Half Yearly Report

PR 110/11

7.00am, Thursday, 24 November 2011

DIXONS RETAIL PLC

Interim results ahead of expectations

Dixons Retail plc, one of Europe's leading specialist electrical retail and services companies, today announces Interim results for the 24 weeks to 15 October 2011.

Key Highlights

·; Total Group sales up 1%.

·; Growing share across most markets, particularly in the UK and Nordics.

·; Low cost operating model delivering Group performance ahead of expectations.

·; Customer satisfaction and advocacy measures continue to show encouraging progress, particularly in the UK.

·; Net debt reduced to £143.2 million from £215.1 million year on year.

·; £60 million of cost reductions on track for the current year as part of the three year £150 million cost reduction programme.

John Browett, Chief Executive, commented:

"Our focus on building a service-led business model is differentiating our offer for customers and suppliers. In what remains a challenging environment, the pace and impact of improvements in our operating model is driving outperformance versus our competitors and market share gains. While we remain cautious about the economic outlook for the second half of the year, we are well positioned and remain focused on delivering world-class Value, Choice and Service for customers. We will continue to build our KNOWHOW service to further differentiate our offering. We are confident that customers will benefit from fantastic festive deals across an exciting range of technologies from our knowledgeable store colleagues this Christmas."

Financial Highlights

·; Total Underlying Group sales(1) (2) up 1% to £3.29 billion (2010/11 £3.27 billion) and down 2% on a constant currency basis.

·; Total Group sales, including those from the closed business, were £3.30 billion (2010/11 £3.35 billion).

·; Group like for like sales(3) down 5%.

·; Underlying Group gross margins down 0.6%, UK & Ireland gross margin up 0.2%.

·; Total profit before tax of £2.4 million (2010/11 loss of £11.4 million), after non-underlying items of £27.7 million.

·; Underlying pre-tax loss of £25.3 million (2010/11 loss of £6.9 million).

·; Underlying diluted loss per share 0.7 pence (2010/11 nil). Basic earnings per share for continuing operations 0.1 pence (2010/11 loss per share of 0.1 pence).

Breakdown of sales by quarter:-

FINANCIAL SUMMARY

Notes

(1) Throughout this statement, references are made to 'underlying' performance measures. Underlying results are defined as excluding trading results from closed businesses, amortisation of acquired intangibles, net restructuring and business impairment charges and other one off non-recurring items, profit on sale of investments, fair value remeasurements of financial instruments and, where applicable, discontinued operations. These excluded items are described as 'non-underlying'. The financial effect of these items is shown in the analyses on the face of the income statement and in note 3 to the financial information.

(2) Closed business comprises the operations of PC City Spain.

(3) Like for like sales are calculated based on stores that have been open for a full financial year both at the beginning and end of the financial period and are calculated using constant exchange rates. Customer support agreement sales are excluded from all UK like for like calculations. Operations that are subject to closure have sales excluded as of the announcement date. Stores closed for refurbishment are excluded during the period of closure. All Pure play e-commerce pick up store sales are included in like for like sales.

(4) UK & Ireland comprises Currys, CurrysDigital, Dixons Travel, PC World, combined 2-in-1 Currys and PC World, operations in Ireland, DSGi Business and KNOWHOW. Like for like sales exclude DSGi Business.

(5) Nordics comprises the Elkjøp group and Dixons Travel Denmark.

(6) Other International comprises Greece (Kotsovolos), Italy (Unieuro, combined 2-in-1 Unieuro and PC City stores and Dixons Travel Italy), Czech Republic (ElectroWorld), Slovakia (ElectroWorld) and Turkey (ElectroWorld).

(7) Pure play e-commerce division comprises Dixons.co.uk and PIXmania.

(8) Underlying Earnings Before Interest and Tax (EBIT) equates to underlying operating profit and is defined as underlying earnings from retail operations, after property losses, before deduction of net finance costs and tax.

(9) Free Cash Flow relates to continuing operations and comprises net cash flow from operating activities before special pension contributions, less net interest paid, less income tax paid and net capital expenditure.

