Preliminary Results

Home Retail Group Plc 02 May 2007 2 May 2007 Home Retail Group plc Preliminary Results Home Retail Group, the UK's leading home and general merchandise retailer, today announces its Preliminary Results for the financial period ended 3 March 2007. The financial period is shorter than a full year due to the change in year-end and it also includes certain financial impacts of GUS plc's ownership of Home Retail Group up to the point of demerger1. To assist with analysis and comparison, certain pro forma information has therefore been provided to eliminate the distortions of these two impacts on the performance of Home Retail Group. Operating highlights * Delivered on each element of the strategy for growth * Expanded choice, improved ranges and enhanced the customer offer * Extended our leading market share in UK home and general merchandise * Driven gross margin benefits through leverage of purchasing scale and ongoing supply chain initiatives * Enlarged the combined portfolio by 38 stores to reach 990 * Capitalised on clear multi-channel leadership * Established further initiatives and operational improvements to continue driving sustainable growth Financial highlights * Pro forma sales2 up 6% in total to Â£5,851m (2006: Â£5,510m) with like-for-like sales up 2.4% at Argos and down 1.4% at Homebase; reported sales of Â£5,607m * Pro forma benchmark operating profit3 up 8% to Â£359.4m (2006: Â£331.8m) with growth at both Argos and Homebase; reported operating profit of Â£305.2m * Pro forma benchmark profit before tax4 up 12% to Â£376.7m (2006: Â£337.1m); reported profit before tax of Â£296.9m * Pro forma basic benchmark earnings per share5 up 14% to 29.3p (2006: 25.6p); reported basic earnings per share of 21.6p * Benchmark pre-tax return on invested capital6 up 150 basis points to 12.0% * Final dividend of 9.0p recommended, making 13.0p for the year Oliver Stocken, Chairman of Home Retail Group, commented: 'These results represent a strong start to Home Retail Group's new life as an independent company. They are particularly pleasing in a year during which we achieved the successful demerger from GUS and were faced with some difficult conditions in our markets.' Terry Duddy, Chief Executive of Home Retail Group, added: 'We are pleased to report that both Argos and Homebase have performed well, benefiting from the shared infrastructure and capabilities of the Group while continuing to invest for future growth. The combination of a strong operational performance, together with a clear strategy for growth, means we are well positioned and confident of making further progress in what we expect to be another challenging year for UK consumer spending.' 1. The change in both the year-end and the Group's capital structure on demerger result in statutory reported results that are non-comparable. The statutory reported results for the most recent financial period include the results for Homebase from 1 March 2006 (approximately 12 months) and the results for the rest of the Group from 1 April 2006 (approximately 11 months). The statutory reported results also reflect certain financial impacts that are a result of the fact that Home Retail Group was wholly owned by its former parent company, GUS plc, until the demerger became effective on 10 October 2006. These results are not therefore representative of a financial period length comparable to the prior year, nor do they reflect the capital structure that Home Retail Group operated under from the date the demerger occurred. 2. Pro forma sales are calculated on a 52-week basis. This represents the 52 weeks to 3 March 2007 and the comparable 52 weeks to 4 March 2006. 3. Pro forma 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. It is calculated on a 52-week basis. 4. Pro forma benchmark profit before tax ('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. Net interest income within pro forma benchmark PBT is calculated to illustrate the Group's financial performance as if the demerger capital structure had existed at 31 March 2006 and had been achieved based on underlying cash flows prior to 31 March 2006. Benchmark PBT also includes Home Retail Group's share of post-tax results of associates. It is calculated on a 52-week basis. 5. Pro forma basic benchmark earnings per share ('EPS') is defined as benchmark PBT less taxation attributable to benchmark PBT, divided by the weighted average number of shares in issue from the date of demerger (excluding Home Retail Group shares held in its Employee Share Ownership Trust ('ESOT')). It is calculated on a 52-week basis. 6. Benchmark pre-tax return on invested capital is defined as benchmark operating profit plus share of post-tax results of associates, divided by pro forma net assets excluding retirement benefit balances, tax balances and net cash/debt. 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 9.30am to analysts and investors at 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. Home Retail Group's First Quarter Trading Statement (Interim Management Statement) covering the 13 weeks to 2 June 2007 will be announced on 14 June 2007. 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 52-week pro forma to Statutory reported to ________________________________________________ Â£m 3 March 4 March 3 March 31 March 2007 2006 2007 2006 (short (12 months) period) Argos 4,164.0 3,858.8 3,912.8 3,892.6 Homebase 1,594.2 1,559.0 1,606.3 1,561.8 Financial Services 93.2 92.5 87.6 93.6 ________________________________________________ Sales 5,851.4 5,510.3 5,606.7 5,548.0 Cost of sales (3,852.2) (3,654.6) (3,680.5) (3,686.5) ________________________________________________ Gross profit 1,999.2 1,855.7 1,926.2 1,861.5 Operating expenses before exceptional items and costs related to demerger incentive schemes (1,639.8) (1,523.9) (1,592.5) (1,515.5) ________________________________________________ Argos 325.0 297.0 300.9 296.0 Homebase 53.4 51.4 51.2 51.8 Financial Services 5.0 6.1 4.5 6.1 Central Activities (24.0) (22.7) (22.9) (16.2) Adjustment on merger accounting - - - 8.3 ________________________________________________ Benchmark operating profit 359.4 331.8 333.7 346.0 Pro forma net interest income (see below) 16.6 9.5 n/a n/a Share of post-tax results of associates 0.7 (4.2) 0.7 (4.2) ________________________________________________ Benchmark PBT 376.7 337.1 n/a n/a Net interest costs attributable to GUS capital structure (see below) (39.2) (40.9) (21.0) (45.3) Exceptional items included in operating profit (22.7) (24.7) (22.7) (24.7) Costs related to demerger incentive schemes (5.8) - (5.8) - Financing fair value remeasurements (0.1) (2.4) (0.1) (2.0) Financing impact on retirement benefit balances 12.3 2.6 12.1 2.6 ________________________________________________ Profit before tax 321.2 271.7 296.9 272.4 Taxation (117.5) (94.9) (109.5) (96.0) of which: taxation attributable to pro forma benchmark PBT (122.1) (114.5) n/a n/a ________________________________________________ Profit for the period 203.7 176.8 187.4 176.4 ________________________________________________ Basic benchmark EPS 29.3p 25.6p n/a n/a Basic EPS n/a n/a 21.6p 20.3p Number of shares for basic EPS 869.6m 869.0m 869.6m 869.0m ________________________________________________ Net interest reconciliation: Pro forma net interest expense (1.2) (8.3) n/a n/a Financing costs charged to Financial Services 17.8 17.8 n/a n/a ________________________________________________ Pro forma net interest income 16.6 9.5 n/a n/a Interest costs attributable to GUS capital structure (46.1) (40.9) (44.3) (49.2) Exceptional finance income 6.9 - 6.9 - Adjustment on merger accounting - - - (14.0) Financing costs charged to Financial Services - - 16.4 17.9 ________________________________________________ Net interest costs attributable to GUS capital structure (39.2) (40.9) (21.0) (45.3) Financing fair value remeasurements (0.1) (2.4) (0.1) (2.0) Financing impact on retirement benefit balances 12.3 2.6 12.1 2.6 ________________________________________________ Income statement net financing costs (10.4) (31.2) (9.0) (44.7) ________________________________________________ Financial information in the above tables and throughout this announcement has been prepared in accordance with Note 1, Basis of Preparation. The basis of preparation for pro forma restatements is set out at Appendix 1, with reconciliations between pro forma and statutory reported periods provided at Appendix 2. Pro forma sales up 6% to Â£5,851m, reflecting growth of 8% at Argos and 2% at Homebase. Pro forma benchmark operating profit up 8% to Â£359.4m, comprising a Â£28m increase at Argos (a Â£17m increase adjusting for Â£11m of one-off costs incurred in the first half of the previous year), and a Â£2m increase at Homebase; Financial Services declined Â£1m and costs of Central Activities were Â£1m higher. Pro forma benchmark PBT up 12% to Â£376.7m, which additionally reflects the Â£7m lower net interest expense on a reduced average net debt position, together with a Â£5m improved contribution from Home Retail Group's share of post-tax results of associates. An improved effective tax rate based on pro forma benchmark PBT of 32.5%. The improvement from 33.5% in the prior year largely reflects a lower level of disallowable expenditure for tax purposes. Pro forma basic benchmark EPS up 14% to 29.3p. Final dividend of 9.0p per Home Retail Group share recommended by the Board, making a total dividend of 13.0p per share for the year. The proposed dividend is larger than if it had been on the previously announced basis of reflecting the shorter statutory reported period. It represents cover, based on pro forma benchmark basic EPS, of 2.25 times. Net cash of Â£60m at 3 March 2007. From the allocated pro forma net debt as at 31 March 2006 of Â£200m, the net cash inflow has been driven by strong working capital management, together with the improved profit performance. The position at 3 March rather than 31 March 2007 is flattered by excluding a full month of March which has historically been a cash outflow month of approximately Â£100m. Benchmark pre-tax return on invested capital (ROIC) improvement to 12.0%. Based on year-end invested capital of Â£3,012m and pro forma benchmark operating profit plus share of post-tax results of associates of Â£360.1m, pre-tax ROIC improved 150 basis points versus 10.5% at last year's balance sheet date. Outlook The Group has performed strongly for the financial year just completed. However, we remain cautious on a retail environment that is still expected to be challenging. In addition, comparatives for the retail market as a whole, and particularly Argos, become tougher as we start to face last year's positive impacts of the World Cup as well as certain other product categories that boosted the first and particularly second financial quarters last year. Home Retail Group continues to position its businesses accordingly, and has entered the new financial year from a position of operational strength. GROUP STRATEGY Home Retail Group seeks to take advantage of four factors to drive sustainable growth. 