalogue, a recent development has seen additional 'internet-only' lines added to argos.co.uk. The initial ranges extend choice in areas such as white goods, furniture, nursery and jewellery, and are typically for delivery via Argos Direct. For some smaller items such as technology accessories, these are posted to customers free of charge. 

Further multi-channel developments

Sales made across more than one channel were 38% of all of Argos' sales, comprising 22% on the internet and 5% by phone (both being a combination of store collection or home delivery), with the balancing 11% being in-store orders for home delivery.

Of the 22% internet sales, over half were online Check & Reserve collections. This channel continued to grow at nearly 50%. Enhancements to the service include: showing the real-time stock availability of any product in the two nearest stores with the choice of eight alternative nearby stores to check; submitting a mobile number for a text message copy of an online reservation; and, launching in time for peak trading, a reminder text will be sent by midday of the day the reservation expires.

Other website enhancements include customer ratings and product reviews trialled initially in sound and vision, and a large number of these products and other products will soon be presented with 360-degree viewable images and video content. A new 'gallery view' option also presents products with a visual emphasis rather than in traditional list form.  Argos also continues to build knowledge and understanding of its customers and uses this to drive relevancy and conversion through communication tools such as targeted emails.

Financial review

Total sales in the 26 weeks to 30 August 2008 increased by 1.1% to £1,856m; like-for-like sales declined by 3.0%. There was further strong sales growth and market share gains in consumer electronics categories such as video gaming, flat panel TV and 'satnav', though the rate of growth eased in the second quarter. Furniture and homewares saw declining sales given the challenging market conditions, while trading in seasonal categories was also difficult. The contribution to sales growth from net new space was 4.1%, with the phasing of openings expected to result in a slightly lower contribution in the second half of the year.

Gross margins were down by approximately 75 basis points, driven by the shift in product mix towards lower margin consumer electronics categories that is also likely to continue into the second half. There were continued supply chain gains and some foreign exchange benefits in the half, however these were reinvested in lower prices in the catalogue that was current for the majority of the period. In the second half of the year, it is expected that reincluded line pricing in the Autumn/Winter catalogue will be broadly flat; the dollar foreign exchange position will be approximately neutral and supply chain gains or selective price rises are to be used to offset cost price pressures, although many thousands of lines have still seen price declines or been held flat.

Benchmark operating profit for the 26 weeks to 30 August 2008 declined 14% to £85.5m. Underlying operating cost inflation accelerated to approximately 4% from the 3% level experienced last year, principally as a result of higher fuel and utility costs as well as continued rental inflation. Total operating costs rose by approximately 1%, with the cost base excluding the impact of inflation therefore declining by about 3%. This excellent 4% level of cost productivity, given total sales growth of 1%, was the result of further cost containment initiatives; this level of cost productivity is not expected to be repeated through the peak second half trading period given the exceptional level achieved last year.  Homebase

26 weeks to £m		30 August 2008	1 September 2007
Sales		829.3	853.9
Benchmark operating profit		29.5	47.0
Benchmark operating margin		3.6%	5.5%
Like-for-like change in sales		(10.3%)	(2.5%)
New space contribution to sales change		7.4%	2.2%
Total sales change		(2.9%)	(0.3%)
Gross margin movement		Up c.125bps	Up c.300bps
Benchmark operating profit change		(37%)	12%
Number of stores at period end		345	311
Of which contain a mezzanine floor		186	171
Store selling space at period-end ('000 sq ft)		15,944	14,604
Of which	- garden centre area	3,614	3,319
	- mezzanine floor area	1,954	1,825

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

Operational review

Addressing the trading environment

Home Retail Group remains confident in the Homebase customer proposition. The product ranges have been strongly developed, the store portfolio significantly enhanced and operational improvements achieved across all measures of retail performance such as availability, customer service and colleague engagement.

