28th Jun 2005 07:00
HMV Group PLC28 June 2005 HMV Group plc, the UK's leading retailer of music, video and books, todayannounces its financial results for the 53 weeks ended 30 April 2005, andprovides an update on the Group's recent trading. Financial Highlights • Sales of £1,885.6m (up 3.8% to £1,862.5m on a comparable 52 week basis) including like for like sales growth of 1.1%• Profit before tax and exceptional items of £136.2m (up 9.9% to £129.3m on a comparable 52 week basis)• At constant exchange rates, and on a 52 week basis, sales up 4.7% and operating profit up 5.1%.• Adjusted earnings per share were 24.0p (up 11.8% to 22.8p on a comparable 52 week basis). Basic earnings per share were 23.9p.• Cash generation strong with net borrowings of £17.3m, a decrease of £40.5m• Final dividend of 5.1p per share making a total dividend of 6.8p per share, an increase of 17.2% on last year Operational Highlights • 42 new stores successfully opened during the year, comprising 23 in HMV UK & Ireland, eight in HMV Japan, seven in Waterstone's, three in HMV Canada and one in HMV Australia• Strong market share performance across the Group• New HMV digital downloading service to launch 5 September 2005, resulting from strategic partnership with Microsoft Corporation Trading Update (for the 7 weeks ended 18 June 2005) • Total sales up 2.3% with like for like sales down 1.0% against strong trading in the comparative period• UK trading conditions remain difficult, though HMV trend improved by key releases, and Waterstone's in line with expectations• Excellent start to the year for international businesses with like for like sales growth of 12.3% in HMV Canada and 3.4% in HMV Asia Pacific Alan Giles, Chief Executive Officer, said: "These results once more demonstrate the resilience of the Group's specialistretail formats in highly competitive conditions. Market share performance in allof our product categories and territories has been strong, reflecting the skillof our employees, the effectiveness of our operational systems and the authorityof our leading brands. " The UK trading environment became more difficult during the year and theoutlook for the consumer remains uncertain. However, interest in our productcategories remains buoyant, with first week sales of Coldplay's X&Y CD album thesecond highest in UK chart history, an improving DVD release schedule, HarryPotter and the Half-Blood Prince attracting significant advance orders and newhardware consoles poised to ignite the market for games software. The Groupremains committed to pursuing its plans for store expansion, and is well placedto benefit from an improvement in trading conditions when this arrives." Enquiries HMV Group Alan Giles Chief Executive Neil Bright Group Finance Director Paul Barker Head of Corporate Communications 01628 818300 Brunswick Susan Gilchrist William Cullum Eilis Murphy 020 7404 5959 PERFORMANCE OVERVIEW The period under review is the 53 weeks ended 30 April 2005, whereas the priorperiod covers the 52 weeks to 24 April 2004. The following commentary excludes,where applicable, the benefit of the 53rd week. Financial Highlights 53 weeks 52 weeks 52 weeks 52 weeks 2005 2005 2004 increase £m £m £m (decrease)--------------------------- ----------- --------- -------- --------Sales 1,885.6 1,862.5 1,793.5 3.8%Like for like sales % - 1.1% 1.8% -Operating profit 144.4 137.5 131.5 4.5%Finance charges* 8.2 8.2 13.9 (41.1%)Profit before tax* 136.2 129.3 117.6 9.9%Adjusted earnings per share** 24.0p 22.8p 20.4p 11.8%Total dividend per share 6.8p 6.8p 5.8p 17.2%--------------------------- ----------- --------- -------- -------- 2005 2004 Increase £m £m (decrease)--------------------------- --------- -------- ---------Underlying net borrowings 17.3 57.8 (70.1%)Free cashflow 74.8 119.8 (37.5%)Capital expenditure 55.4 54.2 2.2%Group stockturn 6.5x 6.3x 0.2x--------------------------- --------- -------- ---------Store numbers 588 559 29Average trading square footage 3.35m 3.26m 2.6%--------------------------- --------- -------- --------- * before exceptional finance charges of £2.7m in 2005** adjusted in 2005 for exceptional finance charges and underlying tax rate of29% CHIEF EXECUTIVE'S REVIEW Despite difficult economic conditions in the UK, this has been a year of goodprogress for HMV Group in which we delivered improved total sales and profit. Inrecognition of our strong cash generation, even after increased investment inthe expansion of our HMV businesses in the UK and Japan and Waterstone's, weaccelerated the return of cash to our shareholders through an increase in thedividend and by commencing on-market share buy-backs. Profitable new space HMV UK & Ireland's new store openings are the cornerstone of our medium termgrowth plans. This year we successfully opened 23 new stores, including our200th location, increasing year end trading space by 10%. On an individual storebasis, our new openings are smaller than the current chain average, as wecontinue to scope store size for small and medium-sized towns and suburbs, whichare the focus of our new openings. We consistently achieve a high rate of returnon these investments with the average cash payback on the capital invested insuch stores being comfortably inside two years. Therefore, we believe it isfirmly in the interests of our shareholders to continue, over the next four tofive years, to exploit this growth opportunity, taking us to at least 300stores. HMV Japan successfully opened eight new stores during the year, including its50th location. By taking best practice and learning from the HMV UK & Ireland"Blueprint" and applying this to its own programme of store openings, HMV Japanhas been able to meet the Group's targets for consistency and speed of return onnew store investments. Waterstone's is now entering a new phase of growth, after three years ofinvestment in the skills and infrastructure of the business. This year, wesuccessfully opened seven new stores, including a new 20,000 square feetdestination store on London's Oxford Street, and three stores