(10) Currency neutral change percentage reflects the year on year growth or decline in Underlying Sales, calculated excluding the effect of currency movements.

(11) Certain statements made in this announcement are forward looking. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from any expected future events or results referred to in these forward looking statements. Unless otherwise required by applicable laws, regulations or accounting standards, we do not undertake any obligation to update or revise any forward looking statements, whether as a result of new information, future developments or otherwise.

Underlying Group sales were up 1% at £3,291.7 million (2010/11 £3,272.1 million) and down 5% on a like for like basis, outperforming local markets in general. Underlying Group sales were down 2% at constant exchange rates. Underlying losses before interest and tax were £5.7 million (2010/11 profit of £8.9 million). Underlying loss before tax was £25.3 million (2010/11 loss of £6.9 million). Group gross margins were down 0.6% across the half.

The service led business model has enabled the UK & Ireland division to deliver an encouraging financial performance with losses significantly reduced year on year, despite the challenging market conditions.

Total sales in the UK & Ireland division were down 5% to £1,529.7 million (2010/11 £1,616.0 million) and like for like sales were down 8% in the half. Like for like sales in the second quarter were down 5%, showing an improving trend through the half. Underlying operating losses for the first half were reduced year on year to £3.9 million (2010/11 loss of £10.7 million).

The work under the Renewal and Transformation plan to improve stock management has enabled the Group to work better with suppliers as they increasingly look to engage customers with products through our service led multi-channel model. The financial performance also benefitted from the work done to reduce costs and improve operational efficiencies. As a result gross margins have improved through the period and were up 0.2% in the first half.

The anniversary of the World Cup and iPad launch presented a tough start to the year which was followed by a good back to school period. White goods held up well with the significant majority of business being replacement. Computing has been supported by the developing replacement cycle for laptops as well as by tablets with the iPad 2 and Android based tablets selling strongly. Televisions, whilst lapping very tough comparatives from last year, remained particularly weak.

Services continue to benefit from the launch of KNOWHOW with its improved proposition for customers. A number of further improvements to the service offering have been introduced, such as cloud back-up services and Infinity for tablets which provides customers with a tablet plus KNOWHOW services for a monthly fee and enables them to update their tablet every two years.

Alongside this, the business has developed improved customer journeys for each category. In vision, an enhanced customer journey to help customers understand the increasing number of options available in televisions has been developed, ensuring customers purchase the right product with the right features, benefits and accessories for their needs. In computing, specific merchandising has been designed to explain the features and benefits of selected products together with additional accessories and services to help customers more easily find a solution for their needs.

With 255 stores refitted, including 35 Megastores, revenues representing approximately two thirds of the total sales in the UK & Ireland will be transacted through new format stores over peak this year.

The changes being made are increasingly being recognised by customers. Surveys show increasing customer satisfaction measures with, for example, advocacy (highly likely to recommend) rising steadily by 28 percentage points over the last 12 months to 71%.

Dixons Travel continues to perform well. The new format now rolled out across all of Dixons Travel's stores delivers a better range and store experience for customers, including a focus on portable items and accessories. With operations now in Denmark and Italy as well as the UK & Ireland, Dixons Travel continues to explore further opportunities in airport locations across Europe.

Dixons.co.uk is operated as an integral part of our multi-channel offer in the UK & Ireland. It provides the business with a pure play operation supporting the multi-channel offer, as well as providing customers with further choices for their shopping trip. While Dixons.co.uk is currently reported as part of the pure play e-commerce division it does not reflect its operational structure and as such will, in future, be reported as part of the UK & Ireland operations. A re-statement of the divisional results will be provided in due course.

Operations in Ireland continue to trade well out of new format stores. There has been some recovery in sales in the market as the Irish economy has rebased itself.

The Nordic division continues to perform well. Elkjøp saw sales grow by 8% at constant exchange rates, while in sterling, underlying sales grew by 16% to £994.3 million (2010/11 £860.4 million). Like for like sales were up 5%. Underlying operating profits were £42.1 million (2010/11 £45.0 million).