However, as a result of further deterioration in the outlook for its product markets, Homebase will be taking additional action to reduce the cost base of the business as well as lowering the level of future capital investment. Further operational and customer offer improvements will still be implemented, with the overall emphasis of all its activity being to ensure the business remains well positioned to capitalise on the longer-term recovery in market conditions.

Gross margin management

The period saw further progress on gross margins being driven by sourcing and supply chain initiatives. There will be a continuation of this strategy, though the level of retained gross margin benefits will ultimately also be a function of the trading and foreign exchange environments, with the latter expected to result in an adverse impact in at least the first half of the next financial year.

Cost base management

Homebase is a highly operationally geared business. In the current financial year a significant cost reduction programme has been implemented, and further cost reduction activity will be required given the outlook for sales volumes.

A key area where action has already been taken this year is in store payroll, where alteration in customer-facing colleague hours have been made to better match demand levels and trading patterns. While this has reduced total store colleague hours, previous trials of the realignment of shift patterns over the last 18 months have demonstrated improvements in customer service. 

Store portfolio investment

New store investment will be reduced significantly and will only occur where there is a high degree of certainty of achieving a return on investment in excess of the required hurdle rate; the likely future opening rate will therefore be reduced to a low single-digit number of stores a year. As has been the case in previous years, ongoing portfolio management is likely to see a limited number of store closures each year, typically where exiting an underperforming store can be achieved on at least a value neutral basis.

There is an opportunity to downsize certain stores in the portfolio, typically where those greater than 35,000 square feet can be reduced to allow for a separate 8-10,000 square foot Argos store, subject to planning permission. Several stores have recently been downsized and a review currently underway should produce additional opportunities.

While the total capital expenditure programme at Homebase will reduce, it will still include a programme that starts to address the remaining stores in the portfolio that have seen little or no investment for many years. Refurbishment in these stores will improve the product offering and shopping experience, deliver the brand more consistently and drive attractive returns on capital. It is expected that around 15 stores will be refitted by the end of this financial year at a total capital spend of about £10m. Sales uplifts across these stores are expected to be approximately 15%.

Working the existing space, range and format harder

Homebase will continue to invest in the product offering. As well as the constant cycle of range reviews, other initiatives underway include new processes for all stores to reflect changes in the top selling lines, space planning developments to help improve sales densities, driving up related product attachment rates and reviewing opportunities for a greater level of impulse-driven sales.

The 'Home' catalogue continues to demonstrate leverage of the product range, skills and infrastructure from Argos. It has been extended to now include over 2,500 products, with 85 new furniture ranges and 750 new lines in total. New styles and fashion trends that are co-ordinated across ranges continue to be reproduced with in-store displays.

Installation services are being extended with a trial in around 50 stores for bathrooms. An opportunity exists to replicate the success of kitchen installations, where this has helped capture new orders and drive up average transaction values, and customer recommendation rates have been consistently high.

E-commerce development

Homebase.co.uk is currently achieving about £25m of annual transactional sales. Plans are in place to more than double the number of transactional lines to 7,000 over the course of the year, which will support the opportunity to potentially double internet sales over the medium term. Browseable lines will also increase from 10,000 lines to 20,000 over the course of the year, with the ultimate target to have 100% of lines either browseable or transactional. 'Stock Check' of browseable lines has been rolled out to all UK stores, while trials of a Check & Reserve service are also currently in place in a small number of stores.

Financial review

Total sales in the 26 weeks to 30 August 2008 declined by 2.9% to £829m; like-for-like sales declined by 10.3%. As a result of poor weather conditions, seasonally-related categories experienced a like-for-like sales decline of approximately 20% in the first quarter when they account for around 40% of the sales mix. In non-seasonally related categories, a broadly consistent high single-digit like-for-like decline was experienced as a result of the generally difficult trading environment. Kitchens were one area of continued growth, driven by the national rollout of the kitchen installation service.

The contribution to sales growth from net new space was 7.4%, benefiting from the relaunch of the net 21 Focus stores that opened between December 2007 and June 2008. As a result of phasing, the contribution from new space is expected to drop to approximately 3% in the final quarter of the financial year.

