Interim Results

24th Oct 2007 07:01

Home Retail Group Plc24 October 2007 24 October 2007 Home Retail Group plc Half-Year Results Home Retail Group, the UK's leading home and general merchandise retailer, todayannounces its results for the 26 weeks to 1 September 2007. The results of theprior year's first half reflect a non-comparable financial period due to thechange in year-end and also include certain financial impacts of GUS plc'sownership of Home Retail Group up to the point of demerger1. To assist withanalysis and comparison, certain pro forma information for the prior period hastherefore been provided to eliminate the distortions of these two impacts on theperformance of Home Retail Group. Operating highlights * Successful execution of trading strategies * Supply chain initiatives continuing to provide benefits across the group * Product, customer and operational initiatives in progress to continue driving sustainable growth * Launch of largest ever Argos catalogue * Homebase's new store opening programme accelerated by the acquisition of 27 Focus DIY stores * The trialling of Argos in India and the new HomeStore&More format in the UK are proceeding to plan Financial highlights * Sales2 up 3.0% in total to £2,736.5m (2006 pro forma: £2,656.4m), with like-for-like sales up 1.4% at Argos and down 2.5% at Homebase * Gross margin ahead by approximately 125 basis points at Argos and approximately 300 basis points at Homebase * Continued emphasis on operating cost control across the group with approximately 3% underlying inflation and around 1% other cost growth * Benchmark operating profit3 up 34% to £136.1m (2006 pro forma: £101.7m), with growth of 50% at Argos and 12% at Homebase; reported operating profit of £150.4m * Benchmark profit before tax4 up 40% to £149.8m (2006 pro forma: £107.2m); reported profit before tax of £169.3m * Basic benchmark earnings per share5 up 41% to 11.7p (2006 pro forma: 8.3p); reported basic earnings per share of 13.2p * Cash generation of £162.7m, benefiting principally from further improvement in working capital management; closing net cash position of £222.9m versus year-end £60.2m * Interim dividend increased by 18% to 4.7p (2006: 4.0p) Terry Duddy, Chief Executive of Home Retail Group, commented: "The Group has performed very strongly in the first half, both from anoperational and financial point of view. There was a particularly good result atArgos with profit growth of 50%, while Homebase grew profits by 12% despite somedifficult market conditions. Although we remain cautious given the uncertainconsumer outlook, as we move into the key seasonal period both businessescontinue to enhance their customer offers, while also benefiting from theleverage of our shared group operations." 1. The change in both the year-end and the Group's capital structure on demerger resulted in prior year statutory reported results that are non-comparable. The statutory reported results for the first half of the current financial year represent the 26 weeks to 1 September 2007. The statutory reported results for the first half of the prior financial year represented the results for Homebase for the seven calendar months of March to September inclusive, and the results for the rest of the Group for the six calendar months of April to September inclusive. The results for the first half of the prior financial year also reflected certain financial impacts that were a result of the fact that Home Retail Group was wholly owned by its former parent company, GUS plc, until the demerger became effective on 10 October 2006. The prior period results are not therefore representative of a financial period length comparable to this year, nor do they reflect the capital structure that Home Retail Group operated under from the date the demerger occurred. 2. Sales are calculated on a 26-week basis. This represents the statutory reported 26 weeks to 1 September 2007 and the comparable pro forma 26 weeks to 2 September 2006. 3. Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, store impairment charges, exceptional items and costs related to demerger incentive schemes. It is calculated on a pro forma 26-week basis for the comparable period. 4. Benchmark profit before tax (benchmark PBT) is defined as profit before amortisation of acquisition intangibles, store impairment charges, exceptional items, costs related to demerger incentive schemes, financing fair value remeasurements, financing impact on retirement benefit balances and taxation. Net interest income within pro forma benchmark PBT is calculated to illustrate the Group's financial performance as if the demerger capital structure had existed at 31 March 2006 and had been achieved based on underlying cash flows prior to 31 March 2006. Benchmark PBT also includes Home Retail Group's share of post-tax results of joint ventures and associates. It is calculated on a pro forma 26-week basis for the comparable period. 