27th Jun 2006 07:01
Carpetright PLC27 June 2006 Carpetright plc Preliminary Results Announcement for the year ended 29 April 2006 Carpetright plc, Europe's leading specialist carpet and floor coverings retailertrading within the UK, Republic of Ireland, Belgium, The Netherlands and Poland,today makes its preliminary announcement of its audited results for the 52 weeksended 29 April 2006. Highlights Group • Total Group sales £451.4 million, down 2.4% (2005: £462.5 million) • Second half total Group sales increased by 4.1% to £235.9 million (2005: £226.6 million) • Profit before tax £64.2 million, down 11.4% (2005: £72.5 million) • Underlying pre tax profit * fell 7.8% to £56.7 million (2005: £61.5 million) • Second half underlying pre tax profit * increased by 16.5% to £34.6 million (2005: £29.7 million) • Basic earnings per share 65.0p, down 8.5% (2005: 71.0p) • Underlying earnings * per share fell 6.4% to 57.5p (2005: 61.4p) • Strong cash generation with operating cash flow of £86.4 million • Recommended final dividend of 30.0p giving a total of 49.0p, up 4.3% UK and Republic of Ireland • Like-for-like sales decline of 2.8% • Underlying operating profit * fell 8.8% to £55.1 million (2005: £60.4 million) • Underlying operating margin * of 13.8% • Gross margin improved to 60.6% (2005: 59.9%) • Store expansion plans on track, with 67 stores opened in the year • Good profits and cash flow from the development of the property portfolio Rest of Europe • Like-for-like sales growth of 6.9% (excluding fitting income) • Operating profit grew 20.0% to £3.6 million (2005: £3.0 million) • Operating margin of 6.7% (2005: 5.6%) • Store expansion plans accelerating, with ten stores opened, including two in Poland * 'Underlying' excludes exceptional items and tax thereon Lord Harris, Chairman and Chief Executive, said: "There is no doubt that 2006 has been a difficult year for Carpetright, but I amdelighted nevertheless with the progress we have made. Early in the year theGroup opened its 500th store and in March we opened our first store in Poland.We are now trading from 538 stores and we continue to expand across Europe." "Following a difficult first half we have delivered a significant improvement inour second half sales and operating profits. The development of our propertyportfolio continues to produce good cash-flow and profits which, combined withstrong underlying operating cash-flow, allows us to increase our dividend by4.3%." "Although customers remain cautious I am confident that the Group is well placedto grow in our existing markets and continues to look at opportunities todevelop in new markets. Our strategy of providing a comprehensive offer withthe widest product range, best prices and excellent customer service will enableus to continue to expand our business and deliver sustainable growth forshareholders." For further enquiries please contact: Carpetright plc Lord Harris of Peckham, Chairman and Chief ExecutiveIan Kenyon, Group Finance DirectorTelephone 020 7638 9571 (until 2pm), 01708 525522 (thereafter) Citigate Dewe Rogerson Sara Batchelor / Fiona MulcahyTelephone 020 7638 9571 There will be a presentation to analysts and investors at 9.00am today at theoffice of Deutsche Bank, Winchester House, 1 Great Winchester St, EC2N 2DB. A copy of the preliminary results and presentation to analysts can be found onour website www.carpetright.plc.uk today at 7.00am and 9.00am, respectively. Certain statements made in this announcement are forward looking statements.Such statements are based on current expectations and are subject to a number ofrisks and uncertainties that could cause actual events or results to differmaterially from any expected future events or results referred to in theseforward looking statements. Overview of Group financial performance 2006 2005 % changeKey Financial Results £'m £'m Group sales 451.4 462.5 (2.4%)Underlying operating profit *- UK and Republic of Ireland ("UK & RoI") 55.1 60.4 (8.8%)- Rest of Europe 3.6 3.0 20.0%- Total 58.7 63.4 (7.4%)Interest (2.0) (1.9) (5.3%)Underlying pre tax profit* 56.7 61.5 (7.8%)Exceptional items 7.5 11.0 (31.8%)Profit before taxation 64.2 72.5 (11.4%)Underlying earnings* per share (pence) 57.5 61.4 (6.4%)Basic earnings per share (pence) 65.0 71.0 (8.5%)Dividend per share (pence) 49.0 47.0 4.3% * Note - Where this review makes reference to underlying operating profit /earnings and tax these relate to operating profits / earnings before exceptionalitems. Carpetright has continued to make good progress against its core financialobjectives despite difficult market conditions particularly in the first half ofthe year. Group sales fell by 2.4% in the year to £451.4 million. Like-for-like sales inthe UK & RoI fell by 2.8% reflecting the weak nature of the UK retail market.In Europe underlying like-for-like product sales grew by 6.9% as the benefits ofactions taken in prior years became apparent to customers who are now enjoyingoutstanding choice, service and value. Underlying operating profit fell to £58.7 million, a reduction of 7.4% on lastyear. This reflects a continuing improvement in the Rest of Europe's resultoffset by a reduction in profits for the UK & RoI due to the weak marketthroughout 2005. The underlying operating margin reduced to 13.0% (2005: 13.7%)due to the fall in UK & RoI profits. The interest charge increased to £2.0 million, versus £1.9 million last year. The Group recorded a profit on the disposal of UK property assets of £7.5million. During the year, as part of the ongoing strategy, the Group continuedto actively manage its store base to mitigate future rental increases. Theprofit on the disposal of property is recorded as an exceptional item by virtueof materiality although the Board anticipates that property profits willcontinue to be achieved on an ongoing basis. Group profit before taxation decreased by 11.4% to £64.2 million with basicearnings per share down 8.5% to 65.0 pence. Underlying earnings per share fellby 6.4% to 57.5 pence. Net debt reduced by £8.7 million to £29.2 million reflecting the strength of theGroup's underlying cash flow. UK and Republic of Ireland Operational Review Financial results 2006 2005 ChangeUK & RoI - Key Financial Results £'m £'m Sales 397.7 409.2 (2.8%)Gross profit 241.2 245.2 (1.6%)Gross margin % 60.6% 59.9% 0.7ppUnderlying operating profit 55.1 60.4 (8.8%)Underlying operating margin % 13.8% 14.7% (0.9pp) The business achieved an underlying operating profit of £55.1 million, areduction of 8.8% compared to last year. The business made a further £7.5million (2005 : £11.0 million) exceptional profit from the disposal ofproperty. Sales for the year declined