Gross margins were ahead by approximately 125 basis points, driven by further sourcing and supply chain gains.

Benchmark operating profit for the 26 weeks to 30 August 2008 declined 37% to £29.5m. Underlying operating cost inflation was approximately 3%. Total operating cost growth was approximately 4%, with the cost base excluding the impact of inflation therefore increasing by about 1%. This cost growth principally reflected the additional investment in new space, largely offset by successful and ongoing cost control and containment programmes throughout the business.

Financial Services

26 weeks to £m		30 August 2008	1 September 2007
Sales		50.5	47.3
Benchmark operating profit before financing costs		11.7	12.3
Financing costs		(8.6)	(9.6)
Benchmark operating profit		3.1	2.7
As at	30 August 2008	1 March 2008	1 September 2007
Store card gross receivables	453	482	437
Personal loans gross receivables	5	9	16
Total gross receivables	458	491	453
Provision	(60)	(59)	(54)
Net receivables	398	432	399
Provision % of gross receivables	13.2%	12.0%	11.9%

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 profit from the transaction for Home Retail Group.

Operational review

The store card operations drove £261m of Group retail sales in the half, up 2% on the comparable period, with the Group sales penetration rate increasing marginally to 8.7%. The offer of promotional credit still remains a key enabler of driving sales in 'big ticket' categories. Approximately 75% of all credit sales (74% in the comparable period) were on promotional credit terms, with these typically being three, six or 12 month 'buy now, pay later' plans.

Financial review

Financial Services' financial objective is to achieve a return in line with financial services industry norms on the revolving (i.e. interest-bearing) element of receivables; the provision of promotional credit products is charged at cost to the Argos and Homebase businesses. The benchmark operating result of £3.1m for the period therefore reflects this arrangement, with the cost advantage versus third-party promotional credit provision being recognised in Argos and Homebase benchmark operating profits.

Total gross receivables grew by £5m versus a year earlier, with a £16m increase in store card operations partially funded by the £11m reduction in the planned run-off of the on-balance sheet personal loans receivables.

There was an increase in provision levels versus the same period last year; delinquency rates for the store card operations were marginally higher at the period end, which contributed to a £1m increase in the bad debt charge for the period.

The benefit of reduced financing costs reflects the limited growth in receivables being more than offset by a lower funding cost rate. A corresponding impact is recognised in Group net interest income.

Central Activities

26 weeks to £m	30 August 2008	1 September 2007
Benchmark operating expense	(12.1)	(13.1)

Central Activities represents the cost of central corporate functions and the investment costs of new development opportunities. Ongoing cost management in the central corporate functions element led to a £1m reduction in costs in the half.

'HyperCITY-Argos', the trial to develop the Argos retail format in India, has now been trading for around 11 months. The trial continues to generate significant learnings and the stores are now gearing up for the peak sales period of Diwali on 28 October 2008. The outlook for the Indian retail market may reduce as a result of some slowing in overall economic growth, but the longer term opportunity remains robust. Home Retail Group will continue to review, along with its partners, the options for the low cost trial following the first Diwali sales period.

A second development opportunity is the HomeStore&More out-of-town homewares format. Learnings from the initial openings and an additional adaptation of the format will be implemented in the third UK store, which is expected to trade from next February. Kitchen-related categories have performed well, with bedding and textiles representing an expansion opportunity. Other operational adjustments continue to be implemented, including store layout, ordering processes and replenishment. The Irish operation in which Home Retail Group has a 33% stake has successfully expanded to six stores in total.

  GROUP FINANCIAL REVIEW

Sales and operating profit

Sales for the Group were flat at £2,736.2m (2007: £2,736.5m) and benchmark operating profit declined 22% to £106.0m (2007: £136.1m). Group benchmark operating margin was 3.9% (2007: 5.0%). The drivers of this performance have been analysed as part of the preceding business reviews.