Management continue to drive the Elkjøp business hard, investing gross margins in growing market share. The business has delivered particularly strong performances in Denmark and Finland during the first half. Sweden continues to be a very competitive market, but Elkjøp has gained share as the market starts to consolidate.

Elkjøp's highly efficient central operating structure has enabled it to achieve a cost to sales ratio of approximately 19%. This enables it to lever its scale across the markets in which it operates to deliver market leading value for customers.

Elkjøp now operates 24 Megastores which continue to perform particularly well. It also has 42 reformatted Superstores.

This division comprises operations in Italy, Greece, Turkey, the Czech Republic and Slovakia. Total sales were up 1% at constant exchange rates and by 2% in sterling to £496.9 million (2010/11 £485.6 million), with like for like sales down 5%, largely as a result of the weak economic environments being experienced in Greece and Italy. Underlying operating loss was £19.7 million (2010/11 loss of £11.5 million).

The turnaround plan at Unieuro in Italy has improved the business and has enabled it to improve its customer offer and trade ahead of its competitors. The economic instability across Southern Europe has inevitably led to a tough trading environment. In response the business is taking actions to reduce costs, the benefits of which will be delivered in the second half of the financial year. Unieuro now operates 24 new format stores which continue to deliver good uplifts versus the base estate. Many of these refurbishments have been delivered at relatively low cost and further refurbishments will occur throughout the financial year.

The economic environment in Greece continues to be challenging. Kotsovolos remains the market leader and is able to leverage its market position and strong supplier relationships to grow its market shares in the difficult trading environment. Gross margins were lower, largely as a result of lower commissions on sales on credit as well as actions to prudently manage credit sales with the third party provider. Further action on costs has limited the impact of the weak sales environment on the businesses' financial performance.

Total sales in the Czech Republic and Slovakia were up 11% in local currency, strongly ahead of their combined markets. 14 stores have now been reformatted into the Group's new format under the Renewal & Transformation plan, and investments have been made in improving in-store service for customers as well as colleague training. These operations are now being managed alongside the Nordic operations which will enable it to benefit from the Nordic operating model. Going forward Central Europe will be reported as part of the Nordic operation. A re-statement of the divisional results will be provided in due course.

The Group now operates 16 stores in Turkey, as well as 9 franchise stores. Total sales grew by 74% in local currency while like for like sales were up 25% in a growing market. Franchising presents a significant opportunity to roll out the ElectroWorld brand across Turkey, particularly in large conurbations geographically spread across the country. It also enables rapid market share growth and brand penetration for no additional capital cost. The business remains on target to open up to 15 franchise stores over the next 12 months.

This division currently comprises PIXmania and Dixons.co.uk. Total sales were £270.8 million (2010/11 £310.1 million) with like for like sales down 16%. Underlying operating loss was £7.4 million (2010/11 loss of £0.8 million). As discussed above, in future Dixons.co.uk will be reported as part of the UK & Ireland division. Going forward the Pure play e-commerce division will comprise the operations of PIXmania only.

In its core European markets (France, Italy, Portugal, Spain and Sweden) PIXmania continues to perform well relative to weak markets impacted by the economic slowdown. The photography and camcorder categories remain a significant proportion of the sales mix and the supply of these categories has been affected by the disruption in Japan earlier in the year, impacting PIXmania's financial performance. In addition PIXmania has been investing in the business as it transforms its operating model and develops its activities. Developments so far have included:

·; Steady growth in new categories underpinning its multi-specialist positioning. Over the past three years, PIXmania has widened its product categories by launching white goods, baby care, toys, gadgets and luggage. More recently it has added sports items as well as beds and mattresses;

·; PIXplace, PIXmania's market place, has grown strongly and now has over 1,500 active third party resellers offering over 1.5 million products through the PIXmania website in 5 countries. Alongside PIXmania's own growing categories, PIXplace provides customers with a wider choice of products, as well as a revenue stream for PIXmania;

·; Extending its store network to 17 PIXmania branded stores which provide customers in major cities with a state-of-the-art multi-channel offering. To support this growth, PIXmania is recruiting experienced retail operators to reinforce its existing team as well as leveraging the Group's know-how;

·; Further investments in E-merchant, its market leading e-commerce platform for third party customers. The success of this investment was realised with the announcement on 30 June 2011 that PIXmania had entered into an agreement with Carrefour to develop its European non-food internet offer. The new Carrefour website went live on 21 November 2011; and

·; PIXmania opened an operational centre in Brno in the Czech Republic earlier this year. This office supports PIXmania's capabilities in R&D, service support and business development for Central Europe countries, while reducing costs.