5. Basic benchmark earnings per share (benchmark EPS) is defined as benchmark PBT less taxation attributable to benchmark PBT, divided by the weighted average number of shares in issue from the date of demerger (excluding Home Retail Group shares held in its Employee Share Ownership Trust (ESOT)). It is calculated on a pro forma 26-week basis for the comparable period. Enquiries Analysts and investors (Home Retail Group)Richard Ashton Finance Director 01908 600 291Stuart Ford Head of Investor Relations Media (Finsbury)Rollo Head 020 7251 3801 There will be a presentation today at 9.30am to analysts and investors at themain auditorium, Merrill Lynch Financial Centre, 2 King Edward Street, LondonEC1A 1HQ. The presentation can be viewed live on the Home Retail Group websitewww.homeretailgroup.com. The supporting slides and an indexed replay will alsobe available on the website later in the day. An Interim Management Statement, covering the 18 weeks of 2 September 2007 to5 January 2008, will be announced by Home Retail Group on 17 January 2008. Certain statements made in this announcement are forward looking statements.Such statements are based on current expectations and are subject to a number ofrisks and uncertainties that could cause actual events or results to differmaterially from any expected future events or results referred to in theseforward looking statements. FINANCIAL SUMMARY--------------------------- ---------- ---------- ---------- Statutory Pro forma Statutory 26 weeks to 26 weeks to period to £m 1September 2September 30September 2007 2006 2006 Argos 1,835.3 1,753.6 1,794.1Homebase 853.9 856.8 979.1Financial Services 47.3 46.0 46.7 ---------- ---------- ----------Sales 2,736.5 2,656.4 2,819.9 Cost of sales (1,770.3) (1,756.4) (1,851.2) ---------- ---------- ----------Gross profit 966.2 900.0 968.7 Net operating expenses beforeexceptional items and costs related todemerger incentive schemes (830.1) (798.3) (861.8) ---------- ---------- ---------- Argos 99.5 66.4 72.4Homebase 47.0 41.9 40.8Financial Services 2.7 3.7 4.1Central Activities (13.1) (10.3) (10.4) ---------- ---------- ----------Benchmark operating profit 136.1 101.7 106.9 Net interest income (see below) 14.0 5.5 5.7Share of post-tax results of jointventures and associates (0.3) - - ---------- ---------- ----------Benchmark PBT 149.8 107.2 112.6 Net interest costs attributable to GUScapital structure (see below) - (35.7) (42.2)Exceptional items 20.2 (16.4) (16.4)Costs related to demerger incentiveschemes (5.9) - -Financing fair value remeasurements (1.2) (0.9) (0.9)Financing impact on retirement benefitbalances 6.4 6.6 6.6 ---------- ---------- ----------Profit before tax 169.3 60.8 59.7 Taxation (54.8) (23.1) (25.1)of which: taxation attributable tobenchmark PBT (48.0) (34.8) (36.6) ---------- ---------- ----------Profit for the period 114.5 37.7 34.6---------------------------- ---------- ---------- ---------- Basic benchmark EPS 11.7p 8.3p 8.7p Basic EPS 13.2p 4.3p 4.0p Number of shares for basic EPS 868.2m 869.0m 869.0m---------------------------- ---------- ---------- ---------- Net interest reconciliation: Third party net interestincome/(expense) 4.4 (3.1) (2.6)Financing costs charged to FinancialServices 9.6 8.6 8.3 ---------- ---------- ----------Net interest income 14.0 5.5 5.7 Interest costs attributable to GUScapital structure - (35.7) (35.7)Adjustment on merger accounting - - (6.5) ---------- ---------- ----------Net interest costs attributable to GUScapital structure - (35.7) (42.2) Financing fair value remeasurements (1.2) (0.9) (0.9)Financing impact on retirement benefitbalances 6.4 6.6 6.6 ---------- ---------- ----------Income statement net financingincome/(costs) 19.2 (24.5) (30.8) ---------- ---------- ---------- The above tables and those throughout this announcement have been prepared inaccordance with Note 1 to the Financial Information on page 26. The basis ofpreparation for pro forma restatements is set out at Appendix 1 on page 17, withreconciliations between pro forma and statutory reported periods provided atAppendix 2 on page 18. FINANCIAL SUMMARY (continued) Sales up 3.0% to £2,737m, reflecting total growth of 4.7% at Argos and a declineof 0.3% at Homebase. Like-for-like sales were up 1.4% at Argos and down 2.5% atHomebase, while the net new space contribution was 3.3% at Argos and 2.2% atHomebase. Gross margin ahead at both businesses. Argos' gross margin was ahead byapproximately 125 basis points and Homebase's by approximately 300 basis points,with the principal drivers being ongoing supply chain initiatives and foreignexchange benefits. Continued operating cost control. Total growth of 4%, of which underlyinginflation represented approximately 3%. Benchmark operating profit up 34% to £136m, comprising a £33m or 50% increase atArgos and a £5m or 12% increase at Homebase; Financial Services declined £1m andcosts of Central Activities were £3m higher. Benchmark PBT up 40% to £150m, which additionally reflects the £8.5m improvementin net interest income as a result