Net interest income

Net interest income was £17.0m (2007: £14.0m). Third party interest income of £9.7m (2007: £5.3m) was earned on Home Retail Group's increased net cash position. A further credit of £8.6m (2007: £9.6m) reflects the financing costs charged within Financial Services' benchmark operating profit. There was a charge of £1.3m (2007: £0.9m) in relation to the unwinding of discounts on benchmark items.

Share of post-tax results of joint ventures and associates

These amounted to a loss of £1.6m (2007: loss of £0.3m). The increased loss is principally due to further costs incurred by the joint venture with Barclays Bank PLC as it continues to develop the Argos credit card launched last year.

Costs related to demerger incentive schemes

These amounted to £5.9m (2007: £5.9m). As previously announced, these costs are expected to amount to a maximum of £40m, to be charged to the income statement over the three-year period commencing from the date of demerger, and are excluded from benchmark PBT. Approximately one year of cost therefore remains to be taken.

Exceptional items

An exceptional pre-tax charge of £549.9m was recorded in the first half of the year. Of this, £542.3m represents write downs to the carrying value of Homebase's assets and onerous lease provisions.

In light of market conditions, the latest financial plans result in a value-in-use calculation lower than the previous carrying value of Homebase assets. A goodwill impairment charge of £381.7m has therefore been booked, reducing the Homebase goodwill value to £388.7m. Also based on latest estimates and assumptions, a net impairment charge of £94.5m has been taken in respect of the carrying value of Homebase store-related assets, as well as a £66.1m provision for lease contracts deemed to be onerous. These accounting charges do not change the cash flows of the Group.

The residual £7.6m exceptional charge in the period reflects the final costs of post-acquisition integration of the Focus DIY stores.

Financing fair value remeasurements

Changes in the fair value of certain financial instruments as well as certain foreign exchange movements are recognised in the income statement within net financing costs. These amounted to charges of £8.3m (2007: £1.2m). The increase is principally the result of currency translation differences on overseas subsidiary cash balances, with an equal and opposite adjustment being recognised as a movement in reserves.

Financing impact on retirement benefit balances

The credit through net financing costs in respect of the excess of expected return on retirement benefit assets over the interest expense on retirement benefit liabilities amounted to £5.7m (2007: £6.4m). The current service cost, which Home Retail Group believes to be a fairer reflection of the cost of providing retirement benefits, is already reflected in benchmark operating profit.

Profit before tax

Benchmark profit before tax declined 19% to £121.4m (2007: £149.8m). Reported loss before tax was £437.0m (2007: profit of £169.3m).

Taxation

Taxation attributable to benchmark PBT was £38.1m (2007: £48.0m), representing an effective tax rate (excluding joint ventures and associates) of 31.0% (2007: 32.0%). The reduction in the effective rate largely reflects the cut in the standard UK corporation tax rate from 30.0% to 28.0%, partially offset by the absolute level of disallowable expenditure increasing slightly on a declining level of profits.

Taxation attributable to non-benchmark items amounted to a credit of £28.3m (2007: charge of £6.8m); the majority of the exceptional charge is not allowable for tax purposes. The total tax expense for the period was therefore £9.8m (2007: £54.8m).

Number of shares and earnings per share

The number of shares for the purpose of calculating basic earnings per share in the half is 871.1m (2007: 868.2m), representing the weighted average number of issued ordinary shares of 877.4m (2007: 877.4m), less an adjustment of 6.3m (2007: 9.2m) representing shares held in Home Retail Group's share trusts net of vested but unexercised options and 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 10.4m (2007: 8.7m) to 881.5m (2007: 876.9m). However, as the Group made a reported loss after tax for the period, the effect of employee share incentive schemes is anti-dilutive and therefore diluted EPS equals basic EPS.

Basic benchmark EPS is 9.6p (2007: 11.7p), with diluted benchmark EPS of 9.4p (2007: 11.6p). Reported basic EPS is a loss of 51.3p (2007: profit of 13.2p), with reported diluted EPS being a loss of 51.3p (2007: profit of 13.1p).