FINANCIAL POSITION

Many of the markets in which the Group operates remain challenging. In spite of this the Group has delivered a robust performance against the financial priorities of profitability and strengthening the balance sheet:

·; Exit of loss making operations of PC City in Spain completed;

·; Completion of sale and leaseback of Swedish warehouse in June, raising £58 million;

·; Group gross margins were down 0.6% in the first half following an improved performance in the second quarter;

·; On target to reduce costs by £60 million in the year, as part of the three year £150 million cost reduction programme;

·; Significant headroom maintained on the Group's £360 million revolving credit facility (the "RCF") throughout the year, with the facility unused at the interim date;

·; Agreement reached with the trustee of the UK defined benefit scheme following the triennial valuation with an 11 year deficit reduction plan, with payments of £16 million to be made in 2011/12 and £20 million in 2012/13;

·; Positive Free Cash Flow before restructuring items of £104.7 million was generated;

·; Net debt was reduced to £143.2 million compared to £206.8 million at the end of the 2010/11 financial year.

Free Cash Flow was £72.6 million (2010/11 Free Cash Flow of £11.4 million). The improved cash result arose primarily from the disposal of the Jönköping warehouse in Sweden, and lower levels of capital expenditure year on year.

Working capital inflow since the start of the year was £63.6 million. This partly reflects the normal cyclical increase in activity at this point in the year, but also the significant improvements that have been made to stock management, while still improving availability, range and promotion management. These were partly offset by:-

·; The unwind of the impact of cash flow timing at year end (associated with the additional UK bank holiday on 29 April)

·; The impact of £13.1 million unwind of working capital, resulting from the closure of the operations in Spain.

Overall Group stock levels were down 12% year on year.

Net restructuring reflects the cash outflows relating to the strategic reorganisation activities as announced in previous years. This year these predominantly comprise costs of £23.8 million associated with the closure of operations in Spain.

At 15 October 2011 the Group had net debt of £143.2 million, compared with net debt of £215.1 million at 16 October 2010 and £206.8 million at the end of the 2010/11 financial year.

Net debt is stated inclusive of restricted funds of £111.5 million (2010/11 £118.4 million), which predominantly comprise funds held under trust for potential Customer Support Agreement liabilities.

The improvement in net debt was due to the Free Cash Flow generated, partly offset by £6.0 million paid to the UK Pension Scheme under the terms of the deficit reduction plan. As a result of the improved funding position, the Group's £360 million Revolving Credit Facility was unutilised at the interim date. It remains the Group's objective to continue to reduce the financial borrowings of the Group as the 2012 and 2015 Bonds mature.

Underlying loss before tax is reported before net non-underlying income before tax of £27.7 million. A further explanation of these items is shown below:

·; Amortisation of acquired intangibles of £1.9 million predominantly comprises brand names, with the year on year change being affected by currency movements.

·; Net restructuring charges relate to the exceptional elements of the UK business transformation and for the current period comprise severance costs (prior period comprised accelerated depreciation charges associated with the reformat of the UK & Ireland store portfolio).

·; Profit of £37.2 million arising on the sale (and subsequent leaseback) of the Group's Nordic distribution centre in Jönköping, Sweden.

·; Other items of £2.4 million comprise:

- Costs of £4.0 million relating to the UK riots with such costs relating mainly to stock write offs and repair costs to damaged properties; and

- An upwards revaluation of £1.6 million (required by accounting standards) of a small Nordic associate shareholding following the acquisition of the remaining shares in that entity.