1. Leverage extensive product portfolio, market leadership and purchasing scale by: â€¢ building upon market leading positions through enhancing and developing both the product range and the offering in core areas â€¢ using shared scale and expertise in sourcing and logistics as well as joint product ranges to provide value for money and wide choice Our businesses have continued to carry out extensive range reviews, introducing thousands of new products over the last year. The level of direct importing has grown to over 28% of Group sales. Nearly half of this is now being sourced directly from the manufacturer by the Group's overseas buying offices. This represents more than 5,000 products across Argos and Homebase. 2. Increase market share in targeted large product markets by: â€¢ capitalising upon the strength of the Argos and Homebase brands to identify opportunities in product markets (particularly large, fragmented markets) â€¢ utilising the inherent flexibility of the Argos and Homebase formats â€¢ using shared infrastructure efficiently to make these products available to customers quickly and easily Argos and Homebase have this year both expanded their trials of furniture and housewares catalogues in order to extend the Group's leading position in these fragmented markets. The growth in sales of furniture and other large products will see the Group start work in the current financial year on its fourth two-man home delivery warehouse. Homebase's utilisation of the shared supply chain and home delivery infrastructure has brought it the scale and cost advantage of the UK's largest home delivery operation of large, bulky products. 3. Expand the Argos and Homebase store networks by: â€¢ Opening approximately 30 Argos stores per year â€¢ Opening approximately 15 Homebase stores per year, with a further small number of existing Homebase stores also supporting a mezzanine level The Group's store base is approaching 1,000 stores and we continue to see the opportunity over time for Argos to exceed 800 stores and Homebase to exceed 450 stores. We also continue to develop formats and store presentations in both businesses, and run property as central function for leverage and space management opportunities. 4. Extend and exploit multi-channel leadership by: â€¢ driving incremental sales growth over and above that which is achieved through new store openings â€¢ continuing with a customer focused, fully integrated approach to ensure that whether customers shop with Argos in store, online or over the phone they are able to find, order and receive goods seamlessly across the different channels â€¢ leveraging skills, scale and infrastructure to support the Homebase proposition The leadership of Argos in terms of fully integrated multi-channel convenience is such that over one-third of its sales are ordered and delivered across more than one channel. Skills and ecommerce infrastructure at Argos have led to the re-launch of the Homebase website which is growing sales strongly and profitably. Both businesses also benefit from our in-house financial services business which provides appropriate credit offers to drive product sales and is fully enabled across all customer channels. BUSINESS REVIEWS To assist with analysis and comparison, the following business reviews are based upon pro forma information. The basis of preparation for pro forma restatements is set out at Appendix 1, with reconciliations between pro forma and statutory reported results provided at Appendix 2. Argos ________________________________________________________________________________ Pro forma 52 weeks to 3 March 2007 4 March 2006 Sales (Â£m) 4,164.0 3,858.8 Benchmark operating profit (Â£m) 325.0 297.0 Benchmark operating margin 7.8% 7.7% ________________________________________________________________________________ Like-for-like change in sales 2.4% (1.4%) New space contribution to sales change 5.5% 7.5% Total sales change 7.9% 6.1% Benchmark operating profit change 9% n/a Number of stores at period end 680 655 Of which Argos Extra stocked-in 238 189 ________________________________________________________________________________ As the UK's leading general merchandise retailer, Argos provides a highly successful and unique offer of choice, value and convenience. Argos - operational review Further market share gains achieved. With sales growing 8% to Â£4.2bn, Argos continued to extend its share of the overall home and general merchandise market. Argos was named as the UK's biggest furniture retailer by Verdict Research. Once again, Argos was the number one toy retailer in the UK for 2006, and increased its lead over the second player according to NPD Group. Share gains also continued within other categories, including the broad electrical goods category. More catalogue prices lowered. The price reduction on reincluded lines in the Spring/Summer 2007 catalogue is approximately 3%. Argos has lowered prices on reincluded lines in every catalogue since 1999 to constantly reinforce its value proposition for customers. Prices lowered further during life of catalogue. Argos employs a dynamic pricing approach, continuing to lower around 20% of prices during the six-month life of the catalogue. Since the launch of the current catalogue in January, over 3,000 prices have been lowered. Prices are either lowered permanently or through a series of promotions throughout the year with between 500 and 1,000 prices typically cut each time. In addition to television, newspaper and online promotional messaging, every month up to 10 million flyers or brochures are delivered to homes to further communicate price reductions. A unique facility also allows customers to use text messaging to check both the latest price as well as the stock level in an individual store, and then to reserve goods for immediate or later collection. Widest ever customer choice. The current Argos catalogue offers over 17,000 lines across all stores and channels. Since national roll-out of the additional Argos Extra ranges, awareness of the wider offering has continued to build. At the end of the financial period, there were 238 stores that stocked-in the additional 3,000 lines; this is an increase of nearly 50 stores compared to the same time last year and is driven by a roughly equal mix of new stores and existing store conversions. All the remaining stores offer customers the option to either order-in for later collection from store or to have goods delivered to home. Argos 'Home' catalogue trial extended. The latest edition of this separate catalogue was in 228 stores by the end of the period. It features 348 pages and 3,200 products, with over 100 new lines now exclusive to this catalogue. Research has shown that the Home catalogue is helping Argos further define itself as the clear market leader, raise awareness and increase quality perception. The catalogue is supported in store with a comprehensive marketing package and a virtual brochure on the Internet. Multi-channel leadership further strengthened. Internet orders grew 45% to represent over 16% of total Argos sales; online reservations for later collection in store now represent over half of this, and grew 60% in the year. A further 8% of total sales are via telephone or text. In addition, of the 22% of total sales that are delivered to home, around half of these are still ordered in store. Together, this means that over one-third of all Argos' sales are ordered or received by customers using more than one channel. In the recent Hitwise UK Online Performance Awards, www.argos.co.uk was the second most visited site within the 'Shopping & Classifieds' category, behind only Amazon and therefore ahead of all other UK retailers. Argos was also the third most searched for brand during 2006, behind only eBay and 'Bebo'. Home delivery convenience enhanced. Argos Direct is the largest two-man delivery infrastructure in the UK, with around five million products delivered in the last year. Using a fleet of around 800 vehicles, it now makes deliveries in three slots across the day - morning, midday and afternoon. This leading level of service also includes drivers calling ahead to customers to confirm delivery. Argos' delivery of smaller products through the third-party provider Home Delivery Network is also now operated on morning or afternoon delivery slots. Argos Direct is completing its roll out of a new warehouse management solution. Originally implemented at the purpose-built Faverdale distribution centre near Darlington that was opened in 2005, the system has now been implemented in Marsh Leys, with a final roll out to Acton Gate beginning shortly. The system is bringing benefits in terms of enhanced operational efficiency, improved order accuracy levels and reduced clerical work. New stores extending customer reach. There were 30 store openings and 5 store closures during the year, bringing the total at the end of the year to 680 stores. Of the 30 store openings, 3 were relocations and 10 were in new catchments, with the remainder being additional stores in an existing catchment. The openings included 26 as Argos Extra stocked-in stores. Kiosks further improving customer convenience and efficiency. Average sales participation in stores with kiosks is now approximately 12%, with some stores reaching as high as 40%. There are now over 1,000 kiosks across just over half of the store portfolio. In-store operational improvements. The vast majority of stores carry the full 10,000 products that represent the core stocked-in range. Goods that are collected in store account for 78% of total sales. Ongoing improvements in the unique systems, processes and layouts of stockrooms have further enhanced customer choice, service and convenience. Infrastructure changes for network optimisation. In the financial year just begun, Argos will implement changes to its infrastructure that will lead to greater network optimisation and less complexity. The direct importing element of the Argos Direct home delivery operation will be moved from Corby to the purpose-built direct importing facility opened last year at Kettering. This will enable a rented central distribution facility at Wolverhampton to be closed, as its operations will be relocated to the capacity released at Corby. Argos - financial review Sales in the 52 weeks to 3 March 2007 increased by 7.9% in total; like-for-like sales grew 2.4%. There was exceptional growth in TVs and video games systems throughout the year, driven by new digital technology and gaming platforms, together with a further boost in relation to the World Cup in the first half of the year. This offset some continued market weakness in the audio, DVD/VCR and compact digital camera categories. Other areas that had good growth during the year included white goods, bedroom