Dividends

Home Retail Group's dividend policy remains to target dividend cover over the medium term of around two times, based on full-year basic benchmark EPS.

While benchmark EPS in the period has declined, an interim dividend maintained at 4.7p is being announced today. This will be paid on 21 January 2009 to shareholders on the register at the close of business on 14 November 2008 (an ex-dividend date of 12 November 2008).

Cash flow and closing net cash position

26 weeks to £m	30 August 2008	1 September 2007
Benchmark operating profit	106.0	136.1
Exceptional items within operating profit	(549.9)	20.2
Demerger incentive scheme costs	(5.9)	(5.9)
Statutory operating profit after exceptional items	(449.8)	150.4
Depreciation and amortisation	76.5	73.9
Movement in working capital	77.4	114.6
Finance expense charged to FS cost of sales	8.6	9.6
Non-cash Homebase exceptional charges	542.3	-
Other non-cash operating items	14.9	24.8
Cash flows from operating activities	269.9	373.3
Net interest	10.1	4.5
Taxation	(36.7)	(57.2)
Net capital expenditure	(56.6)	(70.5)
Purchase of term deposit	(75.0)	-
Acquisitions and disposals	-	(6.8)
Cash inflow before financing activities	111.7	243.3
Dividends paid	(86.8)	(78.1)
Repayment of borrowings	-	(225.1)
Other financing activities	0.1	-
Net increase/(decrease) in cash and cash equivalents	25.0	(59.9)
Opening cash and cash equivalents	174.0	283.8
Net cash inflow/(outflow)	25.0	(59.9)
Effect of foreign exchange rate changes	0.7	(1.0)
Closing cash and cash equivalents	199.7	222.9
Term deposit	75.0	-
Closing financing net cash	274.7	222.9

Cash flows from operating activities were £269.9m in the half (2007: £373.3m). Lower operating profits and a reduced level of working capital inflow were the principal drivers of the reduction in operating cash generation versus the comparable period.

Net capital expenditure reduced in the half to £56.6m (2007: £70.5m). Tax paid of £36.7m (2007: £57.2m) was lower principally as a result of a repayment from the tax authorities in respect of the final settlement of historic tax issues that were successfully agreed in the previous financial year. Other cash flows in the half included £10.1m of interest received and £86.8m of dividends paid. 

The Group's net financing cash position at 30 August 2008 was therefore £274.7m, an increase of £100.7m on the opening net cash position at 1 March 2008 of £174.0m. The financing net cash position includes a £75m nine month term deposit; this was purchased in July 2008 and matures in 15 April 2009.  

Balance sheet

As at £m	30 August 2008	1 March 2008	1 September 2007
Goodwill	1,541.0	1,922.7	1,878.9
Other intangible assets	85.1	83.7	76.3
Property, plant and equipment	618.4	731.8	685.1
Inventories	1,011.0	1,004.8	929.9
Instalment receivables	397.7	432.0	398.8
Other trading assets	259.8	196.8	192.2
	3,913.0	4,371.8	4,161.2
Trade and other payables	(1,216.1)	(1,130.8)	(1,178.5)
Other trading liabilities	(167.0)	(101.5)	(90.8)
	(1,383.1)	(1,232.3)	(1,269.3)
Invested capital	2,529.9	3,139.5	2,891.9
Retirement benefit (obligations)/assets	(14.1)	83.7	59.5
Net tax liabilities	(6.9)	(52.0)	(14.8)
Financing net cash	274.7	174.0	222.9
Reported net assets	2,783.6	3,345.2	3,159.5

Reported net assets amounted to £2,783.6m, which is equivalent to 320 pence per share, excluding shares held in the EST. The reduction in net assets of £561.6m versus the 1 March 2008 year-end balance sheet was driven principally by the Homebase asset write down and increased onerous lease provisions, together with the increase in trade and other payables. Good management of working capital contributed to the £100.7m increase in financing net cash versus the year-end position.