of further strong cash generation. An effective tax rate based on benchmark PBT of 32.0%. Basic benchmark EPS up 41% to 11.7p. Interim dividend up 18% to 4.7p per share. Net cash of £223m at 1 September 2007. Cash generation of £163m in the halfreflected further improvements in working capital management, together with thestrong profit performance and lower year-on-year capital expenditure. BUSINESS REVIEWS To assist with analysis and comparison, the following business reviews are basedon pro forma information for the first half of the prior year; this representsthe 26 weeks to 2 September 2006 and is therefore a comparable financial period.The basis of preparation for pro forma restatements is set out at Appendix 1 onpage 17, with reconciliations between pro forma and statutory reported resultsprovided at Appendix 2 on pages 18 and 19. Argos 26 weeks to 1 September 2 September 2007 2006 Sales (£m) 1,835.3 1,753.6 Benchmark operating profit (£m) 99.5 66.4 Benchmark operating margin 5.4% 3.8% Like-for-like change in sales 1.4% 5.1%New space contribution to sales change 3.3% 6.9%Total sales change 4.7% 12.0% Gross margin movement Up c.125bps Down c.100bps Benchmark operating profit change 50% n/a Number of stores at period end 685 670Of which Argos Extra fully stocked-in 252 214 As the UK's leading general merchandise retailer, Argos provides a highlysuccessful and unique offer of choice, value and convenience. Argos - operational review Biggest ever catalogue launched in July. The latest Argos catalogue has 18,100lines, some 1,500 or 9% more than last year. The number of 'core' lines hasincreased by nearly 1,000, so the vast majority of the 685 stores now stock-inaround 10,800 lines for immediate collection. The number of Argos Extra linesalso increased by around 600 to 3,700, while the number of home delivery-onlylines was broadly flat at 3,700. Additional product categories and ranges. As well as 5,000 brand new products,there are numerous new product groups including areas of pet care, technology,leisure and eco-friendly goods. There is the biggest ever range of Apple, Sonyand Dyson products, and these have also been given their own 'brand shops' withdedicated pages in the catalogue. There is a new premium own-brand homewaresrange - the 'Inspire' collection - as well as new premium products from brandssuch as Dualit and Gaggia. The wider Argos Extra choice in even more stores. There are now 252 Argos Extrafully stocked-in stores, representing 37% of the portfolio compared to 32% ayear earlier. These stores all stock-in 14,500 lines for immediate collection.There are also 64 stores that now carry an edited selection of the Argos Extrarange, in order to benefit from the increased sales participation when productsare available for immediate collection. In any store where a particular Extraproduct is not stocked-in, it can be ordered-in by the customer for latercollection. Delivery of these ordered-in products to stores is via Argos' normalsupply chain infrastructure. Increased level of price investment. Argos has lowered prices in each and everyedition of its catalogue since 1999. In the current catalogue, the overall pricereduction is approximately 5% across the 8,000 reincluded lines, an increase onthe 3% achieved in the previous Spring/Summer edition of the catalogue. Lowerprices continue to be funded by the growing scale of the business and itsongoing supply chain initiatives. Further growth of the separate 'Home' catalogue. Available in 253 stores, thisnow includes over 3,300 lines across 384 pages, and has 300 lines that are notin the main catalogue. Argos also now has four stores trialling furnituredisplays, with up to 34 room sets. Developments continue on the presentation offurniture displays that may be suitable for use across the wider storeportfolio. Multi-channel leadership continues. Check & Reserve, Argos' free service thatallows immediate collection of all 14,500 stocked-in products, continues to beits fastest growing channel with online reservations growing 43%. Check &Reserve represents 12% of total sales, with a further 12% being remote ordersfor delivery to home. The Internet overall represents 18% of orders and grew by28%, with phone orders representing 6%. Home delivery overall is 24% of Argos'sales, and was ahead marginally of last year notwithstanding more of the highdemand consumer electronics products, particularly flat screen TVs, arestocked-in for immediate collection. Around half of all home delivery orderscontinue to be placed in-store. Enhancements to www.argos.co.uk website. As part of a three-year e-commerceprogramme, Argos enhanced its website in September with a complete update ondesign and operation. The major changes included improved site navigation andgreatly enhanced search functionality, as well as a new tabular format forproduct information and prominent links to buying guides. Other improvementsinclude greater use of product imagery and brand logos to help categoryselection