furniture, in-car child safety and other nursery-related lines. The contribution to sales growth from net new space was 5.5%, boosted in the first half of the year by the 33 Index stores acquired in 2005. This factor, together with the larger total sales base, leads to a lower expected contribution to sales growth of between 3% and 4% going forward from continuing to open around 30 new stores a year. The stronger sales performance in the first half was substantially offset by a related reduction in gross margin of approximately 100 basis points, driven by the shift in the product mix and the popularity of Argos' promotional offers. In the second half of the year, gross margin was ahead by around 50 basis points as a result of ongoing supply chain initiatives, a less promotional stance during the key seasonal period and improved management of stock clearance activity. The resulting gross margin for the full year was therefore in line with the prior year. Benchmark operating profit for the 52 weeks to 3 March 2007 grew 9% to Â£325m. Growth excluding Â£11m of one-off charges incurred in the first half of the previous year was 6%. Underlying operating cost inflation continued to be approximately 4%. A further 4% growth in operating costs (excluding the Â£11m of one-off charges) reflects the direct costs of higher sales, new space including the incremental operating costs of the acquired Index stores and additional supply chain infrastructure, partially offset by robust cost control. Homebase ________________________________________________________________________________ Pro forma 52 weeks to 3 March 2007 4 March 2006 Sales (Â£m) 1,594.2 1,559.0 Benchmark operating profit (Â£m) 53.4 51.4 Benchmark operating margin 3.4% 3.3% ________________________________________________________________________________ Like-for-like change in sales (1.4%) (3.1%) New space contribution to sales change 3.6% 3.1% Total sales change 2.2% 0.0% Benchmark operating profit change 4% n/a Number of stores at period end 310 297 Of which contain a mezzanine floor 165 144 ________________________________________________________________________________ Homebase is positioning itself as the UK's leading home enhancement retailer. Homebase - operational review Successful trading strategy. Following a step-up in promotional activity in the prior year, Homebase successfully reverted to its previous levels of promotions. This, together with improved stock management and the continued benefit from supply chain initiatives, resulted in gross margins being strongly ahead in the year. Good execution of this trading strategy and margin management was a key operational highlight given a further year of challenging market conditions. New space improving reach and product offering. Homebase opened 17 new stores and closed 4 (including two store relocations), bringing the total number of stores to 310. The majority of the new stores were of a smaller store format and in new catchments. As a result of the opening programme since acquisition, Homebase now has 10% of its portfolio in a smaller store format (around 20,000 sq feet internal ground floor area, typically with an 8,000 square foot mezzanine and an 8,000 square foot garden centre). These smaller stores are able to offer an authoritative range across the broader home enhancement categories, and are often the only national retailer in smaller catchments such as market towns for categories including core DIY, garden and showroom. Mezzanine floors in over half the store portfolio. There are 165 mezzanines, with 7 of the 21 increase in the year coming from existing store conversions and the balance from new store openings. The latest mezzanine floors continue to reinforce the Homebase brand as a destination for kitchens, bathrooms and furniture which are typically displayed on the mezzanine, while creating an improved environment for retailing homewares, furnishings and accessories on the ground floor space beneath. Most new stores will continue to be opened with a mezzanine, with a limited number of existing stores remaining to be converted. Latest format roll out trials progressing to plan. Trials are in place to evaluate rolling out the proven home enhancement offering throughout the Homebase chain. The opportunity remains to provide a comprehensive and compelling set of merchandise ranges in a more consistent manner throughout the store portfolio. Around one-third of the portfolio has received minimal or no store refurbishment investment for a number of years. As a result, only around half of the store portfolio carries a comprehensive display of the Homebase kitchen range and only a similar number of stores have a significant Furniture Extra display in place. Initial trials began in late 2006 to review how best to reconfigure space for additional ranges and improve customer perception in these stores. These trials will be fully evaluated after Homebase's key selling months in the first half of the current financial year. Differentiation through broader home enhancement offer. Homebase's enhanced and extended home furnishing offer continues to successfully differentiate it from the competition. The 'big book of furnishings' trial, which has been extended to 100 stores, now has 1,700 of the Furniture Extra products and a further 1,300 other home enhancement products across a total 276 pages. As well as products that are cutting edge and new stylish designs, there are also 'Smart Buy' design-led lines offering value for money and 'WOW' deals that offer great value at low prices. The initiative is a further example of leveraging the existing Group sourcing and supply chain skills. The Homebase Ideas magazine reinforces its style-led home enhancement ranges. With a circulation of over 400,000, it is one of the UK's top consumer magazines and it extended its leadership of the 'home interests' category in the latest ABC circulation figures. New product ranges. A further 50 range reviews have been completed in the last year. These have included homewares and furnishings, horticulture and core DIY and decorating categories. One of the most recent launches has been a new own brand paint range - 'Flawless' - which has been specially formulated for ease of application, coverage, durability and consistent finish. The range will help Homebase gain additional market share in a core category that represents an Â£800m market. It will give further authority alongside the leading Dulux and Crown brands, together with specialist paint ranges from Farrow & Ball, Fired Earth and Laura Ashley, as well as a broad offer of other Homebase own-brands. Kitchen installation trial progressing well. Approximately one-third of the store base now offers a full kitchen installation service to customers, helping to capture additional orders from those customers seeking installation and also supporting the sale of higher priced ranges and accessories. Opportunity remains to roll out further to more stores and potentially to other product categories. Leveraging multi-channel skills, scale and infrastructure. Furniture has been a strong sales category during the year, enabled by the shared supply chain and home delivery infrastructure. Visits to www.homebase.co.uk have also risen strongly; the website is now the third most popular in the 'house and garden' category according to the Hitwise 2006 UK Annual Online Performance Awards. Further products are being added in order to better reflect the in-store ranges and allow customers to research individual products or ranges. Recent additions also include virtual bathroom and kitchen brochures. Further operational improvements. Rationalising the many ways that different stores approach a process into the single most efficient way began with the 'Homebase Way' programme launched in 2003 and has continued in the latest '300 to 1' store operations consistency programme. As part of this, store management teams were restructured during the year to reflect a clear focus on delivering sales through better customer service, the wider product range that Homebase now sells and improved systems and processes. Operational improvements leading to positive employee feedback. In the 2007 all-employee opinion survey, 60 out of 64 measures improved on the year before. The level of overall employee engagement has risen from less than 20% in the first survey in 2003 to over 59% in the latest survey; this is a score double that of a UK benchmark of other comparable organisations. Homebase - financial review Sales in the 52 weeks to 3 March 2007 increased by 2.2% in total; like-for-like sales declined 1.4%. Sales of furniture and kitchens were strong over the year, while core DIY and decorating ranges were weak particularly in the first half. There were good performances in seasonal categories at relevant selling times during the year, including air conditioning, horticulture and garden maintenance. The contribution to sales growth from net new space was 3.6%. In the new financial year, while Homebase still expects to open a similar number of new stores, the contribution to sales growth is expected to be between 2% and 3% as a result of the planned size and phasing of store openings. Gross margin was ahead by approximately 200 basis points in the first half of the year as a result of a reduced level of promotional activity together with the benefits from supply chain initiatives. This continued in the second half, together with improved stock management. As a result, gross margin for the full year was ahead by approximately 300 basis points. Benchmark operating profit for the 52 weeks to 3 March 2007 grew 4% to Â£53.4m. In total, operating costs grew 9% in the year. Underlying cost inflation continued to be approximately 4%, with the remaining 5% being driven by additional investment in new space, together with the costs of strategic and operational initiatives. Financial Services ________________________________________________________________________________ Pro forma 52 weeks to 3 March 4 March 2007 2006 Sales (Â£m) 93.2 92.5 Benchmark operating profit before financing costs 22.8 23.9 Financing costs (17.8) (17.8) _______________________________ Benchmark operating profit (Â£m) 5.0 6.1 ________________________________________________________________________________ 3 March 2007 31 March 2006 Store card gross receivables 448 378 Personal loans gross receivables 24 55 ________________________________________________________________________________ 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 ensure the maximum possible profit from the transaction for Home Retail Group. Credit offers support initiatives in the retail businesses. For example, the trial of the 'Home' catalogue in Argos and growing kitchen sales in Homebase benefit from in-house financial services. While approximately 50% of existing gross receivable balances as at 3 March 2007 are promotional credit offer-based, approximately 70% of