by 2.8% to £397.7 million (2005: £409.2 million).Like-for-like store sales declined by 2.8%. Sales from net new spacecontributed growth of 2.8% although this was offset by the impact of the closureof the Allders concessions in February and March 2005. The like-for-like sales performance was very different across the two halveswhich was a mirror image of the performance in the year ending 30 April 2005.The first half saw a decline in like-for-like sales of 7.1% (2005 : 3.0%increase) whilst the second half improved by 1.9% (2005 : 5.4% decline). Trading performance at product level was mixed. Carpet sales, includingunderlay and associated products, increased by 4.3% whilst laminate sales weredown 38%. This reflects the market changes towards carpet at the expense oflaminate. Sales of ordered cut-length carpets were strong with more orderscoming through at higher average prices. Overall we believe that the business is continuing to grow market share and weremain focused on delivering a strong promotional programme providing customerswith outstanding choice and value. This programme was supported by an increasedinvestment in advertising during the year. We estimate that our market shareincreased by approximately 2% over the year to around 28% at the year-end. Despite the slowdown in sales the business has continued to improve its grossmargin which increased by 0.7 percentage points to 60.6%. This increasereflects further buying scale improvements, appropriate management ofpromotional pricing, together with reductions in stock losses. The improvedsales volume in the second half contributed to better rebates from the supplierswhich enabled us to deliver higher margins in the second half. These factorsshould allow us to continue to improve gross margin during the coming year by0.5 to 0.75 percentage points. Operating costs rose by 0.7% during the year to £186.1 million. The costs as apercentage of sales increased to 46.8% (2005: 45.2%). The major increases werein rent, rates and advertising. We announced last year that we expected our newdistribution network to result in reduced distribution costs. However, duringthe year we have focused our attention on improved customer service rather thancost reduction and this has, in our opinion, helped us to improve sales. We nowhave a stable platform from which to drive efficiencies. Looking ahead thereremain significant cost challenges in the areas of rents, rates and energy costswhich will continue to drive up our overall costs, pre new space, by anestimated 5% to 6%. Where appropriate we will continue to reduce our propertycosts through our relocation programme. Underlying operating margin was 13.8% (2005: 14.7%). This still represents agood performance for the business which we intend to increase as marketconditions improve towards our target of 15.0%. Store portfolio development We continue to develop our store portfolio and have opened 67 stores during theyear. The store make-up is now : Sq ftUK & RoI Store Base April 2005 Openings Closures April 2006 Target (Thousands) April 2006Large (> 6,000 sq ft) 345 27 (18) 354 350 3,476Small (< 6,000 sq ft) 28* 20 (2) 46 100 241Concessions 30* 20 (10) 40 100 105 403 67 (30) 440 550 3,822 * Includes a reclassification of three stores compared to 2005 accounts Our medium term target of 450 stores and 100 concessions remains unchanged. Wehave established a strong pipeline of store openings for next year, includingthe expansion of our concession business within House of Fraser. We willcontinue to close and relocate some of our larger stores on A1 parks in favourof smaller, cheaper stores. The Republic of Ireland remains an important market for us and we had 19 storestrading at the year-end. We opened two in the year and we plan to open afurther six in the current financial year. Product Our product offer remains a key competitive advantage. We offer a wide rangeespecially in carpets and vinyl. During the year there has been a gradualswitch back to carpets from laminate and we have focused our attention onimproving our carpet ranges for the customer. We have rebranded many of our "cut-length" carpets and have introduced new products that reflect changingconsumer choice. In the current year we expect colour and texture to becomemore important. The laminate market declined in 2005 by an estimated 16%. As the marketcontracts, we have continued to reduce our ranges in laminate and have insteadfocused on continued range improvements in both vinyl and rugs. We will look todevelop our rug sales further in the current year. Service We continue to invest in the three key service areas : • The in-store experience • The effectiveness of the supply chain • The quality of the fitting service In the stores we have continued to improve the layouts with the introduction ofdesignated areas for carpet and vinyl remnants. We have simplified the carpetranges and reduced the laminate ranges. We continue to train our staff incustomer service with a focus on providing customers with the best value productthat meets their needs. During the year we have focused significant attention on the supply chain toensure our new distribution centre is fast, efficient and reliable. Theoperation has improved throughout the year and we are delighted with the currentperformance levels and the overall service we are offering our customers. We continue to encourage the third-party floor covering fitters, to whom wesubcontract work, to be assessed and, if necessary, trained through a programmerun in association with the Flooring Industry Training Association. This is anongoing process as new fitters are always being introduced as our businessexpands. Since inception 1,751 fitters have been through the programme and over300 were assessed in the past year. All three elements of service have contributed to an improvement in our customerservice which is measured through the number of complaints we receive. We haveseen these reduce steadily over the last three years with a 2.8% reduction inthe past year. Whilst there are no reliable industry statistics for complaints,we believe we are significantly better than the competition and will continue totarget further improvements. IT systems investment During the year we completed the first phase of a major investment which isreplacing the core central and store IT systems. The investment totals £27million with the capital outlay spread over four years. The benefits includelower operating costs and improved management information. In the first phase we successfully implemented SAP, a leading software package,as our new central system covering buying and finance and received the "SAPquality award" for the quality of the implementation. We are now developing thenew store system which will replace the existing, old, system. We anticipatecommencing the roll-out during the second half of the current year and expect tocomplete the roll-out during 2008. People Providing outstanding customer service is only possible with the right peopleand we recognise that our people are key to our success. We employ 3,562 staffwithin the UK & RoI and seek to offer an attractive remuneration packagesupported with appropriate training and development. In April we launched a new Group Personal Pension Plan which is a definedcontribution plan open to all employees who have over three months' service.The Company matches the employees' contributions up to a maximum of 5%. We arevery pleased with the level of support this has enjoyed. In addition theCompany offers other benefits many of which are focused on rewarding longservice. During the current year we intend to focus more attention on our storemanagement so that we retain the strongest level of management in each store andwill continue our policy of recruiting the best employees in our market. The Company has a policy of equal opportunities which applies in relation torecruitment of all new employees and to the management of existing personnel.We offer all our staff training relevant to their roles and believe thisbenefits customer service. Summary and prospects The last year has been challenging but we have made significant progress. TheUK & RoI store base has been expanded, gross margins have improved and ourinvestments in distribution and information systems have been implementedsuccessfully. However, cost pressures, particularly in the areas of rent, ratesand energy, continue to increase our overall costs. We remain well placed tocontinue the growth seen in the second half into the current year and areconfident that we will continue to achieve our objectives. Specifically we willbe looking to : • Open approximately 60 new stores including 20 concessions• Improve market share• Deliver further improvements in customer service• Ensure our new IT store system is implemented successfully Rest of Europe Operational Review Financial Results 2006 2005 ChangeRest of Europe - Key Financial Results £'m £'m Sales 53.7 53.3 0.8%Gross profit 29.7 27.8 6.8%Gross margin % 55.3% 52.1% 3.2ppUnderlying operating profit 3.6 3.0 20.0%Underlying operating margin % 6.7% 5.6% 1.1pp The business recorded an underlying operating profit of £3.6 million, anincrease of 20% on last year. Included within the result are Polish start-upcosts amounting to £0.2 million. Underlying like-for-like product sales grew by 6.9% with all product categoriesgrowing. The prior year revenue comparative was affected by changes to revenuerecognition in respect of fitters' charges and product sales in accordance withthe Group's accounting policy. Gross margin improved by 3.2 percentage points on total sales and by 1.8percentage points on product sales due to the reduction in fitters chargeswithin sales as well as better supplier rebates. Costs rose by 5.2% to £26.1million due primarily to the growth in sales and store numbers coupled with thePolish start up costs. The underlying margin increased to 6.7% (2005: 5.6%) and we are confident thatthis will continue to improve towards our target of 10%. We expect Poland tobecome profitable once we have around ten stores. Store portfolio development The store expansion programme accelerated during the year with ten storesopening and one closure. The portfolio is as follows : Sq ftRest of Europe Store Base April 2005 Openings Closures April 2006 Target (Thousands) April 2006Netherlands 61 7 - 68 80 836Belgium 28 1 (1) 28 30 347Poland - 2 - 2 20 23 89 10 (1) 98 130 1,206 The plans for the current year include further expansion within Belgium, TheNetherlands and Poland and we are targeting another 12 stores across thesecountries. The sublet and modernisation programme was substantially completed during theyear and this helped to improve the look and feel of the stores whilst at thesame time adding complementary tenants. The business will now follow arefurbishment cycle similar to the UK & RoI which requires a minimal amount ofongoing capital investment. Poland The decision to enter the Polish market was taken following a review of severalCentral European options. In summary the key reasons for choosing Poland are : • The market is worth £600 million and is predicted to grow by 40% over the next five years; • There are 39 million inhabitants, with large markets in the bigger cities; • The retail parks are well developed but there is minimal presence of specialist flooring retailers; • There is access to a plentiful, well educated, industrious workforce who can deliver excellent customer service; Our two stores are located in prime sites on retail parks in Gdansk and Warsaw.The stores are branded "Carpetright" offering a take-away range of carpets,vinyl, laminate and rugs. We will develop the cut-length offer over the currentyear. Following the success of the initial stores we intend to open a further sixstores in the current year with a medium term target of 20 stores located in themajor towns. People We employ 529 staff in the Rest of Europe and enjoy high levels of loyalty dueto the benefits we offer in terms of remuneration and training. Our people area key source of differentiation from the competition and we ensure that theyreceive appropriate ongoing training. Within Poland we have engaged a PolishGeneral Manager who has recruited his own teams in both stores and these teamshave been trained and supported by resource from the UK, Belgium and TheNetherlands. Summary and prospects The performance in the Rest of Europe over the last year has been very strongand the proposition has become well established with customers. We will continue to expand the business in the current year and are looking to: • Open approximately 12 new stores including six in Poland• Grow market share in the three existing countries• Improve the operating margin towards our target of 10%• Explore the possibility of opening stores within new, appropriate markets. FINANCIAL REVIEW Financial results 2006 2005 % ChangeTaxation rate %- Underlying 31.4 31.0 (0.4pp)- Effective 31.2 32.0 0.8ppEarnings per share (pence)- Underlying 57.5 61.4 (6.4%)- Basic 65.0 71.0 (8.5%)Dividend per share (pence)- Proposed and paid 49.0 47.0 4.3%- Cover including property profits 1.33 1.51 (11.9%)- Cover excluding property profits 1.17 1.31 (10.7%) Net debt (£'m) 29.2 37.9 23.0%Pension deficit (£'m) 1.5 2.4 37.5%Interest cover (times) 33.1 39.2 (15.6%) Taxation The