Liquidity and funding

The Group's financing net cash position is expected to continue to be sufficient to meet its needs in the foreseeable future. In addition, the Group has £700m of un-drawn committed borrowing facilities available, £685m of which does not expire until 2013.

Accounting standards and use of non-GAAP measures

The Group has prepared its consolidated financial statements under International Financial Reporting Standards for the 26 weeks to 30 August 2008. The basis of preparation is outlined in Note 1 to the Financial Information on page 25.

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 26.

Principal risks and uncertainties

The Group set out in its 2008 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 competitor activity, product supply and other operational processes, product safety, business interruption, infrastructure development, reliance on key personnel, the regulatory environment and currency. These risks, together with examples of mitigating activity, are set out in more detail in the 2008 Annual Report and Financial Statements on pages 50 and 51.  Appendix 1. Trading statement comparables

Financial year 2007/08							Financial year 2008/09
	Q1 13 weeks to 2 June 2007						Q1 13 weeks to 31 May 2008
Argos
Sales	£893m						£929m
Like-for-like change in sales	0.9%						0.0%
Net new space contribution	3.6%						4.0%
Total sales change	4.5%						4.0%
Gross margin movement	Up c.150bps						Down c.125bps
Homebase
Sales	£463m						£440m
Like-for-like change in sales	2.7%						(12.0%)
Net new space contribution	2.5%						7.0%
Total sales change	5.2%						(5.0%)
Gross margin movement	Up c.300bps						Up c.125bps
	Q2 13 weeks to 1 Sept 2007		H1 26 weeks to 1 Sept 2007				Q2 13 weeks to 30 Aug 2008		H1 26 weeks to 30 Aug 2008
Argos
Sales	£942m		£1,835m				£927m		£1,856m
Like-for-like change in sales	1.8%		1.4%				(5.8%)		(3.0%)
Net new space contribution	3.0%		3.3%				4.2%		4.1%
Total sales change	4.8%		4.7%				(1.6%)		1.1%
Gross margin movement	Up c.100bps		Up c.125bps				Down c.25bps		Down c.75bps
Homebase
Sales	£391m		£854m				£389m		£829m
Like-for-like change in sales	(8.0%)		(2.5%)				(8.3%)		(10.3%)
Net new space contribution	1.8%		2.2%				8.0%		7.4%
Total sales change	(6.2%)		(0.3%)				(0.3%)		(2.9%)
Gross margin movement	Up c.300bps		Up c.300bps				Up c.125bps		Up c.125bps
	Q3 18 weeks to 5 Jan 2008		YTD 44 weeks to 5 Jan 2008
Argos
Sales	£1,919m		£3,755m
Like-for-like change in sales	(0.2%)		0.6%
Net new space contribution	2.7%		2.9%
Total sales change	2.5%		3.5%
Gross margin movement	c.0bps		Up c.50bps
Homebase
Sales	£498m		£1,352m
Like-for-like change in sales	(6.3%)		(3.9%)
Net new space contribution	2.2%		2.2%
Total sales change	(4.1%)		(1.7%)
Gross margin movement	Up c.200bps		Up c.250bps
	Q4 8 weeks to 1 Mar 2008		H2 26 weeks to 1 Mar 2008		FY 52 weeks to 1 Mar 2008
Argos
Sales	£566m		£2,486m		£4,321m
Like-for-like change in sales	1.9%		0.3%		0.7%
Net new space contribution	3.5%		2.8%		3.1%
Total sales change	5.4%		3.1%		3.8%
Gross margin movement	Down c.50bps		Down c.25bps		Up c.50bps
Homebase
Sales	£217m		£715m		£1,569m
Like-for-like change in sales	(5.3%)		(6.0%)		(4.1%)
Net new space contribution	4.6%		3.0%		2.5%
Total sales change	(0.7%)		(3.0%)		(1.6%)
Gross margin movement	Up c.150bps		Up c.200bps		Up c.250bps

 

END

 

 

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