credit sales have been driven by promotional credit offers during the year. Financial Services' financial objective is to achieve a return on the revolving (i.e. non-promotional) element of receivables in line with financial services industry norms and to recover costs on the provision of promotional credit products to Argos and Homebase customers. The retail businesses are therefore receiving a competitive advantage in the form of the provision of promotional credit products at cost. The Financial Services offering is fully multi-channel. Customers can apply for credit and use the account during the same online visit. The Internet is the fastest growing channel for card applications and Â£1 of every Â£6 spent on the Argos website is spent using the Argos store card. Development of the financial services product portfolio continues. An Argos credit card will begin being launched this month as part of the joint venture arrangement with Barclays Bank PLC. This will offer a unique three-month interest-free credit period on all purchases and access to a new exclusive loyalty scheme. Financial Services - financial review Store card gross receivables grew by Â£70m versus the previous balance sheet date, driven by the continued success of the range of promotional credit products offered. The store cards funded 8% of Group retail sales. The continued planned run-off in personal loans saw a Â£31m reduction in gross receivables over the period. Growth in benchmark operating profit before financing costs was held back by reduced income of about Â£2m relating to the lowering of customer late payment fees from December 2006. A further impact from late payment fees of around Â£5m is expected in the current year. New development opportunities In February 2007, Home Retail Group signed heads of terms to develop the Argos retail format in India through a franchise arrangement with a Joint Venture company owned by leading Indian retailers Shopper's Stop Ltd and Hypercity Retail India Private Ltd. Under the terms of the arrangement, Argos will be providing its brand, catalogue and multi-channel expertise and IT support. The business will be launched towards the end of the year under the 'HyperCITY-Argos' brand name, initially in the Mumbai region. At this stage, it is envisaged that the proposition will be based largely on the existing Argos multi-channel proposition. On 25 April 2007, Home Retail Group completed the acquisition of a 33% stake in 'home store + more', the Irish retailer. 'home store + more' is an out-of-town homewares format, currently with two stores in the Dublin area. The investment of around Â£7m (Euro 10m) will be used to fund an agreed plan to expand the out-of-town homewares chain in Ireland. It expects to open approximately three stores a year over the next few years. Separate from this investment, the management team of 'home store + more' will also support Home Retail Group in its own development of a homewares format in the UK. Home Retail Group expects the initial pilot phase to include up to three UK stores in the next 12 months. Central Activities ________________________________________________________________________________ Pro forma 52 weeks to 3 March 2007 4 March 2006 Central Activities (Â£m) (24.0) (22.7) ________________________________________________________________________________ Central Activities represents the cost of central corporate functions and, going forward, the investment costs of new development opportunities. Cost growth in the year was slightly ahead of previous expectations as a result of recording a Â£1m loss on the disposal of Whiteaway Laidlaw Bank. Central Activities are expected to include an additional Â£5m of costs in each of the next two years in relation to the investment in new development opportunities. GROUP FINANCIAL REVIEW Sales and operating profit Pro forma sales for the Group grew 6% to Â£5,851m (2006: Â£5,510m) and pro forma benchmark operating profit grew 8% to Â£359.4m (2006: 331.8m). Group pro forma benchmark operating margin was 6.1% (2006: 6.0%). The drivers of this performance have been analysed as part of the preceding divisional reviews. The definition of pro forma benchmark operating profit is operating profit before amortisation of acquisition intangibles, store impairment charges, exceptional items and costs related to demerger incentive schemes. As with pro forma sales, it is calculated on a 52-week basis. This represents the 52 weeks to 3 March 2007 and the comparable 52 weeks to 4 March 2006. Net interest costs Pro forma net interest income for the year was Â£16.6m. This reflects Â£1.2m of estimated net interest expense on Home Retail Group's net debt/cash position during the course of the year on the basis of a pro forma allocation of Â£200m net debt as at 31 March 2006, improving to a net cash position of Â£60m as at 3 March 2007. Against this is the credit of Â£17.8m reflecting the financing costs charged within Financial Services' benchmark operating profit. Interest costs attributable to the GUS capital structure prior to the demerger were Â£46.1m (2006: Â£40.9m) and have been excluded from pro forma benchmark PBT. Share of post-tax results of associates These amounted to income of Â£0.7m (2006: loss of Â£4.2m). The improvement is principally due to the costs incurred in the previous year associated with the wind-down of AAGUS, a consumer finance company in the Netherlands in which Home Retail Group has a 33% holding. Exceptional items Demerger-related costs of Â£11.3m were incurred by Home Retail Group. As previously disclosed, these included costs in relation to early vesting of GUS plc share incentive schemes, banking set-up fees and other professional fees. An additional exceptional cost on demerger of Â£7.3m in relation to the waiver of a loan due from Experian was also taken in the first half of the financial year. Store impairment charges in respect of the Homebase store portfolio were Â£4.1m (2006: Â£12.8m). Within net financing costs, exceptional finance income of Â£6.9m was recorded in the second half of the financial year. This relates to the gain made on the transfer of an interest rate swap associated with the Â£225m fixed rate financing facility novated from GUS plc on demerger. Financing fair value remeasurements Changes in the fair value of certain financial instruments are recognised in the income statement within net financing costs. These amounted to charges of Â£0.1m (2006: Â£2.4m). 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 Â£12.3m (2006: Â£2.6m). The increase in the credit is principally as a result of the special contribution of Â£100m made in March 2006. The ongoing accounting charge, 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 Pro forma benchmark profit before tax for the year grew 12% to Â£376.7m (2006: Â£337.1m). Reported profit before tax was Â£296.9m (2006: Â£272.4m). The definition of pro forma benchmark profit before tax is 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. Net interest income within pro forma benchmark PBT is calculated to illustrate the Group's financial performance as if the demerger capital structure had existed at 31 March 2006 and had been achieved based on underlying cash flows prior to 31 March 2006. Benchmark PBT also includes Home Retail Group's share of post-tax results of associates. It is calculated on a 52-week basis. Taxation Taxation attributable to pro forma benchmark PBT for the year was Â£122.1m (2006: Â£114.5m), representing an effective tax rate (excluding associates) of 32.5% (2006: 33.5%). The improvement in the effective rate largely reflects a lower level of disallowable expenditure for tax purposes. The reported effective tax rate (excluding associates) is 37.0% (2006: 34.7%), representing a total tax expense for the period of Â£109.5m (2006: Â£96.0m). Number of shares and earnings per share On demerger, Home Retail Group was admitted to the Official List and to trading on the London Stock Exchange's market for listed securities with 877.4m issued ordinary shares. The number of shares for the purpose of calculating earnings per share in the prior year has been taken as 869.0m, representing the number of shares in issue at the date of demerger, excluding 8.4m ordinary shares held in Home Retail Group's Employee Share Ownership Trust ('ESOT'). For the financial period just ended, the weighted average number of shares since demerger has been used, which, excluding shares held in the ESOT, was 869.6m. The calculation of diluted EPS reflects the potential dilutive effect of employee share incentive schemes in place post demerger. This increases the number of shares for diluted EPS purposes by 7.6m to 877.2m (2006: 876.6m). Pro forma basic benchmark EPS is 29.3p (2006: 25.6p), with pro forma diluted benchmark EPS of 29.0p (2006: 25.4p). Reported basic EPS is 21.6p (2006: 20.3p), with reported diluted EPS of 21.4p (2006: 20.1p). Dividends As indicated at the time of demerger, a policy whereby the full year dividend is ordinarily covered at least twice by basic benchmark EPS has been established by the Board. For the financial period to 3 March 2007, the Board are now proposing to pay the final dividend based on the higher figure of the 52-week pro forma basic benchmark EPS, rather than on a lower statutory reporting period basis as had previously been indicated. A final dividend of 9.0p is therefore being recommended, making 13.0p for the year. Based on pro forma benchmark EPS of 29.3p, this represents cover of 2.25 times. Based on reported basic EPS of 21.6p, it represents cover of 1.66 times. The final dividend, subject to approval by shareholders at the AGM, will be paid on 25 July 2007 to shareholders on the register at the close of business on 25 May 2007. Cash flow and net debt As part of the demerger, Home Retail Group was allocated pro forma net debt of Â£200m as at 31 March 2006. Cash flows from operating activities (before incurring outflows related to interest, tax, investing and financing activities) were Â£604.5m in the period (2006: Â£367.4m). The principal drivers of the strong cash generation have been good management of working capital, together with the non-repeat of the prior year Â£100m special pension contribution to the Argos UK defined benefit pension scheme. As the cash generation is for a short period (i.e. c. 11 months) as a result of the change in year-end, there is also a benefit within it from the exclusion of March, historically a cash outflow month. It is estimated, based on previous cash flows for the month of March, that cash generation would therefore have been approximately Â£100m lower on a full year basis. There has also been a lower level of capital expenditure at Â£162.4m in the period (2006: Â£254.9m). This is partly as a result of approximately Â£25m of capital expenditure that would ordinarily have occurred in the month of March, together with approximately Â£25m of capital expenditure delayed