28th Jun 2007 07:02
HMV Group PLC28 June 2007 HMV Group plc, the UK's leading retailer of music, DVD and books, todayannounces its financial results for the 52 weeks ended 28 April 2007, andprovides an update on the Group's recent trading and progress on strategicinitiatives. Financial Highlights - Sales of £1,894.5m (up 3.8%), inclusive of a 3.5% fall in like for like sales.- Profit before tax and exceptional items of £48.1m (2006: £98.2m).- Exceptional charges totalled £26.5m (2006: £18.0m).- Profit before tax of £21.6m (2006: £80.2m).- Adjusted eps 8.7p (2006: 17.4p). Basic eps 4.0p (2006: 14.0p).- Net debt of £130.6m (2006: £15.6m), after acquisition of Ottakar's plc for £90.2m including debt.- Final dividend of 5.6p making a total dividend of 7.4p (2006: 7.4p). Trading Update (for the 8 weeks ended 23 June 2007) - Like for like sales up 3.8%, including an 8.8% increase in HMV UK & Ireland.- Gross margin improvements in line with expectations. Strategy Update - Strategic plans announced on 13 March underway and on track.- Completed review of strategic options for HMV Japan. Now in discussions which may lead to a disposal. Simon Fox, Chief Executive, said: "The turnaround plan we announced in March is progressing well and we are ontrack. The benefits of our actions are beginning to come through and arereflected in the good start we have made to our new financial year." Enquiries HMV Group Simon Fox Group Chief Executive 01628 818355 * Neil Bright Group Finance Director 01628 818355 * Paul Barker Head of Corporate Communications 01628 818355 *Brunswick Susan Gilchrist / Eilis Murphy /Alex Tweed 020 7404 5959 * All enquiries on 28 June 2007 should be directed via Brunswick. Chairman's Statement The year was difficult for HMV Group, and we performed below our expectations. Twelve months ago, I said that we anticipated significant changes in ourmarkets, and that the Group had begun of period of transition as we prepared ourbusinesses to be more resilient to the twin challenges of rapidly changingconsumer behaviour and intense competition from newer channels. Market shiftswere even more severe than predicted. Physical sales of music on the high streetremain under the greatest pressure, although we saw the positive impact of oursimplified, lower pricing. In books, the supermarkets and the Internet gainedshare. However, Ottakar's was successfully integrated with the Waterstone'sbusiness during the year, and this acquisition reinforces our belief in theimportance of market leadership. The Group's profit before tax and exceptional items was £48.1m. Basic earningsper share were 4.0p and earnings per share before exceptional items were 8.7p.The Board has recommended a final dividend of 5.6p per ordinary share. Togetherwith the interim of 1.8p per share, the total dividend for the year is 7.4p, thesame as last year. A great deal of our attention has been focused on leadership talent on the Boardand in critical management positions. Foremost amongst these appointments wasthe naming of Simon Fox as CEO in September 2006. Simon joined from KesaElectricals plc, where he was Chief Operating Officer. His knowledge andexperience in deep-range retailing across several sales channels gives the Boardconfidence that we have the right executive leadership to effect a programme ofchange which will ultimately transform the Group into a world-classmulti-channel retailer. Further changes to the Group Board were: • Christopher Rogers, Group Finance Director Whitbread plc, joined as a non-executive Director and Chairman of the board Audit Committee in October 2006, and brings a wealth of relevant experience to our Group.• Alan Giles, former CEO, and Brian McLaughlin, non-executive Director, retired from the Board in September 2006.• Steve Knott, MD of HMV UK & Ireland, left the Group and retired from the Board in January 2007. The role of Managing Director of HMV UK & Ireland has been assumed by the Group's CEO. A strategic and operational review was completed in March 2007. The Boardbelieves the Group has a comprehensive and well-balanced strategy to better copewith the challenges that lie ahead. This strategy has three important strands:protecting our core business, saving costs aggressively and growing in newchannels and related products. The environment for entertainment and books retailing will remain highlycompetitive. However, with aggressive plans, focused leadership and thecontinued commitment and dedication of our employees, our resilient brands willstrengthen their market positions and performance as they comprehensivelysatisfy the preferences of our customers. Chief Executive's Review Our markets are changing profoundly. Entertainment is being generated andconsumed in entirely different ways, putting pressure on traditional retailspace and traffic. Similar trends are also evident in the books market. In HMV UK & Ireland, new pricing initiatives implemented during the year didhelp to reverse the earlier loss of market share in our stores. And in both HMVand Waterstone's we accelerated our online businesses to satisfy the increasingconsumer preference for the Internet as a channel to shop. However, the resultswere insufficient to offset the pace and scale of underlying decline, which isreflected in our disappointing financial performance for the year. The Group now has a strategy which reflects the changing market structure andexploits the strengths of the HMV and Waterstone's brands. Our three-year planis to: - drive cost efficiency- protect and revitalise our core business- grow revenue from new channels. Driving cost efficiency The first strand of our strategy is to save by fundamentally restructuring ourcost base. We are streamlining the supply chains for HMV UK & Ireland andWaterstone's by delivering products to single, cross-dock locations instead ofto each and every store. We are also exploiting Group synergies by centralisingthe procurement of goods not for resale and consolidating certain back officefunctions. We expect these initiatives to deliver further cost savings of £40mper year in 2010. Protecting and revitalising our core retail business The revitalising of our core retail business is underway. In HMV UK & Irelandour mix of