in NorthernIreland, strengthening considerably our presence there. The performance of thesestores has given us the confidence to expand the Waterstone's store portfolio in2005/06. Market leadership Our specialist retail formats have this year once more demonstrated theircontinuing resilience in highly competitive conditions. Market share performancein all areas of our business has been strong, reflecting the skill anddedication of our employees, the effectiveness of our operational systems andthe strength of our leading brands. In particular, HMV UK & Ireland continued to gain market share in both music andDVD, demonstrating its ability to successfully differentiate itself from thegeneral retailers and other specialist competitors on the basis of range, storeenvironment, value for money and the advice and recommendations given by ouremployees. At key times of the year, HMV UK & Ireland has proved to be the primary driverfor any growth in the UK music market, whilst our stores continue to provide animportant retail channel to support new artists. Franz Ferdinand, Keane, TheKillers, Scissor Sisters and Kasabian went on to be among the year'sbest-selling artists after featuring in HMV UK & Ireland's new music promotions. DVD represents 44% of HMV UK & Ireland's sales, up from 37% in 2004, and duringthe year total sales grew by 27%. As the most rapidly adopted new entertainmentformat of all time, it is inevitable that DVD growth will begin to slow.However, third-party forecasts predict several more years of continuing growth,albeit at lower levels than we have seen to date. HMV UK & Ireland's strongmarket leadership gives us confidence that this category will continue to be akey driver of sales growth for the Group. We have strengthened our proposition in the games market and are pleased withthe early signs of success in both hardware and software sales. Although thisproduct category is currently only 7% of HMV UK & Ireland's sales, the newgeneration of consoles being brought to the market gives reason to be optimisticabout future growth in this area. In HMV Canada, our DVD sales increased substantially year on year as a result ofour continuing strategy to become the category's leading range authorityretailer. By introducing larger DVD departments into our stores, productivityhas improved markedly and the additional footfall that has been created hashelped to strengthen HMV Canada's sales and market share in music. HMV Japan improved market share in both music and DVD in a difficult market.However, household penetration of DVD hardware remains less well developed thanin Western Europe and North America, whilst the release schedule for Japanesemusic has remained weak. At Waterstone's, the retailing skills of our booksellers has continued tobenefit from further investment in training and development and ourmerchandising capabilities are now stronger than ever. We also have in placehighly efficient IT systems which have allowed us to enhance our ranges, whilstimproving our working capital efficiency. Digital downloading In December 2004, the Group entered into a strategic partnership with MicrosoftCorporation to develop software for HMV's new digital downloading service forthe UK. The market for paid-for digital downloads is at a very early stage and the Boardbelieves that now is the time to take a central role in this developing market.HMV's investment of £10m, divided equally between capital expenditure and launchmarketing, includes the development with Microsoft of a customised 'Jukebox,'which enables customers of the new HMV Digital service to find, buy, manage andenjoy their music all in one place. This software will be distributed via ournetwork of over 200 HMV stores in the UK, and online at www.hmv.co.uk HMV Digital, which will launch on 5 September 2005, will deliver our core brandattributes of range authority, knowledgeable advice and value, whilst leveragingMicrosoft's expertise and unparalleled track record for developingconsumer-friendly software for the widest possible online community. Musicdownloads from HMV Digital are compatible with the Windows Media Audio standardand therefore usable with over 75 portable players currently in the market, arange of which are being sold in our stores, assisted by the expert and trustedadvice of our employees. Management In October 2004, David Gilbert resigned from his position as Managing Directorof Waterstone's due to ill health. Brian McLaughlin, the Group's Chief OperatingOfficer, agreed to postpone his previously announced retirement, and wasreappointed Acting Managing Director of Waterstone's, a role he has combinedwith his duties as an Executive Director of the Group's Board. With the Grouphaving started a process to appoint a new Managing Director at Waterstone's,Brian McLaughlin has now confirmed he will retire from his executive role on 31December 2005. However, we are delighted that the Group's Board will continue tobenefit from his experience as he has agreed to remain on the Board as aNon-Executive Director. With experienced leadership now in place throughout all our businesses, and aproven senior team at Waterstone's, the Board does not intend to appoint a newGroup COO. The Group's Board will gain additional expertise, with theappointment of Steve Knott, Managing Director of HMV UK & Ireland, as anExecutive Director with effect from 1 August 2005. Outlook With the exception of the crucial trading period at Christmas, when ourbusinesses traded extremely successfully, consumer confidence in the UK weakenedduring the year and market conditions are likely to remain challenging in theforthcoming year. This has been in sharp contrast to much better tradingconditions in Ireland. Despite the Group's cautious view for the outlook, we do not expect to bedeterred from progressing our medium to long-term growth prospects. With suchconsistent and assured returns on our new store investments in HMV UK & Ireland,we plan to open a further 25 or so new stores during the new financial year. InWaterstone's, we intend to