into the next financial year. At 3 March 2007, the Group had a net cash position of Â£60.2m. Disposals The disposal of Whiteaway Laidlaw, a commercial bank which offers banking facilities to small businesses and personal customers, was completed in January 2007. Cash consideration was approximately Â£5m, resulting in a loss on disposal of Â£1m which was charged within Central Activities. Balance sheet and return on capital ________________________________________________________________________________ As at 3 March 2007 31 March 2006 Goodwill 1,878.9 1,878.9 Intangible assets 73.4 61.5 Property, plant and equipment 691.6 696.8 Inventories 906.4 881.0 Instalment receivables 416.8 398.5 Other trading assets 188.3 169.6 ___________________________________ 4,155.4 4,086.3 Trade and other payables (1,059.1) (890.5) Other trading liabilities (84.5) (88.6) ___________________________________ (1,143.6) (979.1) ___________________________________ Invested capital 3,011.8 3,107.2 Retirement benefit assets 9.3 25.5 Net tax liabilities (2.6) (4.8) Pro forma net cash/(debt) 60.2 (200.0) ___________________________________ Pro forma net assets 3,078.7 2,927.9 Net GUS group balances - 22.0 ___________________________________ Reported net assets 3,078.7 2,949.9 ________________________________________________________________________________ Reported net assets amounted to Â£3,078.7m, an increase of Â£128.8m on the previous balance sheet date. This is equivalent to 354p per share, excluding shares held in the ESOT (2006: 339p). Benchmark pre-tax return on invested capital, based on benchmark operating profit plus share of post-tax results of associates of Â£360.1m and invested capital of Â£3,011.8m, was 12.0%, representing a 150 basis point improvement on the previous balance sheet date. The improvement represents the combination of the Â£32.5m improvement in profit, together with the Â£95.4m reduction in invested capital. Retirement benefit assets The Group provides a number of post-employment benefit arrangements covering both funded defined benefit and defined contribution schemes. Pension arrangements are operated principally through the Argos UK defined benefit scheme together with the GUS defined contribution scheme, which was replaced post year-end by the Home Retail Group defined contribution scheme. The last actuarial valuation of the Argos UK defined benefit scheme was carried out as at 31 March 2006. The IAS 19 surplus as at 3 March 2007 for the UK defined benefit scheme was Â£9.3m (2006: Â£25.5m). Capital structure The Group finances its operations through a combination of retained profits, bank borrowings and property leases. The Group has significant liabilities through its obligations to pay rents under property leases. The capitalised value of these liabilities is Â£2.6 billion based upon a simple eight-times multiple of last year's operating lease charge, or Â£2.9 billion based upon discounted cash flows of the expected future operating lease charges. The Group, in common with the credit rating agencies, treats its lease liabilities as debt when evaluating financial risk and investment returns. The Group's net debt varies throughout the year due to trading seasonality. Liquidity and funding Liquidity is achieved through arranging funding ahead of requirements and maintaining sufficient un-drawn committed facilities to meet short term needs. At 3 March 2007, the Group had un-drawn committed borrowing facilities available of Â£700m which expire in 2011. These facilities are in place to enable the Group to finance its working capital requirements and for general corporate purposes. Treasury policy and risk management The Group's treasury function seeks to reduce exposures to foreign exchange, interest rate and other financial risks, and to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. Policies and procedures are subject to review and approval by the Board as well as subject to audit review. Counterparty credit risk management The Group's exposure to credit risk is managed by dealing only with banks and financial institutions with strong credit ratings and within limits set for each organisation. Dealing activity is closely controlled and counterparty positions are monitored daily. Interest rate risk management The Group's interest rate exposure is managed by the use of fixed and floating rate borrowings and by the use of interest rate swaps to adjust the balance of fixed and floating rate liabilities. Currency risk management The Group's key objective is to reduce the effect of exchange rate volatility on profits. Transactional currency exposures that could significantly impact the Income Statement are hedged using forward purchases of foreign currencies. Post balance sheet event On 25 April 2007, Home Retail Group completed the acquisition of a 33% stake in 'home store + more', the Irish retailer, for a consideration of around Â£7m (â‚¬10m). Share price and total shareholder return The share price of Home Retail Group ranged from a low of 399.25p to a high of 444.5p during the financial year post demerger. On 2 March 2007, the mid market price was 420.0p, giving a market capitalisation of Â£3.7bn at that date. Total shareholder return (the increase in the value of a share including reinvested dividends) has been 3.4% in the approximate five-month period since demerger. This compares favourably with the total shareholder return for the FTSE 100, which was 1.5% over the same period. Accounting standards and use of non-GAAP measures The Group has prepared its consolidated financial statements under International Financial Reporting Standards for the period ended 3 March 2007. Accounting policies are outlined in Note 3 to the Financial Statements. Home Retail 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 3 to the Financial Statements. Appendix 1. Basis of preparation for pro forma restatements Reporting periods Home Retail Group previously reported as part of GUS plc on a calendar year-end to 31 March, with the Interim Results reported as the six months to 30 September. Within this, to avoid distortion in the financial results relating to the timing of Easter, Homebase was consolidated on a non-coterminous 12 months to 28 February basis. At the Interim Results, Homebase was therefore consolidated on a seven months to 30 September basis, with the second half of its financial year comprising only a five month period. As a result of the change in year-end, Home Retail Group is this year reporting on a statutory basis the financial period ended 3 March 2007. This includes the results for Homebase from 1 March 2006 (approximately 12 months) and the results for the rest of the Group from 1 April 2006 (approximately 11 months). For comparative purposes, FY 2006/07 restated on a pro forma basis is the 52-week period commencing 5 March 2006 and ending on 3 March 2007; H1 2006/07 on a pro forma basis is the 26 week period commencing 5 March 2006 and ending on 2 September 2006; and FY 2005/06 on a pro forma basis is the 52-week period commencing 6 March 2005 and ending on 4 March 2006. Reconciliations between pro forma and statutory reported periods are shown at Appendix 2. The timing of trading statements will also change as a result of the new year-end. At Appendix 3, we have provided trading statement comparables on the new basis. Central Activities Central Activities represents the cost of central corporate functions. As part of GUS, Home Retail Group was not recharged for these types of costs. However, for the purposes of preparing demerger financial information, an approximation was made of the amount of GUS corporate head office costs to apportion to Home Retail Group. These apportioned costs were not representative of either the historical costs Home Retail Group would have incurred or the costs it will incur going forward. As part of the pro forma restatements, Home Retail Group has therefore approximated the additional costs of central corporate functions it would have incurred over and above that apportioned to it by GUS. This has been done on the basis it had operated as a standalone plc through the periods being restated. Capital structure and net interest As part of the demerger, Home Retail Group was allocated pro forma net debt as at 31 March 2006 of Â£200m. For the purposes of preparing pro forma results, net interest income has been calculated to illustrate the impact on the Group's financial performance as if this capital structure had existed at 31 March 2006 and had been achieved based on the underlying cash flows prior to 31 March 2006. The additional net interest costs attributable to the actual GUS capital structure that was in place over the periods are shown separately. Other income statement items Other non-trading income statement items have not been restated as they are not impacted by the change of year-end. These are principally exceptional items, costs related to demerger incentive schemes and financing fair value remeasurements. Appendix 2. Reconciliations between pro forma and statutory reported periods FY 2006/07 Short period Pro forma 52 weeks to Â£m to 3March 2007 restatement 3March 2007 Argos 3,912.8 251.2 4,164.0 Homebase 1,606.3 (12.1) 1,594.2 Financial Services 87.6 5.6 93.2 _______________________________________ Sales 5,606.7 244.7 5,851.4 Cost of sales (3,680.5) (171.7) (3,852.2) _______________________________________ Gross profit 1,926.2 73.0 1,999.2 Operating expenses before exceptional items and costs related to demerger incentive schemes (1,592.5) (47.3) (1,639.8) _______________________________________ Argos 300.9 24.1 325.0 Homebase 51.2 2.2 53.4 Financial Services 4.5 0.5 5.0 Central Activities (22.9) (1.1) (24.0) _______________________________________ Benchmark operating profit 333.7 25.7 359.4 Pro forma net interest income (see below) n/a 16.6 16.6 Share of post-tax results of associates 0.7 - 0.7 _______________________________________ Benchmark PBT n/a 42.3 376.7 Net interest costs attributable to GUS capital structure (see below) (21.0) (18.2) (39.2) Exceptional items included in operating profit (22.7) - (22.7) Costs related to demerger incentive schemes (5.8) - (5.8) Financing fair value remeasurements (0.1) - (0.1) Financing impact on retirement benefit balances 12.1 0.2 12.3 _______________________________________ Profit before tax 296.9 24.3 321.2 Taxation (109.5) (8.0) (117.5) of which: taxation attributable to pro forma benchmark PBT n/a n/a (122.1) _______________________________________ Profit for the period 187.4 16.3 203.7 ________________________________________________________________________________ Pro forma basic benchmark EPS n/a n/a 29.3p Basic EPS 21.6p 1.8p 23.4p Number of shares for basic EPS 869.6m - 869.6m Net interest reconciliation: Pro forma net interest expense n/a (1.2) (1.2) Financing costs charged to Financial Services n/a 17.8 17.8 _______________________________________ Pro forma net interest income n/a 16.6 16.6 