·; The financing charge comprises the following elements:

- £0.2 million of interest charges relating to the closed business of PC City in Spain;

- £1.1 million of net fair value remeasurement losses on revaluation of financial instruments as required by IAS 32 and 39; and

- The prior period also included gains and charges relating to the refinancing that occurred in July 2010.

Underlying property losses were £10.6 million (2010/11 loss of £5.7 million), in line with expectations. These mainly comprise store re-site and store asset disposal costs associated with the Renewal and Transformation plan, predominantly in the UK and Nordics.

Underlying net finance costs were £19.6 million (2010/11 £15.8 million). The increase in costs was primarily due to:

·; The effect of the higher coupon rate on the 2015 Bonds, which were issued part way through the first half of the prior year.

·; A net foreign exchange loss compared to a net gain in the prior year.

The Group's underlying tax charge is based on current expectations of the tax charge to be incurred on full year earnings which equates to an effective rate of 49% (2010/11 full year 37%). The increase in the full year tax rate reflects increased losses where no tax benefit has been recognised and the non-recurrence of one off releases in the prior year of surplus tax provisions following favourable outcomes. Despite the loss, a charge arises in the first half owing to the mix of profits and losses in the different jurisdictions in which the Group operates compared with the equivalent mix for the full year together with the recognition of certain one off items which fall within the 24 week period.

At 15 October 2011, the IAS 19 accounting deficit of the defined benefit section of the UK pension scheme amounted to £219.2 million compared to £244.0 million at 30 April 2011 and £279.3 million at 16 October 2010. The assumptions used for determining the accounting valuation use a consistent basis to that adopted at 30 April 2011 which build from the most recent actuarial valuation as at 31 March 2010.

The overall reduction is largely as a result of a decrease in liabilities which were affected by a lower expectation of long term inflation, only partly offset by a decrease in the discount rate which increases the liabilities.

A full triennial actuarial valuation of the UK defined benefit pension scheme as at 31 March 2010 showed a shortfall of assets compared with liabilities of £239.0 million. Since the year end, this shortfall and the associated recovery plan have been agreed with the trustee. The recovery plan based on this valuation commenced in 2010/11 with payments of £12 million which rise to £16 million in 2011/12, £20 million in 2012/13 and 2013/14 and rising thereafter to £35 million by 31 March 2021. The next triennial valuation is expected to commence in March 2013.

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND EXPENSE

CONSOLIDATED BALANCE SHEET

CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Non-controlling interests (minority interests) comprise shareholdings in Pixmania S.A.S., (PIXmania), ElectroWorld Iç ve Dis Ticaret AS (ElectroWorld Turkey) and Dixons South-East Europe A.E.V.E. (Kotsovolos).

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NOTES TO THE INTERIM FINANCIAL STATEMENTS

The interim financial information for the 24 weeks ended 15 October 2011 was approved by the directors on

24 November 2011. The interim financial information, which is a condensed set of financial statements, has been prepared in accordance with the Listing Rules of the Financial Services Authority and International Accounting Standard 34 'Interim financial reporting' (IAS 34) as adopted by the European Union and has been prepared on the going concern basis as described further in the section on principal risks and uncertainties. Other than as set out below, the accounting policies adopted are those set out in the Group's Annual Report and Accounts for the 52 week period ended 30 April 2011.

New accounting standards, amendments to standards and IFRIC interpretations which became applicable during the period were either not relevant or had no impact on the Group's net results or net assets.

The interim financial information is unaudited and does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006, but has been reviewed by the auditors. The financial information for the 52 weeks ended 30 April 2011does not constitute the Company's statutory accounts for that period but has been extracted from those accounts which have been filed with the Registrar of Companies. The auditors have reported on those accounts, their report was unqualified, did not draw attention to any matters by way of emphasis, and did not contain statements under Sections 498 (2) or (3) of the Companies Act 2006.