and filtering, and better messaging about reservations, delivery andother services which use designs that are consistent to the catalogue.Promotional areas are also more prominent, with new interactive banners anddesigns that are consistent to offline price cut communications. Further convenience developments. Argos will approximately double the number ofQuick Pay kiosks versus last year in readiness for peak trading. There will be atotal of 1,700 across the portfolio, with the vast majority of stores thereforehaving at least one kiosk. Average sales participation in stores with kiosks hasnow reached 15%. New stores extending customer reach. There was a net increase of five stores inthe half; eight new stores opened, three were closed and one was relocated,bringing the total to 685 stores. Of the eight new store openings, four were innew catchments and four were additional stores in an existing catchment; sevenof them were opened as Argos Extra stocked-in stores. Argos - financial review Sales in the 26 weeks to 1 September 2007 increased by 4.7% in total;like-for-like sales grew 1.4%. There was further strong growth in flat panel TVsand video games systems, on top of exceptional growth in the comparable period.There was also good growth in 'satnav' and mobile phones, however audio, VCR/DVDand landline phones continued to trend lower with the market. Seasonalcategories saw a good performance in the first quarter but declined in thesecond quarter due to the adverse weather conditions. The contribution to salesgrowth from net new space was 3.3%, with expectations of a similar contributionin the second half of the year. Gross margins were ahead by approximately 125 basis points, driven by ongoingsupply chain benefits and foreign exchange benefits. Gross margin gains for thefull year are expected to lessen due to a greater level of investment in lowerprices in the latest catalogue. Benchmark operating profit for the 26 weeks to 1 September 2007 grew 50% to£99.5m. Underlying operating cost inflation reduced slightly to approximately 3%from 4% last year. While there was a higher level of distribution costs as aresult of the increase in overseas sourcing, other operating cost growth washeld broadly flat. This was the result of continued cost control and a number ofspecific cost containment initiatives, together with leverage from the increasein new space in the comparable period last year. Such good levels of costproductivity are unlikely to be repeated through the peak second half tradingperiod. Homebase 26 weeks to 1 September 2 September 2007 2006 Sales (£m) 853.9 856.8 Benchmark operating profit (£m) 47.0 41.9 Benchmark operating margin 5.5% 4.9% Like-for-like change in sales (2.5%) (3.2%)New space contribution to sales change 2.2% 4.1%Total sales change (0.3%) 0.9% Gross margin movement Up c.300bps Up c.200bps Benchmark operating profit change 12% n/a Number of stores at period end 311 304Of which contain a mezzanine floor 171 156 Homebase is positioning itself as the UK's leading home enhancement retailer. Homebase - operational review Continued gross margin progress offset weak market demand. Adverse weatherconditions were the cause of the like-for-like sales decline at Homebase givenits greater exposure to the seasonal ranges area of the market. To offset this,Homebase traded to maintain gross margin progress, with execution of thistrading strategy being a key operational highlight in yet another set ofchallenging market conditions for the business. Home enhancement offer further strengthened. The Homebase 'Furniture andFurnishings' catalogue was made available in 106 stores from August. It includesmore dining room and bedroom products and more feature pages to 'create thelook' which coordinates products across the broader home enhancement ranges frompaint and wallpaper to furniture, lighting and accessories. Kitchen installation roll out enhancing market share gains. The trial wasextended from around 100 stores to nearly 200 by the end of the half.Installation services are helping to capture new orders and sell high-pricedranges and accessories. There is good customer feedback and recommendationlevels are high for our installation service. Homebase has also recently beenawarded a 'Gold Award for Excellence' by the Furniture Industry ResearchAssociation for its kitchen installation process and procedures. Acquisition of 27 Focus DIY store properties accelerates new space openingprogramme. The majority of these stores have been selected where Homebase hadtargeted the potential to open a new store organically over the coming years.Five sites have been chosen so that the existing uninvested Homebase store canpotentially be replaced by the acquired store. The properties are expected to betransferred over the period up to 31 December 2007 and will then be re-fitted tothe Homebase fascia over the course of several months in readiness for the peakSpring trading period. Approximately 700 store-based colleagues