products is being broadened to include portable digital audioproducts, including MP3 / 4 players, DAB radio and a range of associatedaccessories. We expect such products to become 13% of store sales by 2010. Inaddition, 3, the UK's leading retailer of music-enabled mobile phone handsets,will open concessions in a number of HMV stores. These initiatives will furtherreduce our dependence on the declining physical music category. At Waterstone's,as market growth continues to come mainly from new channels, we are devotinggreater space to children's books, which is a part of the market less prone toonline purchasing, and we expect the children's category to become 18% of theWaterstone's mix by 2010. We are also adding high quality gift stationery to theWaterstone's store offer. As shopping patterns evolve, we clearly need to improve our understanding ofconsumer behaviour. We must do more to encourage the continued patronage of ourregular and highest spending customers. To these ends, we are launching aninnovative loyalty programme that will operate across both brands and all saleschannels. Rewards money cannot buy will be tailored to the holder's taste inentertainment or books. To further protect our core retail business, we are evolving the HMV storeformat to become more inspiring places to shop, with refreshment hubs containingonline access and the ability to browse our vast catalogue of products and toeven burn music onto CD or memory devices. There will also be spaces toexperience the latest games and consoles. Growing revenue from new channels As we protect, we must grow. And to grow, we will adapt to the new multi-channelenvironment. Here we are investing in our existing transactional sites,hmv.co.uk and Waterstones.com, by integrating them into our stores andincreasing the level of marketing support they receive. By 2010 we expecthmv.co.uk to become 20% of HMV UK's sales and Waterstones.com to represent 9% ofWaterstone's sales. HMV's digital offer will be integrated within hmv.co.uk toprovide customers with a unique choice of physical or downloadable product froma single site. In recognition that today's consumer is absorbing entertainmentcontent from non-traditional channels and sources, leveraging the strongrelationships it has with suppliers, HMV UK will launch a new social networkingwebsite. Delivering film, music and games-related content to its onlinecommunity, our new site will allow users to create home pages, meet like-mindedpeople and access film previews, behind-the-scenes footage and musicperformances. Leadership is vital in these product markets. These requirements are metunquestionably by both brands in the UK and by our overseas HMV businesses inCanada, Hong Kong and Singapore. However, HMV Japan does not benefit from marketleadership and, consequently, we have reviewed our strategic options for thisbusiness. We are now in discussions which may or may not lead to a disposal ofthis business. Our recent performance belies the fact that this Group has two of the strongestand most identifiable retail brands on the high street, knowledgeable staff whogive high levels of service, and prime store locations that generate over 200million visitors per year in the UK alone. By combining these brand strengthswith our comprehensive strategic plan we are confident that we have solidfoundations on which to build the recovery of the Group. Outlook Trading update 8 weeks to 23 June 2007------------------------------------ ----------- ----------- Like for like Total sales sales growth growth % %---------------- ----------- -----------HMV UK & Ireland 8.8 12.6HMV Asia 1.4 4.1HMV Canada (5.4) (3.5)---------------- ----------- -----------Total HMV 5.2 8.4Waterstone's 1 0.6 40.2---------------- ----------- -----------HMV Group plc 1 3.8 15.8---------------- ----------- ----------- Like for like sales growth and total sales growth are stated at constantexchange rates. 1. Like for like sales growth of Waterstone's and HMV Group plc is adjusted to include in the comparative period the sales of Ottakar's plc, which was acquired on 3 July 2006. A good start has been made to the new financial year, with positive like forlike sales growth in HMV UK & Ireland and in Waterstone's, albeit reflectingsofter comparables from a year ago when trading was adversely impacted by theWorld Cup. HMV UK has continued to increase its share of the music and DVDmarkets and is continuing to exploit a growing games market, while Waterstone'shas benefited from a book market where the trends have improved on the finalquarter of the last financial year. In our key UK businesses gross margins have improved as a result of actionstaken in the final quarter. HMV Asia also made a good start to the new financial year, while the like forlike sales performance in HMV Canada reflected a weaker DVD market. The turnaround plan communicated in March 2007 is progressing well and we are ontrack. In line with the plan, our objective for this financial year is tostabilise the business and financial performance of the Group. Financial Review The period under review is the 52 weeks ended 28 April 2007, whilst the priorperiod covers the 52 weeks to 29 April 2006. 2007 2006 £m £m----------------------- ----------- -----------Sales 1,894.5 1,825.9Like for like sales % (3.5)% (5.7)%Operating profit (before exceptional items) 57.3 102.6Operating exceptional items (24.7) (18.0)Net finance charge (before exceptional items) (9.2) (4.4)Exceptional finance charges (1.8) -Profit before tax (before exceptional items) 48.1 98.2Profit before tax 21.6 80.2----------------------- ----------- -----------Adjusted basic earnings per share 8.7p 17.4pBasic earnings per share 4.0p 14.0pTotal dividend per share declared 7.4p 7.4p----------------------- ----------- -----------Underlying net borrowings 130.6 15.6Free cashflow 6.3 53.7----------------------- ----------- -----------Store numbers 745 591Average trading square footage 3.98m 3.44m----------------------- ----------- ----------- Group sales increased by £68.6m or 3.8% to £1,894.5m. This included a like forlike sales decline of 3.5% (HMV -3.3%, Waterstone's -4.1%). Total sales includedthe impact of the acquisition of Ottakar's plc on 3 July 