Interest costs attributable to GUS (44.3) (1.8) (46.1) capital structure Exceptional finance income 6.9 - 6.9 Financing costs charged to Financial Services 16.4 (16.4) - _______________________________________ Net interest costs attributable to GUS capital structure (21.0) (18.2) (39.2) Financing fair value remeasurements (0.1) - (0.1) Financing impact on retirement benefit 12.1 0.2 12.3 balances _______________________________________ Income statement net financing costs (9.0) (1.4) (10.4) _______________________________________ Appendix 2 (continued) ________________________________________________________________________________ H1 2006/07 6 months to Pro forma 26 weeks to Â£m 30Sept 2006 restatement 2Sept 2006 Argos 1,794.1 (40.5) 1,753.6 Homebase 979.1 (122.3) 856.8 Financial Services 46.7 (0.7) 46.0 Sales 2,819.9 (163.5) 2,656.4 ________________________________________ Cost of sales (1,851.2) 94.8 (1,756.4) ________________________________________ Gross profit 968.7 (68.7) 900.0 Operating expenses before exceptional items and costs related to demerger incentive schemes (861.8) 63.5 (798.3) ________________________________________ Argos 72.4 (6.0) 66.4 Homebase 40.8 1.1 41.9 Financial Services 4.1 (0.4) 3.7 Central Activities (10.4) 0.1 (10.3) ________________________________________ Benchmark operating profit 106.9 (5.2) 101.7 Pro forma net interest income (see below) 5.7 (0.2) 5.5 Share of post-tax results of associates - - - ________________________________________ Benchmark PBT 112.6 (5.4) 107.2 Net interest costs attributable to GUS capital structure (see below) (42.2) 6.5 (35.7) Exceptional items included in operating profit (16.4) - (16.4) Costs related to demerger incentive schemes - - - Financing fair value remeasurements (0.9) - (0.9) Financing impact on retirement benefit balances 6.6 - 6.6 _______________________________________ Profit before tax 59.7 1.1 60.8 Taxation (25.1) 2.0 (23.1) of which: taxation attributable to pro forma benchmark PBT (36.6) 1.8 (34.8) _______________________________________ Profit for the period 34.6 3.1 37.7 _______________________________________ Pro forma basic benchmark EPS 8.7p (0.4p) 8.3p Basic EPS 4.0p 0.3p 4.3p Number of shares for basic EPS 869.0m - 869.0m ________________________________________________________________________________ Net interest reconciliation: Pro forma net interest expense (2.6) (0.5) (3.1) Financing costs charged to Financial Services 8.3 0.3 8.6 _______________________________________ Pro forma net interest income 5.7 (0.2) 5.5 Interest costs attributable to GUS (35.7) - (35.7) capital structure Adjustment on merger accounting1 (6.5) 6.5 - Financing costs charged to Financial Services - - - _______________________________________ Net interest costs attributable to GUS capital structure (42.2) 6.5 (35.7) Financing fair value remeasurements (0.9) - (0.9) Financing impact on retirement benefit balances 6.6 - 6.6 _______________________________________ Income statement net financing costs (30.8) 6.3 (24.5) _______________________________________ 1. Information previously provided in the demerger prospectus dated 14 September 2006 and the Interim Results released on 21 November 2006 was required to be produced on an 'aggregated basis' containing certain 'carve out adjustments'. The financial statements being reported today are required to be prepared on a retrospective 'consolidated' basis; as a result, merger accounting and certain reclassification adjustments have been made to reverse 'carve out' entries between GUS group companies that were not actually accounted for in the individual statutory demerged entities. Appendix 2 (continued) __________________________________________________________________________________ FY 2005/06 12 months to Pro forma 52 weeks to Â£m 31March 2006 restatement 4March 2006 Argos 3,892.6 (33.8) 3,858.8 Homebase 1,561.8 (2.8) 1,559.0 Financial Services 93.6 (1.1) 92.5 Sales 5,548.0 (37.7) 5,510.3 Cost of sales (3,686.5) 31.9 (3,654.6) ______________________________________ Gross profit 1,861.5 (5.8) 1,855.7 Operating expenses before exceptional items and costs related to demerger incentive schemes (1,515.5) (8.4) (1,523.9) ______________________________________ Argos 296.0 1.0 297.0 Homebase 51.8 (0.4) 51.4 Financial Services 6.1 - 6.1 Central Activities (16.2) (6.5) (22.7) Adjustment on merger accounting1 8.3 (8.3) - ______________________________________ Benchmark operating profit 346.0 (14.2) 331.8 Pro forma net interest income (see below) n/a 9.5 9.5 Share of post-tax results of associates (4.2) - (4.2) Benchmark PBT n/a (4.7) 337.1 ______________________________________ Net interest costs attributable to GUS capital structure (see below) (45.3) 4.4 (40.9) Exceptional items included in operating profit (24.7) - (24.7) Costs related to demerger incentive schemes - - - Financing fair value remeasurements (2.0) (0.4) (2.4) Financing impact on retirement benefit balances 2.6 - 2.6 ______________________________________ Profit before tax 272.4 (0.7) 271.7 Taxation (96.0) 1.1 (94.9) of which: taxation attributable to pro forma benchmark PBT n/a n/a (114.5) ______________________________________ Profit for the period 176.4 0.4 176.8 ________________________________________________________________________________ Pro forma basic benchmark EPS n/a n/a 25.6p ________________________________________________________________________________ Basic EPS 20.3p - 20.3p Number of shares for basic EPS 869.0m - 869.0m ________________________________________________________________________________ Net interest reconciliation Pro forma net interest expense n/a (8.3) (8.3) Financing costs charged to Financial n/a 17.8 17.8 Services _____________________________________ Pro forma net interest income n/a 9.5 9.5 Interest costs attributable to GUS (49.2) 8.3 (40.9) capital structure Adjustment on merger accounting1 (14.0) 14.0 - Financing costs charged to Financial Services 17.9 (17.9) - _____________________________________ Net interest costs attributable to GUS capital structure (45.3) 4.4 (40.9) Financing fair value remeasurements (2.0) (0.4) (2.4) Financing impact on retirement benefit balances 2.6 - 2.6 _____________________________________ Income statement net financing costs (44.7) 13.5 (31.2) _____________________________________ 1. Information previously provided in the demerger prospectus dated 14 September 2006 and the Interim Results released on 21 November 2006 was required to be produced on an 'aggregated basis' containing certain 'carve out adjustments'. The financial statements being reported today are required to be prepared on a retrospective 'consolidated' basis; as a result, merger accounting and certain reclassification adjustments have been made to reverse 'carve out' entries between GUS group companies that were not actually accounted for in the individual statutory demerged entities. Appendix 3. Restatement of trading statement comparables Q1 13 weeks to 3 June 2006 Argos Sales Â£855m Like-for-like change in sales 6.1% Net new space contribution to sales change 8.0% ___________ Total sales change 14.1% ___________ Guidance on gross margin movement Down c.100bps Homebase Sales Â£441m Like-for-like change in sales (4.7%) Net new space contribution to sales change 3.6% ___________ Total sales change (1.1%) ___________ Guidance on gross margin movement Up c.200bps Q2 H1 13 weeks to 26 weeks to 2 Sept 2006 2 Sept 2006 Argos Sales Â£899m Â£1,754m Like-for-like change in sales 4.5% 5.1% Net new space contribution to sales change 6.3% 6.9% _________ __________ Total sales change 10.8% 12.0% _________ __________ Guidance on gross margin movement Down c.100bps Down c.100bps Homebase Sales Â£416m Â£857m Like-for-like change in sales (1.5%) (3.2%) Net new space contribution to sales change 4.6% 4.1% _________ __________ Total sales change 3.1% 0.9% _________ __________ Guidance on gross margin movement Up c.150bps Up c.200bps Q3 YTD 18 weeks to 44 weeks to 6 Jan 2007 6 Jan 2007 Argos Sales Â£1,873m Â£3,627m Like-for-like change in sales (0.1%) 2.5% Net new space contribution to sales change 4.5% 5.6% _________ __________ Total sales change 4.4% 8.1% _________ __________ Guidance on gross margin movement Up c.50bps Down c.25bps Homebase Sales Â£519m Â£1,376m Like-for-like change in sales (2.8%) (3.0%) Net new space contribution to sales change 3.0% 3.6% _________ __________ Total sales change 0.2% 0.6% _________ __________ Guidance on gross margin movement Up c.350bps Up c.250bps Q4 H2 FY 8 weeks to 26 weeks to 52 weeks to 3 Mar 2007 3 Mar 2007 3 Mar 2007 Argos Sales Â£537m Â£2,410m Â£4,164m Like-for-like change in sales 3.0% 0.8% 2.4% Net new space contribution to sales change 3.8% 4.4% 5.5% __________ _________ __________ Total sales change 6.8% 5.2% 7.9% __________ _________ __________ Guidance on gross margin movement Up c.50bps Up c.50bps c.0 bps Homebase Sales Â£218m Â£737m Â£1,594m Like-for-like change in sales 9.9% 0.6% (1.4%) Net new space contribution to sales change 3.4% 3.1% 3.6% __________ _________ __________ Total sales change 13.3% 3.7% 2.2% __________ _________ __________ Guidance on gross margin movement Up c.500bps Up c.400bps Up c.300bps Consolidated Income Statement For the short period 1 April 2006 to 3 March 2007 Short period to 3 March 2007 Year to 31 March 2006 ___________________________________ ___________________________________ Before Exceptional 2007 Before Exceptional 2006 exceptional items exceptional items items items Notes Â£m Â£m Â£m Â£m Â£m Â£m _______________________________________________________________________________________________ Revenue 5,606.7 - 5,606.7 5,548.0 - 5,548.0 Cost of sales (3,680.5) - (3,680.5) (3,686.5) - (3,686.5) _______________________________________________________________________________________________ Gross profit 1,926.2 - 1,926.2 1,861.5 - 1,861.5 Net operating expenses 3 (1,598.3) (22.7) (1,621.0) (1,515.5) (24.7) (1,540.2) _______________________________________________________________________________________________ Operating profit 327.9 (22.7) 305.2 346.0 (24.7) 321.3 - Finance income 55.5 6.9 62.4 45.7 - 45.7 - Finance expense (71.4) - (71.4) (90.4) - (90.4) Net financing costs 3, 4 (15.9) 6.9 (9.0) (44.7) - (44.7) Share of post-tax profit/(loss) of joint ventures and associates 0.7 - 0.7 (4.2) - (4.2) _______________________________________________________________________________________________ Profit before tax 312.7 (15.8) 296.9 297.1 (24.7) 272.4 Taxation (104.2) (5.3) (109.5) (103.4) 7.4 (96.0) _______________________________________________________________________________________________ Profit for the period attributable to equity shareholders 208.5 (21.1) 187.4 193.7 (17.3) 176.4 _______________________________________________________________________________________________ Earnings per pence pence share - Basic 6 21.6 20.3 - Diluted 6 21.4 20.1 _______________________________________________________________________________________________ Short period to Year to 3 March 2007 31 March 2006 Notes Â£m Â£m ______ __________________ __________________ _________________ Non-GAAP measures _________________ Reconciliation of profit before tax (PBT) to benchmark PBT Profit before tax 296.9 272.4 Effect of exceptional items 3 15.8 24.7 Effect of financing fair value 4 0.1 2.0 remeasurements Financing impact on retirement 4 (12.1) (2.6) benefit balances Effect of demerger incentive schemes 5.8 - ________________________________________________________________________________________ Benchmark PBT 306.5 296.5 ________________________________________________________________________________________ Benchmark earnings per share pence pence - Basic 6 23.7 22.2 - Diluted 6 23.5 22.1 Consolidated Statement of Recognised Income and Expense For the short period 1 April 2006 to 3 March 2007 2007 2006 Â£m Â£m _____________________________________________________________________________________ Net (expense)/income recognised directly in equity Fair value (losses)/gains in the period (2.7) 5.7 Actuarial (losses)/gains in respect of defined benefit pension schemes (18.3) 5.7 Currency translation differences 0.9 (0.3) Tax credit/(charge) in respect of items taken directly to equity 10.0 (2.3) _____________________________________________________________________________________ Net (expense)/income recognised directly in equity for the period (10.1) 8.8 Profit for the period attributable to equity shareholders 187.4 176.4 _____________________________________________________________________________________ Total recognised income for the period attributable to equity shareholders 177.3 185.2 _____________________________________________________________________________________ Consolidated Balance Sheet At 3 March 2007 3 March 31 March 2007 2006 Â£m Â£m __________________________________________________________________________________ ASSETS Non-current assets Goodwill 1,878.9 1,878.9 Intangible assets 73.4 61.5 Property, plant and equipment 691.6 696.8 Investment in joint ventures and associates 9.2 0.4 Deferred tax assets 74.4 108.8 Trade and other receivables 18.0 43.1 Retirement benefit assets 9.3 25.5 Other financial assets 8.5 5.5 __________________________________________________________________________________ Total non-current assets 2,763.3 2,820.5 __________________________________________________________________________________ Current assets Inventories 906.4 881.0 Trade and other receivables 569.4 1,478.1 Current tax assets 3.0 6.7 Other financial assets - 1.8 Cash and cash equivalents 283.8 130.0 __________________________________________________________________________________ Total current assets 1,762.6 2,497.6 __________________________________________________________________________________ Total assets 4,525.9 5,318.1 __________________________________________________________________________________ LIABILITIES Non-current liabilities Trade and other payables (34.0) (27.8) Loans and borrowings - (222.5) Provisions (57.1) (55.0) Deferred tax liabilities (44.8) (67.2) __________________________________________________________________________________ Total non-current liabilities (135.9) (372.5) __________________________________________________________________________________ Current liabilities Trade and other payables (1,025.1) (862.7) Loans and borrowings (223.6) (1,046.3) Provisions (25.2) (33.6) Other financial liabilities (2.2) - Current tax liabilities (35.2) (53.1) __________________________________________________________________________________ Total current liabilities (1,311.3) (1,995.7) __________________________________________________________________________________ Total liabilities (1,447.2) (2,368.2) __________________________________________________________________________________ Net assets 3,078.7 2,949.9 __________________________________________________________________________________ EQUITY Share capital 87.7 2,895.6 Merger reserve (348.4) (348.4) Other reserves (11.4) (4.3) Retained earnings 3,350.8 407.0 __________________________________________________________________________________ Total equity 3,078.7 2,949.9 __________________________________________________________________________________ Consolidated Cash Flow Statement For the short period 1 April 2006 to 3 March 2007 2007 2006 Notes Â£m Â£m _____________________________________________________________________________________________ Cash flows from operating activities Cash generated from operations 8 a 604.5 367.4 Interest received 13.6 19.0 Interest paid (35.0) (65.1) Tax paid (101.6) (91.0) _____________________________________________________________________________________________ Net cash inflow from operating activities 481.5 230.3 _____________________________________________________________________________________________ Cash flows from investing activities Purchase of property, plant and equipment (134.1) (231.6) Proceeds from the disposal of property, plant and equipment 3.8 3.0 Purchase of intangible assets (28.3) (23.3) Loan to joint venture (8.1) - Disposal of subsidiary - net of cash disposed (3.8) - Acquisition of businesses - (45.1) _____________________________________________________________________________________________ Net cash used in investing activities (170.5) (297.0) _____________________________________________________________________________________________ Cash flows from financing activities Purchase of own shares (6.1) - (Payments)/receipts of amounts (to)/from GUS plc (50.3) 177.7 Repayment of finance leases (1.2) (1.0) Home Retail Group share of GUS plc final dividend (62.0) - Dividends paid (34.6) - _____________________________________________________________________________________________ Net cash used in financing activities (154.2) 176.7 _____________________________________________________________________________________________ Net increase in cash and cash equivalents 156.8 110.0 _____________________________________________________________________________________________ Movement in cash and cash equivalents Cash and cash equivalents at the beginning of the period 130.0 20.0 Effect of foreign exchange rate changes (3.0) - Net increase in cash and cash equivalents 156.8 110.0 _____________________________________________________________________________________________ Cash and cash equivalents at the end of the period 283.8 130.0 _____________________________________________________________________________________________ Notes For the short period 1 April 2006 to 3 March 2007 1. BASIS OF PREPARATION Previously, Home Retail Group (then ARG) prepared its financial information for the financial year for the 12 months to 31 March except for the results of Homebase Limited which were included for the 12 months to 28 or 29 February each year, with adjustments to reflect the balance sheet movements in cash to the end of March. This was done to facilitate comparability of the income statement by avoiding the distortions that would arise relating to changes in the timing of Easter. In order to align the year end across the Group, the Board of Directors have decided to amend the Group's financial year to a 52-week period ending on the Saturday closest to the end of February. Therefore, following the change of accounting reference date, the audited accounts have been prepared for the short period ended 3 March 2007 with comparatives for the 12 months to 31 March 2006. Unless otherwise stated, references to 2007 within the notes to the financial statements are for the short period 1 April 2006 to 3 March 2007, in the case of balance sheet notes, to the balance sheet as at 3 March 2007 with comparatives at 31 March 2006. The Group consolidated financial statements are presented in sterling, rounded to the nearest hundred thousand. They are prepared on the historic cost basis modified for the revaluation of certain financial instruments. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated, and are in line with the listing particulars. Group reorganisation Home Retail Group demerged from its parent company, GUS plc, with effect from 10 October 2006. Shares in Home Retail Group were admitted to the Official List of the Financial Services Authority and to trading on the London Stock Exchange's main market for listed securities on 11 October 2006. All Home Retail Group companies which were owned by GUS plc prior to demerger were transferred under the new ultimate parent company, Home Retail Group plc, prior to 11 October 2006. The introduction of this new ultimate holding company constitutes a group reconstruction and has been accounted for using merger accounting principles. Therefore, although the Group reorganisation did not become effective until 10 October 2006, these consolidated financial statements of Home Retail Group are presented as if the current Group structure had always been in place. In the Prospectus, funding balances between the Group and GUS plc which were interest bearing and had the characteristics of debt, were presented as debt in the balance sheet, with the interest taken to the income statement. Prior to demerger, the net funding balances were reduced by Â£240.0m by means of a capitalisation and the financial statements reflect this capitalisation as having taken place just prior to 31 March 2005. 2. NON-GAAP FINANCIAL INFORMATION Exceptional items Items which are both material and non-recurring are presented as exceptional items within their relevant income statement line. The separate reporting of exceptional items helps provide a better indication of underlying performance of the Group. Examples of items which may be recorded as exceptional items are impairment charges, restructuring costs and the profits/losses on the disposal of businesses. Benchmark PBT The Group uses the term benchmark profit before tax (PBT) as a measure which is not formally recognised under IFRS. Benchmark PBT is defined as profit before amortisation of acquisition intangibles, store impairment charges, exceptional items, financing fair value re-measurements, financing impact on retirement benefit balances, and one-off demerger incentive costs. This measure is considered useful in that it provides investors with an alternative means to evaluate the underlying performance of the Group's operations. Net debt The Group uses the term net debt which is considered useful in that it provides the Group's aggregate net indebtedness to banks and other financial institutions together with debt-like liabilities, notably property leases. Notes For the short period 1 April 2006 to 3 March 2007 2007 2006 3. EXCEPTIONAL ITEMS Â£m Â£m ______________________________________________________________________________________________ Costs relating to the demerger of Home Retail Group and Experian (a) (11.3) - Waiver of loan due from Experian (b) (7.3) - Store impairment charges (c) (4.1) (12.8) Re-organisation costs (d) - (11.9) ______________________________________________________________________________________________ Exceptional items in operating profit (22.7) (24.7) Exceptional finance income (e) 6.9 - ______________________________________________________________________________________________ Total exceptional items (15.8) (24.7) ______________________________________________________________________________________________ (a) Demerger-related expenditure including costs in relation to early vesting of share incentive schemes, banking set up fees and other professional fees. (b) Represents a loan due from Experian which has been waived as part of the demerger process. (c) IFRS requires individual stores to be designated as cash generating units for the purposes of testing for impairment. This resulted in a net impairment charge in respect of the Homebase store portfolio of Â£4.1m (2006: Â£12.8m). (d) In 2005, Home Retail Group (then ARG), undertook a reorganisation whereby approximately 500 Homebase roles, including the merchandising and buying functions previously based in Wallington, Surrey, relocated to the Group's head office in Milton Keynes. The costs of the move totalled Â£11.9m in 2006. (e) Fair value gain made on transfer of interest rate swap novated from GUS plc on demerger. 