invest in up to 10 new store openings during the newfinancial year, strengthening our presence in prime shopping locations. We continue to run our businesses to tightly controlled financial and operatingdisciplines and are retaining our focus on stringent cost control. Havingestablished our plans for digital downloading, the Group is clear on theinvestment requirements for its existing businesses. Where appropriate, we willcontinue to invest as rapidly as we sensibly can in the improvement and organicexpansion of our existing businesses. The strength of our underlying cashflow continues to allow us to pursue organicinvestment opportunities and still reduce our borrowings. In addition tocontinuing investment in our existing businesses, we have been able to dealpromptly with a funding deficit on our defined benefit pension scheme andaccelerate the return of capital to our shareholders. The latter is beingachieved through both the progressive dividend policy which we outlined at thetime of our IPO and a programme of on-market share buy-backs which commenced inthe final quarter of the year. Trading Update 7 weeks to 18 June 2005 ----------------------- Like for like Total sales sales growth growth % %----------------------------- ----------- -----------HMV UK & Ireland (4.0) 1.6HMV Asia Pacific 3.4 6.4HMV North America 12.3 7.3----------------------------- ----------- -----------Total HMV (0.5) 3.4Waterstone's (2.8) (1.0)----------------------------- ----------- -----------HMV Group plc (1.0) 2.3----------------------------- ----------- ----------- Like for like sales growth and total sales growth are stated at constantexchange rates. In the first seven weeks of the new financial year like for like sales fell 1.0%against strong trading in the comparative period, with growth from new storesgiving total sales growth of 2.3%. Although UK trading conditions remain difficult, HMV UK & Ireland continued tooutperform a weak market and has shown an improved trend through June reflectinga stronger release schedule. Trading at Waterstone's is in line with ourexpectations as the business has targeted an improvement in margins through morefocused campaigns and promotions. Our international businesses have made a strong start to the year with like forlike sales in HMV Canada continuing to grow at an impressive 12.3% and anencouraging 3.4% in HMV Asia Pacific. OPERATING AND FINANCIAL REVIEW The 2004/05 financial year has been one of further progress for the Group. In achallenging economic environment, particularly in our UK businesses, the Groupcontinued to grow sales and profits and to generate cash. The success of theGroup's specialist retail formats was especially evident from the strong tradingperformance delivered over the key Christmas period. The period under review is the 53 weeks ended 30 April 2005, whereas the priorperiod covers the 52 weeks to 24 April 2004. The following commentary, whereapplicable, excludes the benefit of the 53rd week. Group sales for the 53 week period increased to £1,885.6m. On a comparable 52week basis, total sales rose by 3.8% to £1,862.5m, including like for like salesgrowth of 1.1% (HMV 1.0%, Waterstone's 1.3%). Exchange rate movements,particularly in the Japanese Yen and Canadian Dollar, had an adverse impact onthe Group's results. At constant exchange rates underlying growth in sales forthe 52 week period was 4.7%, reflecting an exchange impact of £15.9m on salesand £0.7m on operating profit. The Group's operating profit increased by £12.9m to £144.4m for the 53 weeks. Ona comparable 52 week basis this was up 4.5% to £137.5m, with the operatingmargin up to 7.4% from 7.3%. The improvement in operating margin reflected thebenefit of the closure of HMV USA. Overall product margins were largely flat,with a 30 basis points improvement in Waterstone's offset by a comparabledecline in HMV, due in part to the dilution effect of strong DVD sales in theinternational businesses. Store operating costs and administration expenses werealso well controlled and remained, as a percentage of sales, at the same levelas the prior year. Sales 52 weeks Constant 53 weeks 52 weeks 52 weeks Year on exchange Like for like 2005 2005 2004 year growth(1) growth(2) sales growth(3) £m £m £m % % %-------------- -------- -------- -------- --------- -------- ---------HMV- UK & Ireland 999.4 986.0 930.1 6.0 6.1 0.0- Asia Pacific 279.3 278.2 280.9 (1.0) 3.3 (1.7)- North America 160.8 158.3 153.6 3.1 5.2 13.5-------------- -------- -------- -------- --------- -------- ---------Total HMV 1,439.5 1,422.5 1,364.6 4.2 5.4 1.0-------------- -------- -------- -------- --------- -------- ---------Waterstone's 446.1 440.0 428.9 2.6 2.7 1.3-------------- -------- -------- -------- --------- -------- ---------Total Group 1,885.6 1,862.5 1,793.5 3.8 4.7 1.1-------------- -------- -------- -------- --------- -------- --------- Operating profit 52 weeks 52 weeks Constant 53 weeks 52 weeks 52 weeks 2005 2004 Year on year exchange 2005 2005 2004 % of % of growth(1) growth(2) £m £m £m sales sales % %------------ -------- ---------- ---------- ---------- ---------- --------- --------- HMV - UK & Ireland 100.7 96.8 95.5 9.8 10.3 1.3 1.3- Asia Pacific 7.3 7.0 7.6 2.5 2.7 (7.4) (1.5)- North America 8.0 7.6 2.4 4.8 1.6 217.0 223.7------------ -------- ---------- ---------- ---------- ---------- --------- ---------Total HMV 116.0 111.4 105.5 7.8 7.7 5.5 6.2------------ -------- ---------- ---------- ---------- ---------- --------- ---------Waterstone's 28.4 26.1 26.0 5.9 6.1 0.4 0.5------------ -------- ---------- ---------- ---------- ---------- --------- ---------Total Group 144.4 137.5 131.5 7.4 7.3 4.5 5.1------------ -------- ---------- ---------- ---------- ---------- --------- --------- (1). Year on year growth for the 52 week period compared with the corresponding period last year is based on results translated at the actual exchange rates being the weighted average exchange rates for the year ended 30 April 2005 and year ended 24 April 2004 respectively.