2006, which during theperiod contributed £138.8m of additional sales to the Group. At constantexchange rates, total sales grew by 5.6%, as exchange rate movements had anadverse impact on the Group's results, reducing sales by £34.3m and operatingprofit by £1.2m. The Group's operating profit before exceptional items decreased by £45.3m to£57.3m. In addition to a poor sales performance, both UK businesses sufferedgross margin dilution reflecting highly promotional markets. In HMV UK & Irelandgross margin was also impacted by the introduction in September of simplified,lower music and DVD prices, which improved sales and market share performance.The Group continued to successfully reduce its variable cost base, such thatlike for like store costs in the UK businesses fell by £13.3m or 3.5%, despite a£5.6m (4.4%) increase in property costs from rent and rates reviews. The Group's operating result for the 52 weeks ended 28 April 2007 included£24.7m of exceptional charges (2006: £18.0m). These include £10.2m ofintegration costs and £2.9m of store closure costs related to the acquisition ofOttakar's, £7.0m of asset impairments and £4.6m of restructuring costs. Netfinance charges also included an exceptional charge of £1.8m relating toamendments to the Group's existing Senior Bank Facility. Profit before taxation and exceptional items was £48.1m (2006: £98.2m). Sales Year on Constant Like for like year exchange sales 2007 2006 growth1 growth2 growth3 £m £m % % %-------------- ------- -------- --------- --------- --------- HMV - UK & Ireland 932.2 937.2 (0.5) (0.5) (3.4) - Asia4 237.6 275.5 (13.7) (5.0) (3.1) - Canada 187.2 194.5 (3.8) 1.2 (3.3)-------------- ------- -------- --------- --------- ---------Total HMV 1,357.0 1,407.2 (3.6) (1.1) (3.3)-------------- ------- -------- --------- --------- ---------Waterstone's5 537.5 418.7 28.4 28.4 (4.1)-------------- ------- -------- --------- --------- ---------Total Group 1,894.5 1,825.9 3.8 5.6 (3.5)-------------- ------- -------- --------- --------- --------- Operating profit Year on Constant (before year exchangeexceptional 2007 2006 2007 2006 growth1 growth2 items) £m £m % of sales % of sales % %------------- ------- -------- ------- ------- ------- --------HMV - UK & Ireland 24.3 60.6 2.6 6.5 (59.8) (59.8) - Asia4 4.9 8.6 2.0 3.1 (43.3) (37.8) - Canada 11.8 12.5 6.3 6.4 (6.1) (1.0)------------- ------- -------- ------- ------- ------- --------Total HMV 41.0 81.7 3.0 5.8 (49.9) (48.5)------------- ------- -------- ------- ------- ------- --------Waterstone's5 16.3 20.9 3.0 5.0 (21.7) (21.6)------------- ------- -------- ------- ------- ------- --------Total Group 57.3 102.6 3.0 5.6 (44.1) (43.0)------------- ------- -------- ------- ------- ------- -------- 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 28 April 2007 and year ended 29 April 2006 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 year ended 29 April 2006. 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 2005) and that have not been expanded, closed or re-sited during that time. It includes sales from internet sites in the UK, Japan, Hong Kong and Waterstone's. Like for like sales growth is calculated at constant exchange rates. Stores resized (up or down) are excluded from like for like sales performance. Sales are only ever the net amount received. 4. 2006 includes the results of HMV Australia (sales £15.1m and operating loss of £0.8m), which was sold on 28 September 2005. 5. 2007 includes the results of Ottakar's since its acquisition on 3 July 2006. See note 8. HMV UK & Ireland 2006/07 was a challenging year for HMV UK & Ireland, as it sought to address ahighly competitive market for entertainment retailing with the implementationof new simplified, lower prices. Total sales declined by 0.5% including a fallin like for like sales of 3.4%. The like for like sales performance improvedsignificantly in the second half to produce growth of 0.2% following a declineof 8.6% in the first half. This reflected the benefit of store re-pricing andthe acceleration of our e-commerce growth, which delivered an improving salesand market share trend. However, this was achieved at a considerableinvestment in gross margin, which was down 300 basis points over the prioryear. Operating costs continued to be tightly managed, with like for like storecosts down £10.7m (4.6%), inclusive of 4.5% property cost inflation. Thesesavings were offset by £2.0m to implement the simplified, lower pricingstrategy and cost investment in hmv.co.uk, including £1.5m of relaunchmarketing. Overall, therefore, the operating margin fell to 2.6% from 6.5%. In the UK music market volumes fell by 7.7%, while the value of the DVD marketwas flat despite 9.3% volume growth, reflecting continued deflationarypressures. HMV UK outperformed both the music and DVD markets, however, withmarket share gains of 1.4% and 1.7% respectively. In games, new consolelaunches, including the Nintendo Wii and Sony PlayStation 3, contributed to a14.5% rise in the value of the UK games market, with HMV continuing to developits offer and deliver market share gains. During the financial year 15 new stores were opened, covering 58,000 squarefeet, one store was closed and a further store was resited bringing theportfolio at the year end to 237 stores. Following the strategic review, therate of new openings has been reduced, with only eight new stores expected in2007/08, four of which are at airports. Exceptional costs totalling £6.6m have been charged in the year. This consistsof a £3.7m impairment charge following a review of the carrying value of anumber of stores and £2.9m of restructuring costs incurred on the implementationof strategic initiatives outlined earlier. HMV Asia HMV Asia consists of 62 stores in Japan, five stores in Hong Kong and two inSingapore. In addition, HMV Japan operates a successful online business whichcontributed 24% of Japan's total sales, while HMV Hong Kong relaunched a transactional website during the period. After adjusting for HMV Australia,which was disposed of in the prior year, HMV Asia's total sales grew by 0.5% atconstant exchange rates, inclusive of a 3.1% decline in like for like sales. After adjusting for the adverse impact of exchange