effective tax rate on profits is 31.2% (2005: 32.0%). The ongoing effectiverate is expected to remain slightly higher than the combined statutory rate forthe Group due to a number of disallowable items in relation to the Group'sfreehold properties and other small items. Earnings per share Basic earnings per share has reduced by 8.5% to 65.0 pence. This represents areduction in post tax earnings of 10.5% offset by a reduction in the averagenumber of shares of 2.0%. Underlying earnings per share (which removes theeffect of exceptional items) reduced by 6.4% to 57.5 pence. Dividend The Board is proposing a final dividend of 30.0p per share (2005: 28.0p), anincrease of 7.1%, bringing the full year dividend to 49.0p (2005: 47.0p) anincrease of 4.3%. Dividend cover, based on basic earnings per share is 1.33times (2005: 1.51 times). This is below the Group's stated policy to maintaindividend cover at 1.5 times but reflects the Board's confidence in the Group'songoing cash generating ability. Cash-flow and net debt Summary cash-flow 2006 2005 £'m £'mOperating cash inflows 86.4 72.9Net interest paid (1.7) (1.7)Taxation paid (12.9) (18.6)Dividends (31.9) (31.9)Payment for tangible and intangible assets (35.5) (33.2)Proceeds on disposal of tangible assets 19.0 17.0Termination costs of New Carpet Express - (1.5)Free cash-flow 23.4 3.0 Purchase of own shares (9.3) (8.5)Purchase of Mays Holdings Ltd (5.2) -Other (0.2) (0.2)Movement in net debt 8.7 (5.7)Opening net debt (37.9) (32.2)Closing net debt (29.2) (37.9) Net debt reduced year-on-year by £8.7 million to £29.2 million. This was afterfunding the acquisition of Mays (£5.2 million net of cash acquired) andsettlement of the share buyback undertaken in April 2005 (£9.3 million). TheGroup continues to be highly cash generative. Net interest payable increased to £2.0 million (2005: £1.9 million) due tohigher average net debt levels resulting from the share buyback and acquisitionof Mays early in the year. Interest is covered 33.1 times (2005: 39.2 times) byprofits before taxation. Accounting changes - Adoption of International Financial Reporting Standards(IFRS) Carpetright has adopted IFRS in the current year and, as a result, has restatedthe comparative financial information for the year ended 30 April 2005. Allcomparatives have been restated on a consistent basis, with the exception of IAS32 and IAS 39, as the Group took the option to defer implementation until 1 May2005. Details of the restatement are included in Note 11. The key areas of change are : - recognition of all employee benefit-related obligations, principally pensions and save as you earn (SAYE) share based payments - recognition of lease incentives received over the entire term of the lease rather than up to the first market rent review - tangible and intangible assets are reviewed for indications of impairment at a cash generating unit level with any impairment charge taken through the income statement - goodwill is no longer amortised but is subject to annual impairment - financial instruments are included at fair value - recognition of additional deferred tax liabilities and assets on temporary differences - principally rollover relief The overall impact of these changes in 2006 is a reduction in underlying profitbefore taxation of £1.6 million (2005: £0.8 million). Calendar Carpetright will issue its next trading announcement covering the 13 weeks to 29July 2006 on 8 August 2006. The pre first half closing announcement will bemade on 24 October 2006 and this will cover the first 25 weeks of the financialyear. The first half closes on 28 October 2006. CARPETRIGHT PLCPRELIMINARY STATEMENTSPeriod ended 29 April 2006 Consolidated income statementfor the period ended 29 April 2006 2006 2005 Note £m £mRevenue 2 451.4 462.5Cost of sales (180.5) (189.5)Gross profit 2 270.9 273.0Other operating income 9.2 13.3Administrative expenses (213.9) (211.9)Operating profit 2 66.2 74.4 Operating profit before exceptional items 58.7 63.4 Exceptional items: 3 - - Profit on disposal of property, plant and equipment and 7.5 13.0 investment property Goodwill impairment on termination of business - (0.5) Loss on disposal and termination of business - (1.5)Interest payable (2.5) (2.5)Interest receivable 0.5 0.6Profit before taxation 64.2 72.5Taxation 4 (20.1) (23.2)Profit for the financial period 44.1 49.3Attributable to:Equity holders of the parent 8 44.1 49.1Minority interest - 0.2 44.1 49.3 pence pence NoteBasic earnings per share 5 65.0 71.0Diluted earnings per share 5 65.1 70.9 Dividend per share paid and proposed 6 49.0 47.0 All material items in the income statement arise from continuing operations. Statement of recognised income and expensefor the period ended 29 April 2006 Note 2006 2005 £m £mProfit for the financial period 44.1 49.3 Actuarial gain on defined benefit pension scheme 8 0.9 0.2Fair value (losses)/gains taken to equity in respect of cash flow hedges: On first time adoption of IAS 32 and IAS 39 8 (0.1) - Current year 8 0.2 -Exchange differences in respect of hedged equity investments 8 0.8 (0.2)Taxation on items taken directly to or transferred from equity included in 8 (0.3) (0.1)this statementNet gains/(losses) recognised directly in equity 1.5 (0.1) Total recognised income and expense for the financial period 45.6 49.2Attributable to:Equity holders of the parent 45.6 49.0Minority interest - 0.2 45.6 49.2 Consolidated balance sheetat 29 April 2006 Note 2006 2005 £m £mAssetsNon-current assetsIntangible assets 34.3 23.1Property, plant and equipment 122.0 133.6Investment property 21.3 -Deferred taxation asset 1.0 1.1Derivative financial instruments 0.1 -Trade and other receivables 1.7 -Total non-current assets 180.4 157.8 Current assetsInventories 32.6 29.8Trade and other receivables 25.7 25.6Cash and cash equivalents 7 9.3 5.2 (ii)Total current assets 67.6 60.6 Total assets 248.0 218.4 LiabilitiesCurrent liabilitiesTrade and other payables (124.1) (110.4)Borrowings and overdrafts (13.3) (19.7)Current taxation liabilities (8.9) (5.4)Total current liabilities (146.3) (135.5) Non-current liabilitiesObligation under finance leases 7 (4.4) (2.1) (ii)Borrowings 7 (20.0) (21.2) (ii)Provisions (0.1) (0.1)Deferred taxation liabilities (19.7) (16.2)Retirement benefit obligation (1.5) (2.4)Total non-current liabilities (45.7) (42.0) Total liabilities (192.0) (177.5) Net assets 56.0 40.9 EquityShare capital 8 0.7 0.7Share premium 8 14.8 14.1Treasury shares 8 (0.1) (0.1)Other reserves 8 40.6 26.2Total equity: attributable to equity holders of the parent 8 56.0 40.9 Consolidated cash flow statementfor the period ended 29 April 2006 Note 2006 2005 £m £m Cash flows from