(2). Constant exchange growth for the 52 week period compared with the corresponding period last year is based on the weighted average exchange rates for the 52 weeks ended 24 April 2004.(3). HMV Group's like for like sales performance measures stores that were open at the beginning of the previous financial year (i.e. open at the beginning of May 2003) and that have not been expanded, closed or re-sited during that time. It includes sales from internet sites in the UK, Japan and Australia. Like for like sales growth is calculated at constant exchange rates and is for the 52 week period. Stores resized (up or down) are excluded from like for like sales performance. Sales are only ever the net amount received.(4). The profit adjustment for the 53rd week reflects gross margin on sales less directly attributable variable operating costs. HMV UK & Ireland HMV UK & Ireland generated another year of sales and profit growth. While anexcellent Christmas performance underpinned the result, an increasingly subduedconsumer environment in the UK made an already competitive market ever morechallenging. However, the strength of the HMV brand and the resilience of ourspecialist retail proposition ensured a consistently strong market shareperformance. Total sales increased 6.0%, driven by the successful store opening programme,with like for like sales growth flat. The profit generation from new storeinvestment contributed to a £1.3m increase in operating profit to £96.8m.Operating margin was down by 50 basis points to 9.8% due to a fall in grossmargin of 20 basis points, underlying cost inflation and the start up costs ofHMV's digital downloading offer. The video market continues to grow in importance, with DVD now representing 44%of HMV UK & Ireland's total sales mix. With sales up 27% during the year, DVDremains a key sales driver for the business, and our focus remains on maximisingthe potential of the growing number of back catalogue titles, whilst maintaininga competitive offer on new mainstream releases. This strategy has helpedconsolidate HMV's position as the market leader in DVD, with share held despitean intensely competitive market. Bestsellers in the year included LittleBritain: The Complete First Series, Kill Bill Volume 2 and The Lord of the Rings- the Return of the King. Reflecting a continuing commitment to retaining its position as the UK'spre-eminent, market-leading music retailer, HMV further increased its musicmarket share by 1.9% points during the year, and outperformed the market byincreasing the volume of albums sold by over 6% whilst in the rest of the marketvolumes declined by almost 4% in the year. Bestselling CD albums of the year atHMV UK included Scissor Sisters, Keane and Maroon 5. The UK games market had another challenging year, due largely to a shortage ofhardware consoles over the key Christmas season. However, with next generationconsoles due to launch in the coming year, a foretaste of the potential growthopportunities was provided by the successful release in the final quarter of theNintendo DS console. In recognition of HMV UK & Ireland's retailing expertise across each of its mainproduct categories, HMV UK & Ireland was named 'Best Retail Chain' at the 2005Music Week awards, 'Retail Success of the Year' at the British Video AssociationAwards and 'General Retailer of the Year' in the MCV Industry Excellence Awardsfor the Games Industry. This is the first time that all of the majorentertainment industry awards have been held simultaneously by a singleretailer. 23 new stores, covering in excess of 85,000 square feet were opened in the UK &Ireland during the period, three stores were resited and one store was closed,bringing the portfolio to 201, with a further four new stores and one resiteopened since the year end. The focus for our new store openings continues to beon small and medium-size communities, and new store locations this year includedBirkenhead, Derry, Huddersfield, Windsor, Cardiff (resite) and Galway, Ireland.The pipeline for new stores remains strong, and in the new financial year weexpect to open around 25 new stores. HMV Asia Pacific HMV Asia Pacific operates through 91 stores, including 53 in Japan, 33 inAustralia and a total of five stores in Hong Kong and Singapore. Total salesincreased by 3.3% at constant exchange rates. This includes a like for likedecline of 1.7%, offset by the successful opening of eight new stores in HMVJapan, covering 40,000 square feet. The like for like sales decline predominantly reflects a difficult Japanesemarket. In music, while HMV gained share this was in the context of a totalmarket down some 11%, reflecting the continuing lack of large-selling domesticJ-pop releases. The adverse impact of the music market was not fully offset bythe growth in DVD, where the market is less well developed than in the UK andNorth America. However, the investment in new store openings in HMV Japan continued to achieveconsistent and rapid returns, and the business is beginning to benefit from the'Blueprint' project. During the year this focused on the identification ofbest-practice merchandising and ranging techniques, which are now beingimplemented across HMV Japan's store portfolio. Elsewhere in Asia Pacific, HMV Hong Kong delivered a significant improvement insales and profitability, but was offset by a difficult market in Australia,where a head office restructuring was undertaken at the end of the year toreposition the business for improved profitability. Operating profit in HMV Asia Pacific was down 1.5% on last year at constantexchange rates. This reflected gross margin dilution of 40 basis points due tothe growth of lower margin DVD sales, partly offset by good cost control. HMV Canada With 102 stores, including three opened during the period, HMV Canada operatesfrom over 430,000 square feet of retail space. The business had an outstandingyear, with total sales up by 15.3% at constant exchange rates, including likefor like growth of 13.5% and a record stockturn of 6.6x. Operating profitperformance was even more impressive, with growth