The Group's income statement and segmental analysis identify separately underlying performance measures and non-underlying items. Underlying performance measures reflect an adjustment to total performance measures to exclude the impact of closed businesses and other non-underlying items. Underlying performance measures comprise profits and losses incurred as part of the day-to-day ongoing retail activities of the Group and include profits and losses incurred on the disposal and closure of owned or leased properties that occur as part of the Group's annual retail churn. The profits or losses incurred on disposal or closure of owned or leased properties as part of a one-off restructuring programme are excluded from underlying performance measures and are therefore included, among other items, within non-underlying items as described below. The directors consider 'underlying' performance measures to be a more accurate reflection of the ongoing trading performance of the Group and believe that these measures provide additional useful information for shareholders on the Group's performance and are consistent with how business performance is measured internally.

Non-underlying items comprise trading results of closed businesses, amortisation of acquired intangibles, net restructuring and business impairment charges and other one-off, non-recurring items, profit on sale of investments, fair value remeasurements of financial instruments and, where applicable, discontinued operations. Closed businesses are those which do not meet the definition of discontinued operations as stipulated by IFRS 5. A reconciliation of underlying profit and losses to total profits and losses is shown in note 2. Items excluded from underlying results can evolve from one financial year to the next depending on the nature of re-organisation or one-off type activities described above, however, there were no new exclusions in the 24 weeks ended 15 October 2011.

Underlying performance measures and non-underlying performance measures may not be directly comparable with other similarly titled measures or "adjusted" revenue or profit measures used by other companies.  

The Group's operating segments have been determined based on the information reported to the Board. This information is predominantly based on geographical areas which are either managed separately or have similar trading characteristics such that they can be aggregated together into one segment and in the case of pure play e-commerce, as a business area with geographical territories aggregated. Accounting policies for each operating segment are the same as those for the Group and are set out in the 2010/11 Annual Report and Accounts. The Group evaluates each operating segment based on underlying operating profits which excludes those items described in note 1.

All segments are involved in the multi-channel sale of high technology consumer electronics, personal computers, domestic appliances, photographic equipment, communication products and related financial and after-sales services. The principal categories of customer are retail, business to business and online.

The Group's reportable segments have been identified as follows:

·; UK & Ireland comprises electrical and computing retail chains as well as business to business (B2B) activities. The division is engaged predominantly in multi-channel retail sales, associated peripherals and services and related financial and after sales services and also in B2B sales of computer hardware and software.

·; Nordics operates in Norway, Sweden, Finland, Denmark, Iceland, Greenland and the Faroe Islands. The division engages in multi-channel retail sales and provides related product support services to its customers. It also engages in B2B sales of computer hardware, software and services. Across the region, the division operates a successful franchise business, typically in smaller markets.

·; Other International comprises operations in Italy, Greece, the Czech Republic, Slovakia, Turkey and the closed business in Spain which is excluded from underlying results. The Other International division engages in retail sales (including multi-channel sales in some countries) and provides related product support services to its customers in all of its markets. It also engages in B2B sales of computer hardware, software and services in Italy and Greece and has franchise operations in Italy, Greece, the Czech Republic and Turkey.

·; Pure play e-commerce comprises pure play online retailers and operates in all of the countries in which the other divisions operate and across Europe.

Discontinued operations comprise the Group's former operations in Hungary which were disposed in a prior period.

The closed business relates to PC City Spain whereby these operations were closed at the end of June 2011. Owing to its closure rather than disposal, these operations do not meet the definition of discontinued operations as stipulated by IFRS 5.

Central assets and liabilities predominantly comprise intersegment balances, cash & cash equivalents, borrowings, net retirement benefit obligations, derivative financial instruments and tax assets and liabilities.

External revenue for Other International includes £5.5 million relating to the closed business.

Reconciliation of underlying profit / (loss) to total profit / (loss)

Share of post tax result of associates relates to the Nordics.

External revenue for Other International includes £77.9 million relating to the closed business.

Reconciliation of underlying profit / (loss) to total profit / (loss)

Share of post tax result of associates relates to the Nordics.

External revenue for Other International includes £187.4 million relating to the closed business.

Reconciliation of underlying profit / (loss) to total profit / (loss)