2007 2006 4. NET FINANCING COSTS Â£m Â£m ______________________________________________________________________________________________ Finance income: Bank deposits 13.8 7.9 Expected return on retirement benefit asset 37.8 27.5 Interest receivable from GUS group companies 3.9 10.3 ______________________________________________________________________________________________ Total finance income 55.5 45.7 ______________________________________________________________________________________________ Finance expense: Interest cost of perpetual securities (11.1) (11.2) Discount unwind on provisions (1.9) (0.5) Financing fair value remeasurements (0.1) (2.0) Interest expense on retirement benefit liabilities (25.7) (24.9) Interest expense on OFT fine (1.5) - Interest payable to GUS group companies (47.5) (67.6) ______________________________________________________________________________________________ Total finance expense (87.8) (106.2) Less: finance expense charged to Financial Services cost of sales 16.4 15.8 ______________________________________________________________________________________________ Total net finance expense (71.4) (90.4) ______________________________________________________________________________________________ Net financing costs pre exceptional (15.9) (44.7) Exceptional finance income 6.9 - ______________________________________________________________________________________________ Net financing costs (9.0) (44.7) ______________________________________________________________________________________________ Notes For the short period 1 April 2006 to 3 March 2007 2007 2007 2006 2006 5. DIVIDENDS pence Â£m pence Â£m _____________________________________________________________________________________________ Amounts recognised as distributions to equity holders in the year Interim 4.0 34.6 - - _____________________________________________________________________________________________ Ordinary dividends on equity shares 4.0 34.6 - - _____________________________________________________________________________________________ Proposed final dividend for the year ended 3 March 2007 9.0 78.3 The proposed final dividend was approved by the Board of Directors on 24 April 2007 and is subject to approval by the shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability at 3 March 2007 in accordance with IAS 10 'Events after the balance sheet date'. It will be paid on 25 July 2007 to shareholders who are on the register of members at close of business on 23 May 2007. In August 2006, Â£62m was paid to GUS plc as Home Retail Group's share of the GUS plc final dividend in respect of the year ended 31 March 2006. The Home Retail Group Employee Share Ownership Trust (ESOT) has waived its entitlement to dividends in the amount of Â£0.7m. 6. BASIC AND DILUTED EARNINGS PER SHARE (EPS) Basic and diluted EPS for comparative periods have been calculated on the basis of the number of Home Retail Group plc ordinary shares in issue at the date of demerger, excluding ordinary shares held in Home Retail Group's ESOT. Basic and diluted EPS for 2007 have been calculated on the number of shares in issue at the date of demerger for the pre-demerger period together with the weighted average number of shares post demerger, excluding ordinary shares held in Home Retail Group's ESOT. 2007 2006 Earnings Â£m Â£m _____________________________________________________________________________________________ Profit after tax for the financial period 187.4 176.4 Effect of exceptional items 15.8 24.7 Effect of financing fair value remeasurements 0.1 2.0 Financing impact on retirement benefit balances (12.1) (2.6) Demerger incentive schemes 5.8 - Attributable taxation 9.2 (7.2) _____________________________________________________________________________________________ Benchmark profit after tax for the financial period 206.2 193.3 _____________________________________________________________________________________________ Weighted average number of shares millions millions Number of ordinary shares for the purpose of basic EPS 869.6 869.0 Dilutive effect of share incentive awards 7.6 7.6 _____________________________________________________________________________________________ Number of ordinary shares for the purpose of diluted EPS 877.2 876.6 _____________________________________________________________________________________________ EPS pence pence Basic EPS 21.6 20.3 Diluted EPS 21.4 20.1 Basic benchmark EPS 23.7 22.2 Diluted benchmark EPS 23.5 22.1 Notes For the short period 1 April 2006 to 3 March 2007 7. RECONCILIATION OF MOVEMENTS IN EQUITY Other Reserves ______________ Share Merger Other Retained capital reserve reserves earnings Total Â£m Â£m Â£m Â£m Â£m ________________________________________________________________________________________________ At 1 April 2006 2,895.6 (348.4) (4.3) 407.0 2,949.9 Profit for the financial period - - - 187.4 187.4 Share reduction (2,807.9) - - 2,807.9 - Net (cost) recognised in equity for the financial period - - (1.0) (9.1) (10.1) Movement in share based compensation reserve - - - 16.3 16.3 Net movement in own shares - - (6.1) - (6.1) Equity dividends paid during the period - - - (34.6) (34.6) Other movements - - - (24.1) (24.1) ________________________________________________________________________________________________ Total equity at 3 March 2007 87.7 (348.4) (11.4) 3,350.8 3,078.7 ________________________________________________________________________________________________ Other Reserves ______________ Share Merger Other Retained capital reserve reserves earnings Total Â£m Â£m Â£m Â£m Â£m ________________________________________________________________________________________________ At 1 April 2005 2,895.6 (348.4) (9.2) 217.4 2,755.4 Profit for the financial year - - - 176.4 176.4 Net income recognised in equity for the financial period - - 4.9 3.9 8.8 Movement in share based compensation reserve - - - 9.2 9.2 Net movement in own shares - - - - - Equity dividends paid during the year - - - - - Other movements - - - 0.1 0.1 ________________________________________________________________________________________________ Total equity at 31 March 2006 2,895.6 (348.4) (4.3) 407.0 2,949.9 ________________________________________________________________________________________________ Merger reserve The merger reserve arose on the demerger of the Group from GUS plc during 2006 as outlined in Note 2 'Group reorganisation'. Other reserves Other reserves principally consist of shares held in trust, the hedging reserve and the translation reserve. Net movement in own shares represents shares purchased for the purpose of satisfying obligations arising from Home Retail Group plc share-based compensation schemes. Shares in Home Retail Group are held in the following Trusts which have been established since demerger: Home Retail Group Employee Share Ownership Trust (ESOT) The ESOT provides for the issue of shares to Group employees under share option and share grant schemes (with the exception of the Share Incentive Plan). At 3 March 2007 the ESOT held 7,449,855 shares with a market value of Â£31.3m The shares in the Trust are held in the balance sheet of the Group at nil value. The shares were acquired as part of the demerger from GUS at no cost. Dividends on these shares are waived. Home Retail Group Share Incentive Scheme Trust The Home Retail Group Share Incentive Scheme Trust provides for the issue of shares to Group employees under the Share Incentive Plan. At 3 March 2007 the Trust held 1,477,105 shares with a market value of Â£6.2m. These shares were purchased during the year at a cost of Â£6.1m. Notes For the short period 1 April 2006 to 3 March 2007 8. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT 2007 2006 8(a) Cash generated from operations Â£m Â£m _______________________________________________________________________________________________ Profit before tax 296.9 272.4 Adjustments for: Share of post-tax profits of joint ventures and associate (0.7) 4.2 Net financing costs 9.0 44.7 _______________________________________________________________________________________________ Operating profit 305.2 321.3 Loss on sale of property, plant and equipment 0.9 1.0 Loss on sale of subsidiary 1.1 - Depreciation and amortisation 146.4 134.9 Impairment losses 4.1 12.8 (Increase)/decrease in inventories (23.4) 7.6 (Increase)/decrease in receivables (42.7) 0.3 Increase/(decrease) in payables 193.3 (30.9) _______________________________________________________________________________________________ Movement in working capital 127.2 (23.0) (Decrease)/increase in provisions (6.3) 1.0 Movement in retirement benefits 10.0 (90.2) Share based payment expense 15.9 9.6 _______________________________________________________________________________________________ Cash generated from operations 604.5 367.4 _______________________________________________________________________________________________ 8(b) Reconciliation of net increase in cash and cash equivalents to movement in net debt Net debt at 1 April (178.0) (103.9) Effect of foreign exchange rate changes (3.0) - Net decrease in cash and cash equivalents 156.8 110.0 Decrease/(increase) in debt 84.4 (184.1) _______________________________________________________________________________________________ Net debt at the end of the financial year 60.2 (178.0) _______________________________________________________________________________________________ 8(c) Major non-cash transactions Home Retail Group did not enter into any new finance lease arrangements during the period (2006: nil). 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