of 75.6% at constant exchangerates. HMV Canada achieved sales growth in both music and DVD, reflecting improvementsin retail expertise and the brand's fast-growing reputation as a specialist DVDretailer. The total Canadian music market grew by almost 4% in the period, and HMV Canadasignificantly outperformed the market to increase its market share by 1.6%. Thiswas achieved through a combination of competitively priced new releases, strongback catalogue campaigns, effective advertising and an improved releaseschedule. This success was recognised by the Canadian Music Industry Awards,which named HMV Canada 'Best Retail Chain' for the seventeenth consecutive year,and by Canadian Entertainment Network, which for the first time awarded 'DVDRetail Chain of the Year' to HMV Canada. DVD now accounts for over 41% of HMV Canada's business and sales of the formatalso grew by 40% during the year. HMV Canada has continued to build on thefoundations laid last year to establish a strong reputation as a DVD specialistretailer with a particular focus on expanding the range, successfully targetedpromotional activities and improving relationships with suppliers. During the year the three remaining HMV USA stores were closed, as the Groupcompleted its exit from its legacy US business. At constant exchange rates andincluding the results of HMV USA, total sales for HMV North America increased by5.2%. Operating profit excluding the benefit of closing HMV USA, which recorded a£2.0m operating loss last year, increased by £3.2m (75.6% at constant exchangerates). This reflected the strength of the sales performance and excellent costcontrol, although the adverse mix effect of lower margins achieved on DVDdiluted gross margins by 70 basis points. HMV Canada is also pleased to announce the acquisition of the 40,000 square feetVirgin megastore located in Vancouver, where the business was previouslyunder-represented. This significant development, combined with the excellentprogress made during the year, sees HMV Canada well positioned for further salesand profit growth in the forthcoming year. Waterstone's In Waterstone's total sales grew by 2.6%, including like for like sales growthof 1.3%. This reflected strong sales growth in the first half combined with anexcellent Christmas period, followed by a weaker final quarter consistent withthe overall deterioration in UK consumer confidence. Waterstone's maintained itsmarket leading position although market share was slightly diluted over theyear, reflecting a planned, more targeted approach to campaigns and promotions. Operating profit increased by 0.4% to £26.1m, including £1.6m of pre-openingcosts relating to the new superstore on Oxford Street in London. Underlyingprofit before pre-opening costs was up 6.6% and net margin was up 0.2%reflecting improvements in gross margin partially offset by increased rentalcosts. Investments in technology, such as the Phoenix Version 9 inventorymanagement system, continued to deliver benefits with stockturn up to a record4.2 times from 3.9 times last year and the chain achieved negative averageworking capital for the first time in its history. In the three years since investment began in the skills and infrastructure ofthe business, Waterstone's has been transformed into one of the most efficientbooksellers in the world. Sales and operating profits have increased and averageworking capital has been reduced by £30m. Elements of the HMV blueprint havebeen successfully applied, particularly in areas such as stock management, rangeauthority, location strategy and training and development of employees. We arevery pleased with the progress made against our IPO commitment to restoreWaterstone's to growth, but can see opportunities for further improvements.These improvements including, for example, the implementation of space planningtechnology, will lead to increasing returns on our investments and an enhancedcustomer offer. The hard work and commitment shown by Waterstone's employees wasrecognised by the British Book Trade Awards, which for the first time in severalyears voted the chain Bookselling Company of the Year 2005. Seven new stores were successfully opened in the period and six small storeswere closed, bringing the portfolio at the year end to 194 stores trading from1.3m square feet. New locations included the 20,000 square feet superstore onOxford Street in London, Newry, Lisburn and Redditch. The results of the newstore opening programme enable us to look forward with confidence to furtherincreasing the chain's UK presence during the new financial year. Finance charges Finance charges before exceptional items fell £5.7m to £8.2m (2004: £13.9m).This reflected the impact on net borrowings of the Group's strong cashgeneration together with the benefit of a £50m early repayment of term debt inJuly 2004. The comparative also included a £0.8m cost of resetting £80m ofinterest rate swaps at a lower fixed rate, the benefit of which was in the 2005result. In March 2005 the Group successfully completed the refinancing of its borrowingfacilities and as a result £2.7m of deferred financing fees relating to theprevious facility were charged as a non-cash exceptional item. Full details ofthe refinancing are given below. Profit before taxation Profit before taxation and exceptional items for the 53 week period is £136.2m.On a comparable 52 week basis profit before taxation and exceptional items is£129.3m, an increase of £11.7m or 9.9%. Taxation The taxation charge for the financial year of £37.1m (2004: £35.4m) reflects thefull year effective tax rate of 28% applied to profit before taxation (2004:30%). The underlying tax rate is 29% of profit before taxation, which is lowerthan last year due to the utilisation of brought forward losses in HMV Canadaand which has been further reduced to 28% by the first time recognition of adeferred tax asset in Canada. Earnings per share Adjusted earnings per share for the 52 week period, excluding the effect ofexceptional items and reflecting the underlying tax rate of 29% is 