rates and the HMV Australiadisposal, total sales fell by 8.7%. During the period the Japanese entertainment markets were weak, with the musicmarket declining by 5.8% and the DVD market down by over 13%. However, HMVJapan outperformed in both markets, gaining a 0.5% share in music and 2.1% in DVD. Eight stores were opened in the financial year in Japan and in Hong Kong andSingapore three stores were either downsized or resited. Excluding the results of HMV Australia in the prior year, HMV Asia's operatingprofit fell to £4.9m from £9.4m. This reflects the decline in like for likesales, a reduction in gross margin, due to the higher mix of DVD and e-commerce sales, and adverse exchange rate movements of £0.5m. HMV Canada HMV Canada achieved good sales for the year, with total growth of 1.2% atconstant exchange rates. This was driven by new stores, including five openedin the year, offset in part by a decline in like for like sales of 3.3%, albeit against strong comparatives. Entertainment markets were also weak in Canada, particularly in music, wherevolumes declined by 8.6%. The DVD market increased by 8.2% in volume, althoughthis was partly offset by increased deflationary pressures. HMV Canadadelivered further market share gains in music (up 1.7%) and DVD (up 0.4%). Reflecting the continued investment in building the DVD offer, DVD sales mixreached 47% for the year, almost equivalent to music. HMV Canada furtherextended its product range with the successful introduction of a gamesproposition to 22 large stores in time for Christmas. The games offer has nowbeen extended across the chain. Operating profit of £11.8m was £0.7m lower than last year, primarily due to anexchange rate loss of £0.6m, with the impact of the fall in like for like salesoffset by good gross margin and cost control. Waterstone's The financial year was a period of substantial change for Waterstone's,following the acquisition of Ottakar's plc and its 141 stores on 3 July 2006. The successful integration of the two businesses was achieved against a backdropof an intensely competitive and highly promotional book market. Within thecombined portfolio, 18 stores have been closed and six new stores have beenopened in the year, bringing the total portfolio to 323 at the year end,covering 1.9m square feet. Waterstone's like for like sales for the year fell 4.1% in a total book marketwhich grew by 2.1%. This reflected the higher growth rates of non-high streetcompetitors, predominantly the supermarkets and the Internet. The increased scale of Waterstone's following the acquisition of Ottakar's better positionsthe business to compete in this changing market, as does the launch inSeptember 2006 of the Waterstones.com e-commerce website. Waterstone's operating profit for the year (including Ottakar's) was £16.3mcompared with a profit of £20.9m in the prior year. The reduction is due tothe adverse sales performance combined with a reduction in gross margin of 60 basis points, offset by the contribution from Ottakar's, inclusive of synergygains. Operating costs were well controlled, with like for like costs down£2.6m (1.7%), offset in part by £2.0m of waterstones.com start-up losses. The integration of Ottakar's was completed successfully and on time, such thatbefore the crucial Christmas season all stores were rebranded, the Waterstone'sstock management system was introduced into all stores and the Ottakar's back office was integrated with Waterstone's. This ensured that synergies of £6.0mwere delivered in the financial year, ahead of the original expectation of £3-4m. Exceptional integration costs of £10.2m were incurred in the period, togetherwith £2.9m of store closure costs as a result of a review of the combined storeportfolio. Additionally, an assessment of the carrying value of a number ofWaterstone's stores resulted in a £3.3m exceptional impairment charge. Net finance charges Net finance charges before exceptional items increased by £4.8m to £9.2m (2006:£4.4m). This primarily reflected increased levels of net debt following theacquisition of Ottakar's on 3 July 2006. Exceptional finance costs of £1.8m related to amendments to the Group's existingSenior Bank Facility. Consequent to this, the margin payable on the Senior BankFacility will increase to 175 basis points from June 2007, which will increasenet finance charges by around £2.0m per annum.Taxation The taxation charge for the financial year of £5.5m (2006: £24.0m) includes atax credit of £7.5m in relation to the exceptional charges of £26.5m. Thefull-year effective tax rate before exceptional charges was 27% (2006: 29%),with the rate reflecting the successful closure of prior year computations. Inthe absence of the prior year UK credit, the underlying tax rate was 30%. Earnings per share Adjusted basic earnings per share, excluding the effect of exceptional items,was 8.7p, a decrease of 50% on the prior period of 17.4p. Basic earnings pershare was 4.0p (2006: 14.0p), while diluted basic earnings per share was 4.0p(2006: 13.9p). Dividend The Board is recommending a final dividend of 5.6p per share in addition to the1.8p per share interim dividend already paid, bringing the total dividend forthe year to 7.4p (2006: 7.4p). The Board has maintained the dividend level,reflecting its confidence in the turnaround plan. Subject to shareholder approval at the Annual General Meeting on 6 September2007, the final dividend will be paid on 12 October 2007 to shareholders on theregister at the close of business on 14 September 2007. Shares will be quotedex-dividend from 12 September 2007. Cash flow and net debt The Group's underlying net debt increased by £115.0m to £130.6m during thefinancial year, reflecting the acquisition of Ottakar's plc and subsequentrelated capital expenditure and integration costs. Free cashflow beforeOttakar's related capital expenditure (£7.7m) and integration costs (£10.2m) was£24.2m (2006: £53.7m) 2007 2006 £m £m------------------------------ --------- ------------EBITDA 103.6 149.1Capital expenditure (46.6) (46.8)Working capital outflow (13.1) (9.8)Spend from exceptional charges and provision utilisation (15.0) (7.2)Other 1.6 1.1Net interest paid (9.1) (4.1)Taxation (15.1) (28.6)------------------------------ --------- ------------Free cashflow 6.3 53.7Net proceeds from issue of shares 0.1 8.7Shares purchased for cancellation - (18.6)Dividends paid (29.7) (27.6)Special pension contribution (4.4) (4.4)Purchase of Ottakar's plc, repayment of debt andrelated costs (90.2) (11.8)Other 2.9 1.7------------------------------ --------- ------------Net cash (outflow) inflow (115.0) 1.7Underlying opening net debt (15.6) (17.3)------------------------------ --------- ------------Underlying closing net debt (130.6) (15.6)------------------------------ --------- ------------ EBITDA - Earnings Before Interest, Taxation, Interest, Depreciation,Amortisation and exceptional items. Free cashflow - Cashflow from operating activities after capital expenditure andnet interest. Underlying net debt - Underlying net debt is stated before unamortised deferredfinancing fees. Working capital During the financial year, the Group's working capital requirements resulted ina cash outflow of £13.1m (2006: outflow of £9.8m). This reflected thechallenging market conditions, particularly in the UK businesses. Group stockturn fell to 5.3 times (2006: 6.2 times). Capital expenditure Capital expenditure in the period was £46.6m compared with £46.8m last year.This included £7.7m incurred in connection with the integration of Ottakar'splc, £15.2m on new stores and resites, £7.6m on refitting the existing storeportfolio and £7.6m on various IT investment projects. Acquisition of Ottakar's plc The acquisition of Ottakar's was completed on 3 July 2006 for a total cashconsideration of £70.2m. Net liabilities at fair value of £0.8m, inclusive of£31.8m of net debt, were acquired and consequently goodwill of £71.0m has beencapitalised. The rebranding of 139 stores and the implementation of Waterstone's inventorymanagement systems was successfully completed before the crucial Christmasperiod and the Ottakar's head office locations were closed, while key Ottakar'smanagers were retained and integrated into the Waterstone's structure. Costsynergies, achieved by the phased consolidation of back office functions, theoptimisation of supplier terms and from improved financial control amounted to£6.0m in 2006/07, and are expected to rise to over £10m in 2007/08 as the fullsynergy effects flow through. In order to deliver these improvements there havebeen exceptional one-off costs of £10.2m and upfront capital expenditureinvestment of £7.7m in the roll out of Waterstone's inventory managementsystems, rebranding and other store investment. A review of the combined store estate following acquisition has to date led tothe closure of 18 stores and has resulted in exceptional costs charged this yearof £2.9m. It is anticipated that an ongoing review of the estate, focusedparticularly on locations where there is overlap locations between Waterstone'sand the prior Ottakar's stores, will lead to the closure of up to 10% of thecombined store estate in the next few years. Return of capital Following the announcement of the acquisition of Ottakar's the programme ofshare buybacks was suspended. Given the Group's current level of financialgearing, the Board does not intend to recommence the programme in the shortterm. Operating leases All the Group's stores are held under operating leases. In HMV UK andWaterstone's the majority of leases are on typical institutional lease terms,now usually with a 15-year term subject to five year upwards only rent reviews.The majority of the Group's international stores and a minority of UK leasesoperate through turnover related leases, usually with minimum rent guarantees,and lease terms of five to 10 years. The Group's net operating lease rentals were £154.0m in the financial year(2006: £136.2m). The total future rental commitment at the balance sheet dateamounted to £1.2 billion, or £0.8 billion at net present value, while theexisting portfolio has an average remaining lease period of 10 years. Retaininga portfolio of good quality real estate, in prime retail areas, at commerciallyreasonable rates remains critical to the performance of the Group. Where a storelocation becomes surplus to requirements, the Group's policy of occupying prime,highly marketable locations serves to limit any lease exposure. Incentive arrangements The Group's turnaround plan launched on 13 March 2007 required changes to theremuneration arrangements of Simon Fox, CEO. Consequently, the RemunerationCommittee of the Board has designed a new, one-off co-investment incentivearrangement for him, the main elements of which require him to purchase from hisown funds HMV Group shares to the value of one times his salary. After threeyears, provided that a stretching EPS performance condition is met, he will havethe opportunity to receive up to five HMV Group shares for every one purchased.The performance vesting scale is as follows: 25% of the matching award will vestfor 20% annual compound growth in adjusted EPS over the three year period to 2010, rising to 100% vesting at just over 30% annual compound growth. The Board believes this co-investment arrangement will encourage sufficient personal investment and hence shared risk to ensure a focus on the achievement of a stretching but achievable turnaround plan. 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. The defined benefit scheme was generally closed to newjoiners from 1 January 2002. The most recently completed actuarial valuation of this scheme, as at 30 June2004, identified a deficit of £11.5m on assets of £43.9m. This deficit wasfunded through three contributions of £4.4m, the final amount of which was paidon 31 May 2006. Furthermore, the Group increased its contributions to a rate of14.9% of pensionable pay from 1 July 2005 (from 12.9%), while the members'contribution rate increased to 5% of pensionable salaries from 4%. The nextactuarial valuation will be undertaken as at 30 June 2007. Under IAS 19 'Employee Benefits', the HMV defined benefit scheme had a deficit,net of deferred tax, of £15.6m (2006: £17.5m) at 28 April 2007. Notes for editors HMV Group is one of the world's leading retailers of music and DVD and theleading retailer of books in the United Kingdom and Ireland in terms of totalsales. As of 28 April 