operating activitiesProfit before taxation 64.2 72.5Adjusted for:Depreciation of property, plant and equipment 2 12.1 11.8Depreciation of investment property 2 0.4 -Amortisation of intangible assets 2 1.1 0.4Impairment of goodwill 2 - 0.5Share-based payments 2 0.4 0.1Profit on disposal of property, plant and equipment and investment property (7.5) (13.0)Loss on disposal and termination of business - 1.5Net interest payable 2.0 1.9Operating cash flows before movements in working capital 72.7 75.7(Increase)/decrease in inventories (1.9) 3.5Increase in trade and other receivables (5.3) (1.9)Increase/(decrease) in trade and other payables 20.9 (4.4)Cash generated by operations 86.4 72.9Interest paid (2.4) (1.9)Interest received 0.7 0.2Corporation taxes paid (12.9) (18.6)Net cash generated from operating activities 71.8 52.6 Cash flows from investing activitiesProceeds on disposal of property, plant and equipment and investment property 19.0 17.0Purchases of intangible assets (8.5) (5.8)Purchases of property, plant and equipment (20.9) (27.4)Purchases of investment property (6.1) -Acquisition of shares in subsidiary net of cash acquired 9 (5.2) -Expenditure on disposal and termination of business - (1.5)Net cash used in investing activities (21.7) (17.7) Cash flows from financing activitiesNet proceeds from issue of ordinary share capital to satisfy share option scheme exercises 0.7 -Purchase of own shares (1) (9.3) (8.5)Repayment of borrowings (1.5) (6.5)Receipt of funds from finance company 3.7 -Repayment of obligation under finance leases (0.7) -Dividends paid to shareholders 6 (31.9) (31.9)Net cash used in financing activities (39.0) (46.9) Net increase/(decrease) in cash and cash equivalents in the period 7 (i) 11.1 (12.0)Cash and cash equivalents at the beginning of the period 7 (4.2) 7.7 (ii)Exchange differences (0.1) 0.1Cash and cash equivalents at the end of the period 7 6.8 (4.2) (ii) (1) The cash outflow for the period ended 29 April 2006 includes a £9.3 millionpayment for shares bought back from the market before 30 April 2005, but notpaid for until the period ended 29 April 2006. For the purposes of the cash flow statement, cash and cash equivalents arereported net of overdrafts repayable on demand. Overdrafts are excluded fromthe definition of cash and cash equivalents disclosed in the balance sheet. Notes to the accounts 1 Basis of preparation Carpetright plc, ("the Company") is a company incorporated in England and Wales.The Company and its subsidiaries ("the Group") has previously prepared itsfinancial statements under United Kingdom Generally Accepted AccountingPrinciples ("UK GAAP"). Following a directive issued by the European Union("EU") in July 2002, the Group is required to prepare its consolidated financialstatements in accordance with International Financial Reporting Standards("IFRS") adopted by the EU. The financial statements have been prepared for thefirst time in accordance with IFRS effective at the period end as adopted by theEU, International Financial Reporting Interpretations Committee ("IFRIC")interpretations and with those parts of the Companies Act 1985 (as amended)applicable to companies reporting under IFRS. They comply with Article 4 of theEU International Accounting Standards ("IAS") regulation (EC1606/2002). Thedisclosures required by IFRS 1: First Time Adoption of International FinancialReporting Standards ("IFRS 1") concerning the transition from UK GAAP to IFRSare given in note 11 of these accounts. These disclosures include anexplanation of the exemptions offered by IFRS 1 which the Group elected toadopt. The consolidated financial statements have been prepared on the historical costbasis except for the valuation of derivative financial instruments. Theprincipal accounting policies followed are the same as those published by theGroup on 27 September 2005 and are available on the Group's website,www.carpetright.plc.uk (with the exception of the application of IAS 32:Financial Instruments Presentation (Revised 2005) ("IAS 32") and IAS 39:Financial Instruments Recognition and Measurement ("IAS 39")). Note 10 of theseaccounts describes the Group's treatment of these items in relation to IAS 32and IAS 39. The information is derived from the full Group financial statements for the 52week period to 29 April 2006 and does not constitute full accounts within themeaning of section 240 of the Companies Act 1985. The Group's Annual Report andFinancial Statements, on which the auditors have given an unqualified reportwhich does not contain a statement under section 237(2) or (3) of the CompaniesAct 1985, will be delivered to the Registrar of Companies in due course andposted to shareholders in July 2006. 2 Segmental analysis The Group's primary reporting segment is geographic, as this is the basis onwhich the Group is organised and managed. The Group does not report a secondarysegment on the basis of business operations because business operationsthroughout the Group are the same. The geographical sectors are: United Kingdom& Republic of Ireland ("UK & RoI"), Poland, Belgium and The Netherlands ("Restof Europe"). Central costs are incurred principally in the UK and areimmaterial. As such these costs are included within the UK & RoI segment.Segment revenue, expense and result include transfers between geographicalsegments. Such transfers are priced at arm's length and are eliminated onconsolidation. Analysis by geography: 2006 2005 UK & RoI Rest of Group UK & RoI Rest of Group Europe Europe £m £m £m £m £m £m Gross Revenue 400.7 53.7 454.4 411.8 53.3 465.1Inter-segmental sales (3.0) - (3.0) (2.6) - (2.6)Segment Revenue (by origin and destination) 397.7 53.7 451.4 409.2 53.3 462.5Gross profit 241.2 29.7 270.9 245.2 27.8 273.0Operating profit (before exceptional items) 55.1 3.6 58.7 60.4 3.0 63.4Segment result: 62.6 3.6 66.2 71.4 3.0 74.4 operating profit (after exceptional items)Net interest payable (2.0) (1.9)Profit before taxation 64.2 72.5Taxation (20.1) (23.2)Profit for the financial period 44.1 49.3 Other non-cash expenses:Depreciation of property, plant and equipment 9.9 2.2 12.1 9.5 2.3 11.8Depreciation of investment property 0.1 0.3 0.4 - - -Amortisation of intangible assets 1.1 - 1.1 0.4 - 0.4Impairment of goodwill - - - 0.5 - 0.5Share-based payments 0.4 - 0.4 0.1 - 0.1 Segment assets:Gross assets (by origin and destination) (1) 163.1 74.8 237.9 151.9 64.2 216.1Inter-segment balances (0.4) - (0.4) (4.0) - (4.0)Total segment assets 162.7 74.8 237.5 147.9 64.2 212.1 Segment liabilities:Gross liabilities (by origin and destination) 110.0 15.0 125.0 100.9 15.8 116.7(1)Inter-segment balances - (0.4) (0.4) - (4.0) (4.0)Total segment liabilities 110.0 14.6 124.6 100.9 11.8 112.7 Capital expenditure:Capital expenditure (by origin and 30.8 4.3 35.1 23.6 9.5 33.1destination) (1) Segment assets and liabilities exclude interest bearing balances as well asincome taxation assets and liabilities. 