previouslyemployed by Focus will be transferred and continue their employment withHomebase. Organic new space programme continues. Homebase continues to expect to open 10to 15 new stores a year, the majority of them being in its smaller store formatthat successfully still offers an authoritative range across the broader homeenhancement categories. In the first half the store portfolio increased from 310stores to 311, as there were four new store openings and three closures; therewere also two relocations completed in the period. Excluding the integration ofthe acquired Focus stores, the pipeline of new stores is back-end weighted thisfinancial year; Homebase expects to open a further net nine stores in the secondhalf, with 11 new stores and two closures planned, as well as one furtherrelocation. We continue to believe there is the potential for a portfolio ofover 450 Homebase stores across the UK and Ireland. Format roll out trials indicate further investment opportunity. Around 100Homebase stores have received minimal or no store refurbishment investment for anumber of years. Trials carried out in seven stores have shown encouragingresults on investment spend averaging around £500k per store. The resultsindicate that approximately 70 of the uninvested stores are suitable for thislevel of investment. This will involve a refit of the existing space so as toprovide the proven home enhancement offer that is already successfully in placethroughout the majority of the Homebase chain. Additional trials are now in place to test further the indicated levels ofinvestment spend. The start of a full investment programme will not commenceuntil after the 2008 peak trading season, as effort will be concentrated on theconversion programme of the recently acquired Focus DIY stores. New product ranges. Further range reviews have been carried out in areasincluding tiling, power tools and 'interior store'. The latter, which includesranges across homewares, decorating, soft furnishings and accessories, has seennew merchandising put in place across a large number of stores and also includesmore in-store 'create the look' displays. There has also been a new in-store andonline campaign, called 'Eco Home', to bring together around 900 products toreduce the environmental impact across three areas of water, energy andsustainability. Extra 'eco points' have also been made available on the Spend &Save customer loyalty card. More target marketing. Combining the strengths of its four million customerSpend & Save programme and the Ideas magazine, Homebase has rolled out its newGarden Living Club on a nationwide basis. This offers customers a seasonalmagazine, discounts on Homebase product ranges and concessions on gardeningevents such as Hampton Court Palace flower show. Successful transfer of a national distribution centre. Homebase has relocatedits national distribution centre for small items and high-value products to anew 350,000 square foot site at Wellingborough. The four-month migrationprogramme required the relocation of around 10,000 product lines fromapproximately 300 suppliers. Homebase - financial review Sales in the 26 weeks to 1 September 2007 declined by 0.3% in total;like-for-like sales declined by 2.5%. The benefit of warm weather in the firsttwo months of the half saw good growth of seasonal categories, but this was morethan offset by the adverse weather conditions over the following four months.Non-seasonal categories were generally stable through the half, with kitchensales continuing to see good growth. The contribution to sales growth from net new space was 2.2%, at the lower endof the 2% to 3% rate of organic net new space contribution expected for the fullfinancial year due to the planned later phasing of store openings. Gross margins were ahead by approximately 300 basis points, driven principallyby ongoing supply chain initiatives and foreign exchange benefits, as well asfurther improvements in stock management procedures. Benchmark operating profit for the 26 weeks to 1 September 2007 grew 12% to£47.0m. Underlying operating cost inflation reduced slightly to approximately 3%from 4% last year. A one-off increase in distribution costs as a result of thesuccessful relocation of one of Homebase's distribution centres wasapproximately offset by the one-off benefit from store-related propertytransactions in the half. Other operating cost growth was approximately 2%,principally reflecting additional investment in new space. In relation to the 27 acquired Focus DIY store properties, there will betransitional operating costs incurred from the date of transfer to there-commencement of trading the properties. The current estimate of the costs tobe incurred in the second half of this financial year is approximately £15m.This also includes an element of closure costs in respect of the potential fiverelocations of existing Homebase stores to newly acquired Focus properties.These transitional costs are expected to be recorded as an exceptional