22.8p, anincrease of 11.8% on the prior period of 20.4p. Diluted adjusted earnings pershare for the 52 weeks was 22.3p. On a 53 week basis basic EPS was 23.9p pershare and diluted basic EPS was 23.4p per share. Dividend The Board is recommending a final dividend of 5.1p per share in addition to the1.7p per share interim dividend already paid, bringing the total dividend forthe year to 6.8p, an increase of 17.2% on last year. This reflects thecontinuing strong cash flow of the Group and the Board's ongoing confidence inits future prospects. Subject to shareholder approval at the Annual General Meeting on 28 September2005, the final dividend will be paid on 7 October 2005 to shareholders on theregister at the close of business on 9 September 2005. Shares will be quotedex-dividend from 7 September 2005. Cashflow and net debt The Group continues to be a strong generator of cash, with a free cashflow of£74.8m after capital investment of £55.4m. Underlying net debt at 30 April 2005was £17.3m, a reduction of £40.5m on the prior year. This reduction was after a£4.4m special pension contribution and a £4.9m return of capital toshareholders, both discussed below. 2005 2004 £m £m---------------------------------------- ------------- ------------EBITDA (including 53rd week) 186.2 176.1Capital expenditure (55.4) (54.2)Working capital (outflow) inflow (7.5) 33.9Other (3.7) (1.0)Net interest paid (8.0) (12.2)Taxation (36.8) (22.8)---------------------------------------- ------------- ------------Free cashflow 74.8 119.8Dividends paid (25.0) (19.0)Special pension contribution (4.4) -Shares purchased for cancellation (4.9) ----------------------------------------- ------------- ------------Net cash inflow 40.5 100.8Opening net debt (57.8) (158.6)---------------------------------------- ------------- ------------Underlying closing net debt (17.3) (57.8)---------------------------------------- ------------- ------------ Working capital Working capital remains a key area of management focus. Group stockturn has nowreached 6.5 times, compared with 6.3 times last year, with increases arisingparticularly in HMV Canada and Waterstone's. However, the challenging tradingconditions in the final quarter, together with the timing impact on payments ofthe 53rd week, contributed to an overall £7.5m cash outflow from working capitalin the year. Capital expenditure Capital expenditure in the period was £55.4m compared with £54.2m last year.This included £25.1m on new stores and resites, reflecting the strategy ofmeasured expansion as a key growth driver for the Group. £13.9m was spent onrefitting the existing store portfolio and a further £9.0m was invested in ITsystems. Given the difficult trading environment we continue to monitorcarefully our capital expenditure, but remain confident of being able to pursuethe organic growth plans for our businesses. Refinancing As a result of the strength of the Group's cashflow since IPO, the Group wasable to complete a refinancing of its senior bank facilities during the year,putting in place a more efficient capital structure. A five-year £260m revolvingcredit facility was arranged from 31 March 2005, replacing an existing £150mrevolving credit facility, together with outstanding term debt of £160m whichwas repaid in full. Consequent to the refinancing, £2.7m of unamortised deferredfinancing fees have been written off in the current year as a non-cashexceptional interest charge. Fees of £0.7m incurred in the refinancing have beendeferred and will be amortised over five years. Return of Capital As a further consequence of the Group's strong cash generation, in January weannounced our intention to commence a programme of on-market share buy-backs.This programme began in April, with purchases to date of 2.0m shares at a costof £4.9m, all of which have been subsequently cancelled. The programme iscontinuing and will take into account the ongoing investment requirements of theGroup. Pensions The Group has a number of pension schemes in operation. These primarily includedefined benefit arrangements for approximately 1,000 employees almost entirelyin the United Kingdom. Throughout the year the Group contributed to the defined benefit scheme at arate of 12.8% of pensionable pay, resulting in a SSAP 24 pension cost and cashcontributions in 2004/05 of £3.0m (2003/04: £3.0m). Under FRS 17, the totalillustrative pension cost of the Group's defined benefit arrangements is £4.4m. In respect of the funding position of the HMV Scheme, the most recentlycompleted actuarial valuation as at 30 June 2004 identified a deficit of £11.5mon assets of £43.9m. This deficit is being funded through three contributions of£4.4m each on 31 March 2005, 31 May 2005 and 31 May 2006. Due to a change inactuarial assumptions, the Group has also committed to increasing its employer'scontributions to a rate of 14.9% of pensionable pay from 1 July 2005 and themembers' contribution rate is to increase from 4% of pensionable salaries to 5%with effect from 1 July 2005. Calculated under FRS 17, at the year end the HMV Scheme would show a deficit,net of deferred tax, of £20.2m. However, the potential impact on the Group ofFRS 17 or the comparable international standard, IAS 19, is limited since theHMV defined benefit scheme was closed to new joiners from 1 January 2002 andcurrently has just 81 pensioners. International Financial Reporting Standards ("IFRS") As required by European Union legislation, the Group will first publish itsfinancial statements under IFRS for the 26 weeks ended 29 October 2005 and the52 weeks ended 29 April 2006. The adoption of IFRS is not expected to have anyimpact on the management of the business or the Group's cashflows. It isestimated that the adoption of IFRS will have a small adverse impact on reportedprofit before taxation. For the 53 weeks ended 30 April 2005 this is estimatedto be between £5.0m to £5.5m, based on the financial reporting standards inissue, which remain subject to possible change as the definition andinterpretation of IFRS continues to evolve. The