2007 it operated 422 HMV stores selling music, DVD andelectronic games in six countries and 323 Waterstone's stores, principally inthe United Kingdom and Ireland. All of the Group's operations, both in theUnited Kingdom and internationally, are wholly owned. HMV Group web sites hmvgroup.comhmv.co.ukhmv.co.jphmv.cahmv.com.hkhmv.comwaterstones.com Supporting financial information PageConsolidated income statement 12Consolidated statement of recognised income and expense 13Consolidated balance sheet 14Consolidated cash flow statement 15Notes to the financial statements 16 Consolidated income statement For the 52 weeks ended 28 April 2007 and 29 April 2006 2007--------------------- ------ ----------------------- Before Exceptional After exceptional items exceptional items items--------------------- ------ --------- --------- --------- Notes £m £m £m--------------------- ------ --------- --------- --------- Revenue 1,894.5 - 1,894.5Cost of sales (1,747.8) (9.9) (1,757.7)--------------------- ------ --------- --------- ---------Gross profit 146.7 (9.9) 136.8Administrative expenses (89.4) (14.8) (104.2)--------------------- ------ --------- --------- ---------Group operating profit 57.3 (24.7) 32.6Finance income 3 2.9 - 2.9Finance costs 3 (12.1) (1.8) (13.9)--------------------- ------ --------- --------- ---------Profit before taxation 48.1 (26.5) 21.6Taxation 4 (13.0) 7.5 (5.5)--------------------- ------ --------- --------- ---------Profit for the periodattributable toshareholders 35.1 (19.0) 16.1--------------------- ------ --------- --------- --------- Earnings per share- Basic 6 8.7p (4.7)p 4.0p- Diluted 6 8.7p (4.7)p 4.0p--------------------- ------ --------- --------- --------- 2006--------------------- ------ ----------------------- Before Exceptional After exceptional items exceptional items items--------------------- ------ --------- --------- --------- Notes £m £m £m--------------------- ------ --------- --------- --------- Revenue 1,825.9 1,825.9Cost of sales (1,636.1) (12.9) (1,649.0)--------------------- ------ --------- --------- ---------Gross profit 189.8 (12.9) 176.9Administrative expenses (87.2) (5.1) (92.3)--------------------- ------ --------- --------- ---------Group operating profit 102.6 (18.0) 84.6Finance income 3 1.9 1.9Finance costs 3 (6.3) (6.3)--------------------- ------ --------- --------- ---------Profit before taxation 98.2 (18.0) 80.2Taxation 4 (28.5) 4.5 (24.0)--------------------- ------ --------- --------- ---------Profit for the periodattributable toshareholders 69.7 (13.5) 56.2--------------------- ------ --------- --------- --------- Earnings per share- Basic 6 17.4p (3.4)p 14.0p- Diluted adjusted 6 17.3p (3.4)p 13.9p--------------------- ------ --------- --------- --------- For details of exceptional items, see note 2. Consolidated statement of recognised income and expense For the 52 weeks ended 28 April 2007 and 29 April 2006 2007 2006------------------------------- --------- --------- £m £m------------------------------- --------- --------- Profit for the period attributable to shareholders 16.1 56.2------------------------------- --------- --------- Foreign exchange translation differences - (2.1)Transfers to the income statement on cash flow hedges - 0.7Actuarial gains on defined benefit pension schemes - 2.2Available-for-sale equity securities:Charged to equity - (2.9)Transfers to balance sheet 2.9 -Tax on items recognised directly in equity 0.1 (1.6)------------------------------- --------- ---------Net income (expense) recognised directly in equity 3.0 (3.7)------------------------------- --------- ---------Total recognised income and expense for the period 19.1 52.5------------------------------- --------- --------- Effect of changes in accounting policy:Recognition of cash flow hedges at fair value on thefirst time adoption of IAS 32 and 39 - (0.7)------------------------------- --------- --------- Consolidated balance sheet----------------------- ----------- --------- As at As at 28 April 2007 29 April 2006----------------------- ----------- --------- £m £m----------------------- ----------- --------- Assets Non-current assetsProperty, plant and equipment 169.2 161.9Intangible assets 73.0 2.0Deferred income tax asset 30.1 26.6Trade and other receivables 7.4 8.2----------------------- ----------- --------- 279.7 198.7Current assetsInventories 210.4 174.1Trade and other receivables 69.2 59.2Current tax recoverable 0.6 0.3Other financial assets - 6.8Cash and short term deposits 77.9 81.5----------------------- ----------- --------- 358.1 321.9----------------------- ----------- ---------Total assets 637.8 520.6----------------------- ----------- ---------Liabilities------------- Non-current liabilitiesDeferred income tax liabilities (0.1) (0.1)Retirement benefits liabilities (22.2) (25.0)Interest bearing loans and borrowings (0.8) -Provisions (0.5) (1.0)----------------------- ----------- --------- (23.6) (26.1)Current liabilitiesTrade and other payables (397.1) (370.4)Current income tax payable (15.2) (23.8)Interest bearing loans and borrowings (207.3) (96.6)Provisions (7.8) (6.1)----------------------- ----------- --------- (627.4) (496.9)----------------------- ----------- ---------Total liabilities (651.0) (523.0)----------------------- ----------- -------------------------------- ----------- ---------Net liabilities (13.2) (2.4)----------------------- ----------- --------- Equity--------Equity share capital 323.0 322.9Other reserve - own shares (2.5) (2.9)Foreign currency translation reserve 2.2 2.2Capital reserve 0.3 0.3Retained earnings (336.2) (324.9)----------------------- ----------- ---------Total equity (13.2) (2.4)----------------------- ----------- --------- Consolidated cash flow statement For the 52 weeks ended 28 April 2007 and 29 April 2006 2007 2006----------------------------- ----------- ---------- £m £m----------------------------- ----------- ---------- Cash flows from operating activitiesOperating profit 32.6 84.6Depreciation 46.3 46.5Impairment charges 7.0 11.3Loss on disposal of property, plant and equipment - 0.1Gain on disposal of subsidiary - (0.3)Equity settled share-based payment expense (0.3) (2.3)Pension obligation adjustment (2.5) (3.0)----------------------------- ----------- ---------- 83.1 136.9Movement in inventories (17.0) (18.0)Movement in debtors (5.9) (6.5)Movement in creditors 9.8 14.7Movement in provisions 2.7 (0.6)----------------------------- ----------- ----------Cash generated from operations 72.7 126.5Tax paid (15.1) (28.6)----------------------------- ----------- ----------Net cash flows from operating activities 57.6 97.9----------------------------- ----------- ---------- Cash flows from investing activitiesPurchase of property, plant and equipment (46.6) (46.8)Proceeds from sale of property, plant and equipment 2.6 0.5Interest received 2.7 2.0Proceeds from sale of subsidiary - 1.7Purchase of other financial assets - (9.7)Acquisition of subsidiary including fees (58.4) (2.1)----------------------------- ----------- ----------Net cash flows from investing activities (99.7) (54.4)----------------------------- ----------- ---------- Cash flows from financing activitiesMovements in short-term facilities 31.3 31.9Drawdown of term debt 80.0 -Net debt in subsidiary repaid on acquisition (31.8) -Proceeds of issue of equity shares 0.1 9.4Company shares purchased for cancellation - (18.6)Purchase of own shares - (0.7)Interest paid (11.8) (6.1)Equity dividends paid to shareholders (29.7) (27.6)Finance lease funding received 1.5 -Repayment of capital element of finance lease (0.4) ------------------------------ ----------- ----------Net cash flows from financing activities 39.2 (11.7)----------------------------- ----------- ---------- Net (decrease) increase in cash and cash equivalents (2.9) 31.8Opening cash and cash equivalents 80.1 47.4Effect of exchange rate changes (3.3) 0.9----------------------------- ----------- ----------Closing cash and cash equivalents 73.9 80.1----------------------------- ----------- ---------- Notes to the financial statements 1. Basis of preparation The financial statements of the Group and the Company have been prepared inaccordance with International Financial Reporting Standards (IFRS) as adopted bythe European Union and as applied in accordance with the provisions of theCompanies Act 1985. The principal accounting policies adopted by the Group areset out in the Group's Annual Report and have been applied consistentlythroughout the reporting period. 2. Exceptional items 2007 2006------------------------------ ----------- --------- £m £m------------------------------ ----------- ---------Recognised in arriving at operating profit:Acquisition of Ottakar's:Costs of integration 10.2 -Store closure costs 2.9 -Impairment of property, plant and equipment 7.0 11.3Restructuring costs 4.6 4.3Acquisition and bid defence costs - 2.4------------------------------ ----------- --------- 24.7 18.0Recognised within finance costs:Financing costs 1.8 ------------------------------- ----------- --------- 26.5 18.0------------------------------ ----------- --------- Total exceptional costs of £26.5m have been incurred in the period and a taxcredit of £7.5m arose in respect of these costs. Costs of integrating theOttakar's acquisition of £10.2m have been included within administrativeexpenses, with related store closure costs of £2.9m included within cost ofsales. Impairment charges of £7.0m relating to property, plant and equipment in HMV UKand Waterstone's have been included within cost of sales and £4.6m of costs torestructure the Group in accordance with the strategic initiatives outlinedearlier are included within administrative expenses. Exceptional financing costsof £1.8m related to amendments to the Group's existing Senior Bank Facility (seenote 3). In the prior period, exceptional costs were £18.0m. This included an £11.3mimpairment charge within cost of sales following a review of the carrying valueof certain retail assets based on current market trading conditions. Inaddition, £4.3m of head office and store restructuring costs were incurredpredominantly in Waterstone's and HMV Asia, of which £1.6m was included in costof sales and £2.7m was within administrative expenses. A further £2.4m wascharged within administrative expenses in connection with corporate activity,including acquisition and bid defence costs. A tax credit of £4.5m arose inrespect of these costs. 3. Net finance costs 2007 2006----------------------------- ----------- --------- £m £m------------------------------ ----------- ---------Finance incomeBank interest receivable 2.7 1.9Other finance income - pensions 0.2 ------------------------------- ----------- ---------Total finance income 2.9 1.9------------------------------ ----------- ---------Finance costsBank loans and overdrafts 11.8 6.0Amortisation of deferred financing fees 0.3 0.1Other finance expense - pensions - 0.2------------------------------ ----------- --------- 12.1 6.3Exceptional financing costs 1.8 ------------------------------- ----------- ---------Total finance costs 13.9 6.3------------------------------ ----------- ---------Net finance costs 11.0 4.4------------------------------ ----------- --------- 4. Taxation 2007 2006------------------------------ ----------- --------- £m £m------------------------------ ----------- ---------Taxation recognised in the income statement:United Kingdom, current year:Corporation tax 4.9 17.8Over provision in prior periods (1.4) (0.7)------------------------------ ----------- --------- 3.5 17.1Overseas tax, current year: Corporation tax 4.2 4.8Under provision in prior periods 0.4 ------------------------------- ----------- ---------Total current tax 8.1 21.9Deferred tax:United Kingdom (1.2) 1.9Overseas (1.4) 0.2------------------------------ ----------- ---------Total deferred tax (2.6) 2.1------------------------------ ----------- ---------Total taxation expense in the income statement 5.5 24.0------------------------------ ----------- --------- The tax expense in the current year includes a credit of £7.5m in relation tothe exceptional items of £26.5m, details of which can be found in note 2. Theeffective tax rate on ordinary activities is 27% (2006: 29%). 