item andwill therefore be excluded from Homebase's benchmark operating profit and groupbenchmark PBT. Financial Services 26 weeks to 1 September 2 September 2007 2006 Sales (£m) 47.3 46.0 Benchmark operating profitbefore financing costs 12.3 12.3Financing costs (9.6) (8.6)Benchmark operating profit(£m) 2.7 3.7 1 September 3 March 30 September 2007 2007 2006 Store card gross receivables 437 448 394Personal loans grossreceivables 16 24 38Other gross receivables - - 15Total gross receivables 453 472 447Provision (54) (55) (52)Net receivables 399 417 395 Provision % of grossreceivables 11.9% 11.7% 11.6% Financial Services works in conjunction with Argos and Homebase to provide theircustomers with the most appropriate credit offers to drive product sales, and toensure the maximum possible profit from the transaction for Home Retail Group. Financial Services - operational review Credit offers help to drive market share gains in 'big ticket' categories. Storecard sales have increased by £1m per week year-on-year in the first half, andfunded 8% of group retail sales overall. Successful initiatives are in place toprovide appropriate credit offers in areas such as kitchen sales andinstallation services, and in consumer electronics ranges. The offer is alsofully multi-channel, with around 20% of sales on the Argos website being spenton the Argos card. Internal provision of promotional credit at cost is a key competitive advantage.Approximately 75% of credit sales during the half have been driven bypromotional credit offers. Financial Services' financial objective is to achievea return on the revolving (i.e. interest bearing) element of receivables in linewith financial services industry norms and to recover costs on the provision ofpromotional credit products to Argos and Homebase customers. The retailbusinesses are therefore receiving a competitive advantage in the form of theprovision of promotional credit products at cost. Product portfolio development continues. During the half, a new Argos creditcard was launched as part of the joint venture arrangement with Barclays BankPLC. It offers a unique three-month interest-free credit period on all purchasesand access to an exclusive loyalty scheme, and can be applied for via allcustomer channels. Also as part of the joint venture, Argos personal loans wererelaunched with the latest edition of the catalogue. Financial Services - financial review Store card gross receivables grew by over £40m versus last year, driven by thecontinued success of the range of promotional credit products offered. In thehalf, store card gross receivables declined by £11m due to normal seasonalitypatterns. The continued planned run-off of the on-balance sheet personal loansoperation saw a £22m reduction in gross receivables versus last year (an £8mreduction in the half). Benchmark operating profit before financing costs was flat versus the sameperiod last year; growth was held back by reduced income of about £3m relatingto the lowering of customer late payment fees that began from December 2006.Provision levels are broadly in line with the same period last year. The higherfinancing costs reflect the growth in receivables as well as a higher internalrate charged to reflect the movement in funding costs. A corresponding benefitis recognised in the Group net interest income line. New development opportunities In February 2007, Home Retail Group signed heads of terms to develop the Argosretail format in India through a franchise arrangement with a joint venturecompany owned by leading Indian retailers Shopper's Stop Ltd and HypercityRetail India Private Ltd. Under the terms of the arrangement, Argos is providingits brand, catalogue and multi-channel expertise and IT support. The business,trading under the 'HyperCITY-Argos' brand name, is based largely on the existingArgos multi-channel proposition. During the eight months since signing, the team involved has put together thefirst catalogue, containing 4,700 lines, in readiness for release this month.There will be an initial six stores open in the Mumbai region, testing a rangeof store formats. There will also be a non-transactional website,www.hypercityargos.com, available shortly, and the first stages of the homedelivery and call centre operations are in place. In April 2007, Home Retail Group acquired a 33% stake in an Irish out-of-townhomewares business, 'home store + more'. The investment of £6.8m (Euro 10m) isbeing used to fund an agreed plan to expand the chain in Ireland, at a rate ofapproximately three stores a year over the next few years. The business istrading in line with management expectations and it opened a third Irish storein July. Separate from this investment, Home Retail Group is developing its own homewaresformat in the UK. The first UK 'HomeStore&More' store opened this month inAylesbury, Buckinghamshire. Home Retail Group expects the initial pilot phase toinclude at least one additional store to be opened during the second half of