change reflects adjustments in accounting for employee benefits includingshare based payments and pension schemes and accounting for operating leaseincentives. The Group intends to publish full information on the opening balancesheet and restated 2004/05 results at the time of the Annual General Meeting andTrading Update in September 2005. Notes for editors HMV Group is one of the world's leading retailers of music and video and theleading retailer of books in the United Kingdom and Ireland in terms of totalsales. As of 30 April 2005 it operated 394 HMV stores selling music, video andgames in seven countries and 194 Waterstone's stores, principally in the UnitedKingdom and Ireland. All of the Group's operations, both in the United Kingdomand internationally, are wholly owned. HMV Group Web Sites hmvgroup.comhmv.co.ukhmv.co.jphmv.com.auhmv.comwaterstones.co.uk Supporting Financial Information Page NumberConsolidated Profit and Loss Account 13Statement of Total Recognised Gains and Losses 14Reconciliation of Movements in Shareholders' Funds 14Consolidated Balance Sheet: 30 April 2005 15Consolidated Cashflow Statement 16Notes to the Financial Statements 17 Consolidated Profit and Loss Account 53 weeks ended 52 weeks ended 30 April 2005 24 April 2004 Notes £m £m------------------------------------- -------- ------------ -------------Sales 2 1,885.6 1,793.5Cost of sales (1643.8) (1,567.1)------------------------------------- -------- ------------ -------------Gross profit 241.8 226.4Administrative expenses (97.4) (94.9)------------------------------------- -------- ------------ -------------Group operating profit 2 144.4 131.5Net finance charges(3) 3 (10.9) (13.9)------------------------------------- -------- ------------ -------------Profit on ordinary activities beforetaxation 133.5 117.6Taxation on ordinary activities 4 (37.1) (35.4)------------------------------------- -------- ------------ -------------Profit attributable to members of theholding company 96.4 82.2Ordinary dividend 6 (27.4) (23.4)------------------------------------- -------- ------------ -------------Transferred to profit and loss reserve 69.0 58.8------------------------------------- -------- ------------ -------------Earnings per share - basic 7 23.9p 20.4p------------------------------------- -------- ------------ -------------Earnings per share - adjusted 7 24.0p 20.4p------------------------------------- -------- ------------ -------------Earnings per share - diluted 7 23.4p 20.2p------------------------------------- -------- ------------ -------------Earnings per share - diluted adjusted 7 23.5p 20.2p------------------------------------- -------- ------------ ------------- (1) All results relate to continuing activities.(2) There is no difference between the results stated above and their historical cost equivalents.(3) Finance charges for 2005 includes exceptional finance charges of £2.7m - see note 5 for details(4) Adjusted earnings per share excludes the effect of exceptional items and reflects the underlying tax rate of 29%. Statement of Total Recognised Gains and Losses 53 weeks ended 52 weeks ended 30 April 2005 24 April 2004 £m £m £m £m-------------------------------------------- ------- ------ ------ ------Profit for the period 96.4 82.2Currency retranslation 0.4 1.8Exchange gains (losses) on foreign currencyborrowings (net of tax) 3.9 (1.2)-------------------------------------------- ------- ------ ------ ------Other recognised gains and losses 4.3 0.6-------------------------------------------- ------- ------ ------ ------Total recognised gains and losses relatingto the period 100.7 82.8-------------------------------------------- ------- ------ ------ ------ Reconciliation of Movements in Shareholders' Funds 53 weeks ended 52 weeks ended 30 April 2005 24 April 2004 £m £m---------------------------------------------- ------- --------Profit for the period 96.4 82.2Ordinary dividend (27.4) (23.4)Other recognised gains and losses 4.3 0.6Proceeds of issue of equity shares 1.2 0.2Shares purchased for cancellation (4.9) -Purchase of own shares by EBT (2.3) (1.6)UITF 17 accrual for share-based bonus scheme 1.6 0.9---------------------------------------------- ------- --------Net increase in shareholders' funds for theperiod 68.9 58.9---------------------------------------------- ------- --------Opening shareholders' funds (73.5) (132.4)---------------------------------------------- ------- --------Closing shareholders' funds (4.6) (73.5)---------------------------------------------- ------- -------- Consolidated Balance SheetAs at: 30 April 24 April 2005 2004 £m £m-------------------------------------------------------- ---------- --------Fixed assetsIntangible fixed assets 2.0 2.0Tangible fixed assets 168.1 156.4-------------------------------------------------------- ---------- -------- 170.1 158.4-------------------------------------------------------- ---------- --------Current assetsStocks 157.9 157.5Debtors 82.3 69.4Investments and short term deposits 2.9 2.0Cash at bank and in hand 44.7 175.2-------------------------------------------------------- ---------- -------- 287.8 404.1-------------------------------------------------------- ---------- --------Creditors: amounts falling due within one yearBorrowings (64.2) (48.2)Other creditors (390.6) (394.6)-------------------------------------------------------- ---------- -------- (454.8) (442.8)-------------------------------------------------------- ---------- --------Net current liabilities (167.0) (38.7)-------------------------------------------------------- ---------- --------Total assets less current liabilities 3.1 119.7-------------------------------------------------------- ---------- --------Creditors: amounts falling due after more than one yearBorrowings - (182.3)Other creditors (0.2) (0.1)-------------------------------------------------------- ---------- -------- (0.2) (182.4)-------------------------------------------------------- ---------- --------Provisions for liabilities and charges (7.5) (10.8)-------------------------------------------------------- ---------- -------- (4.6) (73.5)-------------------------------------------------------- ---------- --------Capital and reservesCalled up share capital 4.0 4.0Share premium account 309.6 308.5Profit and loss account 333.2 263.2Goodwill previously written-off to profit and loss account (647.5) (647.5)Capital reserve 0.3 0.2Other reserves (4.2) (1.9)-------------------------------------------------------- ---------- --------Equity shareholders' funds (4.6) (73.5)-------------------------------------------------------- ---------- --------Memo:Reported net borrowings (16.6) (53.3)Deferred financing fees (0.7) (4.5)-------------------------------------------------------- ---------- --------Underlying net borrowings (17.3) (57.8)-------------------------------------------------------- ---------- -------- Consolidated Cash flow Statement 53 weeks ended 52 weeks ended 30 April 2005 24 April 2004 £m £m---------------------------------------------- ---------- --------Net cash inflow from operating activities 173.3 210.6---------------------------------------------- ---------- --------Returns on investments and servicing of finance: Net interest paid (8.0) (12.2)Costs incurred in connection with the raisingof debt (0.7) ----------------------------------------------- ---------- --------Net cash outflow from returns on investmentsand servicing of finance (8.7) (12.2)---------------------------------------------- ---------- --------Tax paid (36.8) (22.8)Net cash outflow from capital expenditure (55.6) (54.1)Equity dividends paid to shareholders (25.0) (19.0)---------------------------------------------- ---------- --------Net cash inflow before management of liquidresources and financing 47.2 102.5---------------------------------------------- ---------- --------Management of liquid resources (1.0) (0.3)---------------------------------------------- ---------- --------New loans/ movements in short-term facilities 59.7 -Loan repayments (225.0) (25.0)Proceeds of issue of equity shares (net ofexpenses) 1.2 0.2Purchase of own shares by EBT (2.3) (1.6)Company shares purchased for cancellation (4.9) ----------------------------------------------- ---------- --------Net cash outflow from financing and managementof liquid resources (172.3) (26.7)---------------------------------------------- ---------- --------(Decrease) increase in cash in the period (125.1) 75.8---------------------------------------------- ---------- -------- Reconciliation of operating profit to net cash inflow from operating activities £m £m------------------------------------------------------- ---------- --------Group operating profit 144.4 131.5Depreciation charge 41.7 44.6Loss on disposal of fixed assets 0.3 0.1Movement in provisions (2.8) (0.4)UITF 17 accrual for share-based bonus scheme (non-cash) 1.6 0.9Special pension contribution (4.4)(Increase) decrease in working capital (7.5) 33.9------------------------------------------------------- ---------- --------Net cash inflow from operating activities 173.3 210.6------------------------------------------------------- ---------- -------- Reconciliation of net cash flow to movement in net debt £m £m------------------------------------------------------- ---------- --------(Decrease) increase in cash (125.1) 75.8Cash outflow from financing (excluding movements in equityand senior preference share capital) 165.3 25.0Cash outflow from short-term deposits 1.0 0.3------------------------------------------------------- ---------- --------Change in net debt resulting from cash flows 41.2 101.1Exchange differences (0.8) (0.3)Movement in deferred financing fees (3.7) (1.9)------------------------------------------------------- ---------- --------Decrease in net debt 36.7 98.9Opening net debt (53.3) (152.2)------------------------------------------------------- ---------- --------Closing net debt (16.6) (53.3)------------------------------------------------------- ---------- -------- Notes to the Financial Statements 1. Accounting Policies The financial statements have been prepared in accordance with applicableaccounting standards under the historical cost convention. The principalaccounting policies have been applied consistently throughout the reportingperiod. 2. Segmental Analysis 2005 2004 ------------------- ------------------- Turnover Operating Operating Turnover Operating Operating profit assets profit Assets (liabilities) (liabilities) ------------- -------- -------- -------- -------- -------- -------- £m £m £m £m £m £mBy class ofbusiness:HMVUK & Ireland 999.4 100.7 (22.7) 930.1 95.5 (44.0)Asia Pacific 279.3 7.3 15.9 280.9 7.6 15.5North America 160.8 8.0 (9.2) 153.6 2.4 (10.2)------------- -------- -------- -------- -------- -------- -------Total HMV 1,439.5 116.0 (16.0) 1,364.6 105.5 (38.7)Waterstone's 446.1 28.4 66.0 428.9 26.0 56.0------------- -------- -------- -------- -------- -------- -------Total 1,885.6 144.4 50.0 1,793.5 131.5 17.3------------- -------- -------- -------- -------- -------- -------Financecharges (10.9) (13.9)------------- -------- -------- -------- -------- -------- -------Profit beforetaxation 133.5 117.6------------- -------- -------- -------- -------- -------- ------- By origin:United Kingdom 1,373.9 119.6 43.6 1,293.5 113.7 13.0Rest of Europe 71.6 9.5 (0.3) 65.5 7.8 (1.0)Asia Pacific 279.3 7.3 15.9 280.9 7.6 15.5North America 160.8 8.0 (9.2) 153.6 2.4 (10.2)------------- -------- -------- -------- -------- -------- -------Total 1,885.6 144.4 50.0 1,793.5 131.5 17.3------------- -------- -------- -------- -------- -------- -------Financecharges (10.9) (13.9)------------- -------- -------- -------- -------- -------- -------Profit beforetaxation 133.5 117.6------------- -------- -------- -------- -------- -------- ------- (1) Turnover analysed by destination is not materially different from turnover analysed by origin.(2) Turnover excludes transactions made between companies within the Group. 3. Net finance charges 2005 2004Related Shares:
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