3 Exceptional items The £7.5m profit for the period ended 29 April 2006 was in respect of thedisposal of property, plant and equipment and investment property (2005: £11.0mprofit that comprises a £13.0m profit on disposal of property, plant andequipment, offset by £0.5m goodwill impairment and £1.5m loss on the disposaland termination of New Carpet Express Limited.) Taxation of £2.4m (2005: £4.4m) has been charged to the income statement inrespect of exceptional items. 4 Taxation 2006 2005 £m £m(i) Analysis of the charge in the periodUK current taxationCurrent period 16.5 18.2Adjustments in respect of prior periods - (0.3) 16.5 17.9Foreign current taxationCurrent period 0.2 0.2Adjustments in respect of prior periods - - 0.2 0.2 Total current taxation 16.7 18.1 UK deferred taxationCurrent period 2.6 3.6Adjustments in respect of prior periods - (0.1) 2.6 3.5Foreign deferred taxationCurrent period 0.8 1.6Adjustments in respect of prior periods - - 0.8 1.6 Total deferred taxation 3.4 5.1 Total taxation 20.1 23.2 The estimated effective tax rates on the profits of the Group are as follows: 2006 2005 % %Underlying tax rate 31.4 31.0Effective tax rate 31.2 32.0 The effective tax rate is defined as the actual taxation paid as a proportion ofthe accounting profit before taxation. The underlying tax rate is defined as theeffective tax rate after adjusting for, when relevant, profits or losses ondisposal of property, plant and equipment including investment property,termination of businesses and taxation adjustments in respect of one-off itemsand prior periods. 5 Earnings per share Basic earnings per share is calculated by dividing earnings attributable toordinary shareholders by the weighted average number of ordinary shares in issueduring the period, excluding those held by a discretionary trust in respect ofthe Group's LTIP, which are treated as cancelled. In order to compute diluted earnings per share, the weighted average number ofordinary shares in issue is adjusted to assume conversion of all potentiallydilutive ordinary shares. Those share options granted to employees andexecutive Directors where the exercise price is less than the average marketprice of the Company's ordinary shares during the period, represent potentiallydilutive ordinary shares. 2006 2005 Weighted Weighted average average number of Earnings per number of Earnings per Earnings shares share Earnings shares share £m 'm Pence £m 'm PenceBasic earnings per share 44.1 67.8 65.0 49.1 69.2 71.0Effect of dilutive share options 0.1 0.1 0.1 - 0.1 (0.1)Diluted earnings per share 44.2 67.9 65.1 49.1 69.3 70.9 Reconciliation of earnings per share excluding post tax exceptional items: 2006 2005 Weighted Weighted average average number of Earnings per number of Earnings per Earnings shares share Earnings shares share £m 'm Pence £m 'm PenceBasic earnings per share 44.1 67.8 65.0 49.1 69.2 71.0Less effect of exceptional items:Goodwill impairment on termination of - - - 0.5 - 0.8businessProfit on disposal of property plant (7.5) - (11.1) (13.0) - (18.9)and equipment and investmentpropertyLoss on disposal and termination of - - - 1.5 - 2.2businessTaxation 2.4 - 3.6 4.4 - 6.3Underlying earnings per share 39.0 67.8 57.5 42.5 69.2 61.4 The Directors have presented an additional measure of earnings per share basedon underlying earnings. This is in accordance with the practice adopted by mostmajor retailers. Underlying earnings is defined as profit before exceptionalitems and related taxation. 6 Dividends 2006 2005 Pence per share £m Pence per share £m Prior year final dividend paid 28.0 19.0 27.0 18.8Current year interim dividend paid 19.0 12.9 19.0 13.1 47.0 31.9 46.0 31.9 The Directors propose a final dividend in respect of the period ended 29 April2006 of 30.0p per share (2005: 28.0p) which is not included as a liability inthese financial statements. Subject to approval by the shareholders at theAnnual General Meeting, the proposed dividend will be paid on 22 September 2006to shareholders who are on the register of members on 8 September 2006. This would take the 2006 interim and final dividend payments to 49.0p (2005:47.0p). 7 Net debt Net debt incorporates the Group's borrowings, bank overdrafts and obligationsunder finance leases, less cash and cash equivalents. i) Reconciliation of net debt 2006 2005 £m £mNet debt at the beginning of the period (37.9) (32.2)Net increase/(decrease) in cash and cash equivalents 11.1 (12.0)(Increase)/decrease in borrowings and obligations under finance leases (1.5) 6.5Exchange differences (0.9) (0.2)Net debt at the end of the period (29.2) (37.9) ii) Components of net debt 2005 2006 Cash flow Exchange movement £m £m £m £mCash and cash equivalents per the balance sheet 5.2 4.1 - 9.3Bank overdrafts (9.4) 7.0 (0.1) (2.5)Cash and cash equivalents per the cash flow statement (4.2) 11.1 (0.1) 6.8Borrowings (10.3) (0.2) (0.3) (10.8)Borrowings (non-current) (21.2) 1.7 (0.5) (20.0)Obligation under finance leases (0.1) (0.7) - (0.8)Obligation under finance leases (non-current) (2.1) (2.3) - (4.4)Net debt (37.9) 9.6 (0.9) (29.2) 8 Total Equity Other Reserves Note Capital Share Share Treasury redemption Translation Hedging Retained capital premium shares reserve reserve reserve earnings Total £m £m £m £m £m £m £m £mAt 1 May 2004 0.7 14.1 - 0.1 - - 26.6 41.5 Actuarial gain on defined benefit - - - - - - 0.2 0.2pension schemeExchange differences in respect of - - - - (0.2) - - (0.2)hedged equity investmentsTaxation on items taken directly - - - - - - (0.1) (0.1)to or transferred from equitythrough the SORIEProfit for the financial - - - - - - 49.1 49.1periodTotal recognised income and - - - - (0.2) - 49.2 49.0expense for the financial periodShare-based payments net of - - - - - - 0.1 0.1taxationDividends 6 - - - - - - (31.9) (31.9)Purchase of own shares by employee - - (0.1) - - - 0.1 -share trustPurchase of own shares - - - - - - (17.8) (17.8)At 30 April 2005 0.7 14.1 (0.1) 0.1 (0.2) - 26.3 40.9 Fair value gains taken to equity - - - - - - (0.1) (0.1)in respectof cash flow hedges on first timeadoption of IAS 32 and IAS 39Restated balance at 1 May 2005 0.7 14.1 (0.1) 0.1 (0.2) - 26.2 40.8 - - - - -Actuarial gain on defined - - - - - - 0.9 0.9benefit pension schemeChange in fair value of cash - - - - - 0.2 - 0.2flow hedgesExchange differences in respect - - - - 0.8 - - 0.8of hedged equity investmentsTaxation on items taken directly - - - - - - (0.3) (0.3)to or transferred from equitythrough the SORIEProfit for the financial - - - - - - 44.1 44.1periodTotal recognised income and - - - - 0.8 0.2 44.7 45.7expense for the financial periodShare-based payments net of - - - - - - 0.7 0.7taxationDividends 6 - - - - - - (31.9) (31.9)Issue of ordinary share capital to - 0.7 - - - - - 0.7satisfy share option schemeexercisesAt 29 April 2006 0.7 14.8 (0.1) 0.1 0.6 0.2 39.7 56.0 9 Acquisition of subsidiary On 29 June 2005, the Group acquired 100% of the issued share capital of MaysHoldings Limited for a cash consideration of £6.5m. Directly attributableacquisition costs were immaterial. Mays Holdings Limited is the parent of agroup of companies with three actively trading stores whose principal activityis that of selling floor coverings both wholesale and retail. The transactionhas been accounted for by the purchase method of accounting. From the date of acquisition to 29 April 2006, the acquisition contributed £5.3mto turnover and £0.4m to profit for the period. It contributed £0.4m to the Group's net operating cash flow. No significant separable intangible assets were acquired. The differencebetween the fair value of the consideration paid and the fair value of the netassets acquired is recognised as goodwill. The goodwill paid relates to theimpact on revenue of the geographic location of the stores. Fair value and accounting policy Fair Book value alignment value £m £m £m Property, plant and equipment 0.2 - 0.2Inventories 0.9 (0.1) 0.8Trade and other receivables 0.2 0.2Cash and cash equivalents 1.3 1.3Trade and other payables (0.2) (0.2)Current taxation liabilities (0.3) (0.3)Provisions (0.1) (0.1)Net assets acquired 2.0 (0.1) 1.9 Purchased goodwill 4.6Total cost of investment 6.5 Satisfied by :Cash consideration 6.5 Net cash outflow arising on acquisition of shares in subsidiary:Cash consideration 6.5Cash and cash equivalents acquired (1.3)Cash flow on acquisition of shares in subsidiary net of cash acquired 5.2 If the acquisition of Mays Holdings Limited had been completed on the first dayof the financial period its contribution to Group revenue and profit for theperiod would have been £6.4m and £0.4m respectively. Post acquisition all of the assets and liabilities of Mays Holdings Limited weretransferred to the Company. 10 Financial instruments Adoption of IAS 32 and IAS 39 and comparative information The Group elected to apply the exemption in IFRS 1 paragraph 36A to defer theadoption of IAS 32 and IAS 39 to 1 May 2005. Accordingly the comparativeinformation for financial risk management is presented under UK GAAP. If theGroup had adopted IAS 32 and IAS 39 at 1 May 2004 interest rate swaps held atthat date would have been capitalised to the balance sheet through reserves andthe movement in fair value would have been posted to the income statement forthe period ended 30 April 2005. Hedge documentation in compliance with IAS 32and IAS 39 was put in place at 1 May 2005. 11 Transition to IFRS The notes below explain the way that IFRS has been adopted by the Group and theanalysis shows a reconciliation of profit andnet assets reported under UK GAAP as at 30 April 2005 to the revised net assetsand profit under IFRS as reported in these financial statements. Areconciliation of net assets is provided from UK GAAP to IFRS at the transitiondate, being 2 May 2004. i) IFRS 1 voluntary exemptions applied: IFRS 1 permits companies adopting IFRS to take certain exemptions from the fullretrospective application of IFRS at the date of transition. The Group electedto adopt the following voluntary exemptions: a) IFRS 3 Business Combinations The Group elected not to apply IFRS 3 Business Combinations retrospectivelyprior to the transition date. The effect of this is that goodwill arising onacquisitions prior to this date is carried at book value as stated under UK GAAPat the date of transition, net of impairment. b) IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 21 stipulates that on transition to IFRS the cumulative translationdifference included in reserves should be classified as a separate component ofequity. IFRS 1 allows first time adopters the option of not applying thispolicy retrospectively, effectively resetting the cumulative translationdifference for all foreign entities back to zero at the date of transition. TheGroup elected to adopt this option. c) IAS 32 Financial Instruments: Presentation (Revised 2005) and IAS 39Financial Instruments: Recognition and Measurement IFRS 1 offered the option of deferring the application of IAS 32 and IAS 39.The Group elected to take this exemption and accordingly is required to complywith IAS 32 and IAS 39 for the first time for the period commencing 1 May 2005.Comparative information is presented in accordance with UK GAAP. d) IAS 16 Property, Plant and Equipment The Group elected to reclassify the fair value of revalued property, plant andequipment on acquisition of the Belgian and Dutch subsidiaries as deemed cost,where deemed cost is the amount used as a surrogate for cost or depreciatedcost. e) IAS 19 Employee Benefits Under IAS 19 the cumulative actuarial loss at the date of transition isrecognised in reserves. The amended version of IAS 19 issued in December 2004allows companies to recognise actuarial gains and losses immediately in theSORIE. The Group has early adopted this amendment. ii) Other transitional provisions and elections made: a) IFRS 2 Share-Based Payments In accordance with the transitional provisions of IFRS 2 the Group has accountedfor equity-settled share-based payments granted after 7 November 2002, that hadnot vested at 1 January 2005 in compliance with the provisions of IFRS 2. b) IAS 19 Employee Benefits The Group elected to recognise movements in actuarial gains and losses, posttransition to IFRS, directly in equity through the SORIE. iii) Explanation of adjustments on transition to IFRS: General Since the date of the IFRS press release issued by the Group on 27 September2005, certain changes have been made to the transitional and comparative IFRSadjustments as announced. These changes have arisen due to furtherinterpretation of IFRS and due to changes in the bases of estimation. a) Reclassification in the income statement: Certain items presented below operating profit under UK GAAP are reported withinoperating profit under IFRS. The IFRS reclassification reported in the 2005income statement relates to the transfer of the profit on disposal of property,plant and equipment net of losses on disposal and termination of business frombelow the operating profit line to within operating profit. b) Reclassification on the balance sheet: Software and software development costs classified as tangible fixed assetsunder UK GAAP are reclassified to intangible assets where they meet therecognition criteria within IAS 38 Intangible Assets. iii) Explanation of adjustments on transition to IFRS (continued) c) Share-based payments Under UK GAAP the Group recognised an expense in respect of the differencebetween the exercise price and the market price of the contingent right toshares or share options. Under IFRS a cost is recognised in respect of the fairvalue of the award at grant date. This cost is accrued over the period thatbenefits are derived from the service of employees and over the vesting period. d) Pensions In accounting for the defined benefit pension scheme under IAS 19 as opposed toSSAP 24 the net defined benefit pension obligation is capitalised on transitionto IFRS together with the associated deferred taxation asset (which is offsetagainst the Group's deferred taxation liabilities). Actuarial gains and lossesare recognised in full in the SORIE. The Group is unable to identify its shareof the assets and liabilities of a multi-employer pension scheme in respect ofits Dutch employees and accordingly accounts for this scheme as a definedcontribution scheme in compliance with IAS 19. e) Operating lease incentives SIC 15 Operating Lease Incentives stipulates that lease incentives represent areduction in lease income or lease expense, which is spread over the lease term,unlike UK GAAP which recognises lease incentives over the period to the firstrent review. f) Finance leases Due to the nature of the properties the Group leases, leased premises have alife span of between 25 and 50 years. Buildings leased for 25 years or more maybe subject to a finance lease test under IFRS, in which the land and buildingselements of the lease payments are separated and the minimum lease payments ofthe land and buildings elements are compared to the relative fair values of thebifurcated land and buildings. The land element is classified as an operatinglease. The Group does not have any leases of land where title to the landpasses to the Group at the end of the lease. The buildings element isclassified as an operating or finance lease by applying the classificationcriteria in IAS 17 Leases. As a result of performing this test, the Group hascapitalised certain leases previously accounted for as operating leases. g) Goodwill Under UK GAAP goodwill is capitalised and amortised over its useful life whereasIFRS replaces amortisation with impairment reviews. An impairment test iscarried out at least at each reporting date or more frequently if conditionssuggest that the carrying value might be impaired. h) Taxation In accordance with IAS 12 Taxation, deferred taxation has been recognised onfair value adjustments to acquired assets and on rollover relief. i) Dividends IAS 10 Events After the Balance Sheet Date, dictates that dividends declaredafter the balance sheet are non-adjusting events. As a consequence they are notaccrued at year end, although the proposed dividend is disclosed in theseaccounts. j) Impairment of property, plant and equipment At each balance sheet date, the Group reviews its assets for indications ofimpairment. Where such indications exist an impairment test is performed bycomparing the asset's recoverable amount (the greater of the asset's net sellingprice and its value in use) to its carrying amount. Any excess of the carryingamount over the recoverable amount is charged to the income statement as animpairment loss. If the asset under review does not generate cash flows thatare independent from other assets, the impairment test is performed on the cashgenerating unit to which the asset belongs. The cash generating unit representsthe lowest level at which cash flows are independently generated. Theillustrative examples in IAS 36 Impairment of Assets suggest that for retailersthis is at the individual store level. Impairment reviews were carried out atstore level on transition to IFRS (as opposed to at an income generating unitlevel under UK GAAP). This resulted in a number of stores being impaired tozero. k) Other IAS 2 Inventory, stipulates that inventory expensed to cost of sales includesall costs associated with purchasing, converting and bringing inventory into itspresent location and condition. This includes volume related rebates receivedfrom suppliers. The IFRS adjustment reclassifies rebates from net operatingexpenses to cost of sales and accounts for the impact on the balance sheet ofsupplier contributions to the valuation of inventory. The reconciliation from UK GAAP to IFRS of profit, and recognised income andexpense for the period ended 30 April 2005 is presented below: Net (loss)/ TotalReconciliation of summary income gain recognisedstatement and SORIE for the period ended Profit for recognised income and30 April 2005 Operating Profit before the financial directly in expense for profit taxation period the SORIE the period £m £m £m £m £m Reported under UK GAAP 62.5 72.4 52.1 (0.2) 51.9 Adjusted for: Share-based payments (0.1) (0.1) (0.1) - (0.1)Pensions 0.1 - - 0.1 0.1Lease incentives (1.0) (1.0) (0.6) - (0.6)Finance leases 0.1 (0.1) (0.1) - (0.1)Deferred taxation - - (3.2) - (3.2)Depreciation on impaired stores 0.1 0.1 0.1 - 0.1Other 0.3 0.3 0.2 - 0.2 (0.5) (0.8) (3.7) 0.1 (3.6) Goodwill 0.9 0.9 0.9 - 0.9Reclassification of profit on disposal of property, 11.5 - - - -plant and equipment and loss on termination ofbusiness Total IFRS adjustments 11.9 0.1 (2.8) 0.1 (2.7) Reported under IFRS 74.4 72.5 49.3 (0.1) 49.2 The reconciliation from UK GAAP to IFRS of equity as at 30 April 2005 (the dateof the last UK GAAP financial statements) and 2nd May 2004 (the date oftransition to IFRS) is presented below: Reconciliation of equity at 30 April 2005 and 2 May 2004 respectively 2005 2004 Total Total £m £m Net assets reported under UK GAAP 42.5 40.3 Adjusted for: Changes to assetsDeferred income in respect of lease incentives 0.3 0.2Finance leases 1.6 1.7Goodwill 0.9 -Impairment of stores' property, plant & equipment (0.8) (0.9)Valuation of inventory (1.1) (1.3)Prepayments (0.4) (0.5) Changes to liabilitiesPensions (1) (2) (1.7) (1.8)Trade and other payables in respect of lease incentives (2) (4.8) (4.1)Finance Leases (2) (1.9) (1.9)Deferred taxation (13.2) (10.0)Dividends 19.0 18.8Other (2) 0.5 0.8 Total IFRS adjustments (1.6) 1.0 Net assets reported under IFRS 40.9 41.3 (1) The deferred taxation asset on pensions is offset against other deferred taxation liabilities(2) Net of taxation This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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