5. Equity dividends 2007 2006------------------------------ ----------- --------- £m £m------------------------------ ----------- --------- Ordinary final dividend of 5.6p per share for 2006 (2005: 5.1p) 22.5 20.4Ordinary interim dividend of 1.8p per share for 2007(2006: 1.8p) 7.2 7.2------------------------------ ----------- --------- 29.7 27.6------------------------------ ----------- --------- The Directors have proposed a final dividend of 5.6p per share (2006: 5.6p),which, in line with the requirements of IAS 10 Events after the Balance SheetDate, has not been recognised within these results. This results in a full yeardividend for 2007 of 7.4p (2006: 7.4p). The proposed final dividend for 2007 of £21.7m (2006: £22.5m), subject toapproval by shareholders at the Annual General Meeting, will be paid on 12October 2007 to shareholders on the Register at the close of business on 14September 2007. Shares will be quoted ex-dividend from 12 September 2007. 6. Earnings per share 2007 2006------------------------------ ----------- --------- £m £m ------------------------------ ----------- ---------Basic and diluted profit attributable to shareholders 16.1 56.2Exceptional items, less tax thereon 19.0 13.5------------------------------ ----------- ---------Adjusted basic and diluted profit 35.1 69.7------------------------------ ----------- --------- Number 'm Number 'm------------------------------ ----------- ---------Weighted average number of Ordinary Shares - basic 401.4 400.6Dilutive share options 0.7 2.1------------------------------ ----------- ---------Weighted average number of Ordinary Shares - diluted 402.1 402.7------------------------------ ----------- --------- Earnings per Ordinary Share is calculated as follows: 2007 2007 2006 2006----------------------- ---------- -------- ------- ------- Pence Pence Pence Pence Basic Diluted Basic Diluted----------------------- ---------- -------- ------- -------Earnings per Ordinary Share 4.0 4.0 14.0 13.9Exceptional items, less tax credit thereon 4.7 4.7 3.4 3.4----------------------- ---------- -------- ------- -------Adjusted earnings per Ordinary Share 8.7 8.7 17.4 17.3----------------------- ---------- -------- ------- ------- 7. Reconciliation of equity 2007 2006------------------------------ ----------- --------- £m £m------------------------------ ----------- ---------Total recognised income and expense 19.1 52.5Ordinary dividend (29.7) (27.6)Company shares purchased for cancellation - (18.6)Issue of equity shares 0.1 9.4Purchase of own shares - (0.7)Share-based payment credit (0.3) (2.3)------------------------------ ----------- ---------Total movement during the period (10.8) 12.7------------------------------ ----------- ---------Opening total equity (2.4) (14.4)Impact of first time adoption of IAS 32 and 39 - (0.7)Opening total equity as restated (2.4) (15.1)------------------------------ ----------- ---------Closing total equity (13.2) (2.4)------------------------------ ----------- --------- 8. Acquisition of subsidiary On 3 July 2006 the Group acquired for cash the share capital of Ottakar's plc.Ottakar's was a chain of book stores which operated from 141 stores in the UK atthe date of acquisition. The book value and fair value of the net assets acquired were as follows: Book value Fair value £m £m--------------------------- ------------ ------------ Property, plant and equipment 30.4 21.5Inventories 27.6 24.0Receivables 8.0 7.8Payables (21.8) (24.9)Taxation (0.6) 2.6Net debt (31.8) (31.8)--------------------------- ------------ ------------ 11.8 (0.8)--------------------------- ------------ ------------Goodwill arising on acquisition 71.0--------------------------- ------------ ------------Consideration (satisfied by cash) 70.2--------------------------- ------------ ------------ Of the £70.2m consideration, £11.8m was paid in the 52 weeks ended 29 April 2006when the Group acquired for cash approximately 10% of the share capital for 440pper share. The remaining 90% of share capital was purchased at 285p per share.As a result of the acquisition goodwill of £71.0m has been capitalised. From the date of acquisition to 28 April 2007, Ottakar's has contributed £138.8mof revenue and made a profit before tax and exceptional items of £6.0m. Inaddition, exceptional costs of £10.2m relating to the integration and £2.9mrelating to store closures have been charged in the period (see note 2). If theacquisition had taken place at the beginning of the period, revenue for theGroup would have been £1,916.0m and profit before exceptional items would havebeen £44.7m. The fair value of tax assets acquired includes deferred tax arising in theperiod from the last balance sheet date to the date of acquisition of £1.9m anddeferred tax arising on other fair value adjustments of £1.3m. Included in the £71.0m of goodwill recognised are certain intangible assets thatcannot be individually separated and reliably measured due to their nature.These items include the expected value of synergies and an assembled workforce. 9. Preliminary financial information The Directors of HMV Group plc are responsible, in accordance with the ListingRules of the Financial Services Authority and applicable International FinancialReporting Standards, for preparing and issuing this preliminary announcement,which was approved on 27 June 2007. The Group has prepared its condensed consolidated financial statements inaccordance with the IFRS accounting policies it has applied in its IFRScompliant full year financial statements. The consolidated income statement,consolidated statement of recognised income and expense, consolidated balancesheet, consolidated cash flow statement and notes to the financial statementsare extracted from the Group's full financial statements for the 52 weeks ended28 April 2007. The Group's full financial statements were approved by theDirectors on 27 June 2007 and received an unqualified audit report. Thisfinancial information is abridged and does not constitute statutory accounts forthe 52 weeks ended 28 April 2007 and 29 April 2006. Full financial statementsfor the 52 weeks ended 28 April 2007 will be filed with the Registrar ofCompanies in due course. The 2006 Annual Report and Financial Statements onwhich the auditors gave an unqualified report have been filed with the Registrarof Companies. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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