thefinancial year. Central Activities 26 weeks to 1 September 2 September 2007 2006 Central Activities (£m) (13.1) (10.3) Central Activities represents the cost of central corporate functions and theinvestment costs of new development opportunities. Cost growth of £2.8m in thehalf principally reflects the first stages of the new development opportunities;as previously disclosed, these costs are expected to total approximately £5m inthe current year and a similar level next year. GROUP FINANCIAL REVIEW Sales and operating profit Sales for the Group grew 3% to £2,736.5m (2006 pro forma: £2,656.4m) andbenchmark operating profit grew 34% to £136.1m (2006 pro forma: 101.7m). Groupbenchmark operating margin was 5.0% (2006 pro forma: 3.8%). The drivers of thisperformance have been analysed as part of the preceding business reviews. Net interest income Net interest income was £14.0m (2006 pro forma: £5.5m). Interest income of £4.4m(2006 pro forma: expense of £3.1m) was earned on Home Retail Group's improvednet cash position. A further credit of £9.6m (2006 pro forma: £8.6m) reflectsthe financing costs charged within Financial Services' benchmark operatingprofit. In the first half of last year, interest costs attributable to the GUS capitalstructure prior to the demerger were £35.7m and have been excluded from 2006 proforma benchmark PBT. Share of post-tax results of joint ventures and associates These amounted to a loss of £0.3m (2006: nil). The movement is principally dueto the initial start-up costs incurred by the joint venture with Barclays BankPLC. Costs related to demerger incentive schemes These amounted to £5.9m (2006: nil). As previously announced, these costs areexpected to amount to a maximum of £40m, to be charged to the income statementover the three-year period commencing from the date of demerger, and areexcluded from benchmark PBT. Exceptional items An exceptional income of £20.2m was recorded in the first half of the year. Thisrepresents the release of an accrual in respect of previous GUS-relatedlong-term incentive schemes which were settled in June 2007. In the first halfof last year, an exceptional cost of £16.4m was incurred in relation todemerger-related costs and the waiver of a loan due from Experian. In the second half of the year, an exceptional item of approximately £15m isexpected to be recorded in relation to the transitional costs of integrating theacquired Focus DIY store properties. Financing fair value remeasurements Changes in the fair value of certain financial instruments are recognised in theincome statement within net financing costs. These amounted to charges of £1.2m(2006: £0.9m). Financing impact on retirement benefit balances The credit through net financing costs in respect of the excess of expectedreturn on retirement benefit assets over the interest expense on retirementbenefit liabilities amounted to £6.4m (2006: £6.6m). The current service cost, which Home Retail Group believes to be a fairerreflection of the cost of providing retirement benefits, is already reflected inbenchmark operating profit. Profit before tax Benchmark profit before tax grew 40% to £149.8m (2006 pro forma: £107.2m).Reported profit before tax was £169.3m (2006: £59.7m). Taxation Taxation attributable to benchmark PBT was £48.0m (2006 pro forma: £34.8m),representing an effective tax rate (excluding joint ventures and associates) of32.0% (2006: 32.5%). The improvement in the effective rate largely reflects agrowth in profits while the absolute level of disallowable expenditure for taxpurposes has remained broadly level. The reported effective tax rate is 32.4% (2006: 42.0%), representing a total taxexpense for the period of £54.8m (2006: £25.1m). Number of shares and earnings per share The number of shares for the purpose of calculating basic earnings per share inthe half is 868.2m (2006: 869.0m), representing the weighted average number ofissued ordinary shares of 877.4m (2006: 877.4m), less the weighted averageordinary shares held in Home Retail Group's Employee Share Ownership Trust(ESOT) of 9.2m (2006: 8.4m). The calculation of diluted EPS reflects the potential dilutive effect ofemployee share incentive schemes in place post demerger. This increases thenumber of shares for diluted EPS purposes by 8.7m (2006: 7.6m) to 876.9m (2006:876.6m). Basic benchmark EPS is 11.7p (2006 pro forma: 8.3p), with diluted benchmark EPSof 11.6p (2006 pro forma: 8.3p). Reported basic EPS is 13.2p (2006: 4.0p), withreported diluted EPS of 13.1p (2006: 3.9p). Dividends Home Retail Group's dividend policy is to progressively reduce dividend coverover the medium term to around two times, based on full-year basic benchmarkEPS. There will be an approximate one-third, two-third split between interim andfinal dividend payments. An interim dividend of 4.7p (2006: 4.0p) is today being announced, representinggrowth of 18%. This will be paid on 23 January 2008 to shareholders on theregister at the close of business on 16 November 2007 (an ex-dividend date of 14November 2007). Cash flow Cash flows from operating activities (before incurring outflows related tointerest, tax, investing and financing activities) were £373.3m in the half(2006: £409.2m). The principal drivers of the strong cash generation have beenthe growth in profits together with continued good management of workingcapital. Net capital expenditure in the half was £70.5m (2006: £88.0m), with a further£6.8m of investment spend in relation to the HomeStore&More acquisition (2006:nil). Tax paid was £57.2m (2006: £31.2m). Other cash flows in the half were £4.5m of net interest received, £78.1m ofdividends paid, £1.5m outflow from other financing activities and a £1.0moutflow in relation to the effect of foreign exchange rate changes. These othercash flows in the first half last year are non-comparable due to impacts of thedemerger. The Group's net cash position at 1 September 2007 was therefore £222.9m, anincrease of £162.7m on the opening net cash position at 3 March 2007 of £60.2m.During the period the Group used cash balances to repay in full a £225mborrowing arrangement inherited from GUS plc on demerger. Post the half-year balance sheet date, a cash payment of £40m was made topurchase 27 Focus DIY leasehold store properties. There will be a furtherapproximate £30m of capital expenditure in the second half of the financial yearto refit these properties. Balance sheet As at 1 Sept 3 March 30 Sept 2007 2007 2006 Goodwill 1,878.9 1,878.9 1,878.9Intangible assets 76.3 73.4 83.3Property, plant and equipment 685.1 691.6 685.9Inventories 929.9 906.4 932.5Instalment receivables 398.8 416.8 394.8Other trading assets 192.2 188.3 154.7 ----------- ----------- ----------- 4,161.2 4,155.4 4,130.1 Trade and other payables (1,178.5) (1,059.1) (1,127.9)Other trading liabilities (90.8) (84.5) (102.1) ----------- ----------- ----------- (1,269.3) (1,143.6) (1,230.0) ----------- ----------- -----------Invested capital 2,891.9 3,011.8 2,900.1 Retirement benefit assets 59.5 9.3 21.9Net tax (liabilities)/assets (14.8) (2.6) 4.2Net cash 222.9 60.2 34.4 ----------- ----------- -----------Reported net assets 3,159.5 3,078.7 2,960.6------------------------- ----------- ----------- ----------- Reported net assets amounted to £3,159.5m, an increase of £80.8m on the year-endbalance sheet at 3 March 2007. This is equivalent to 364p per share, excludingshares held in the ESOT. The major movements on the balance sheet are a £162.7mincrease in net cash versus the year-end position, generated in part bycontinued good management of working capital which contributed to the £119.4mincrease in trade and other payables. Accounting standards and use of non-GAAP measures The Group has prepared its consolidated financial statements under InternationalFinancial Reporting Standards for the 26 weeks ended 1 September 2007.Accounting policies are outlined in Note 1 to the Financial Information on page26. Home Retail Group has identified certain measures that it believes provideadditional useful information on the underlying performance of the Group. Thesemeasures are applied consistently but as they are not defined under GAAP theymay not be directly comparable with other companies' adjusted measures. Thenon-GAAP measures are outlined in Note 2 to the Financial Information on page27. Principal risks and uncertainties The Group has set out in its annual report a number of risks and uncertaintieswhich could impact the performance of the Group. The Group operates a structuredrisk management process which identifies, evaluates and prioritises risks anduncertainties and reviews mitigation activity. On a short-term forward-looking basis over the remainder of the financial year,the main area of potential risk and uncertainty centres on the impact on salesgrowth and thereby profitability in relation to economic conditions and overallconsumer demand. Other potential risks and uncertainties around sales and/orprofit growth include product supply and liability, business interruption,infrastructure development, people, the regulatory environment and currency.These risks, together with examples of mitigating activity, are set out in moredetail in the annual report. Appendix 1. Basis of preparation for pro forma restatements Reporting periodsHome Retail Group previously reported as part of GUS plc on a calendar year-endto 31 March, with the Interim Results reported as the six months to 30September. Within this, to avoid distortion in the financial results relating tothe timing of Easter, Homebase was consolidated on a non-coterminous 12 monthsto 28 February basis. At the Interim Results, Homebase was thereforeconsolidated on a seven months to 30 September basis, with the second half ofits financial year comprising only a five-month period. As a result of the change in year-end, Home Retail Group reported on a statutorybasis the financial period ended 3 March 2007. This included the results forHomebase from 1 March 2006 (approximately 12 months) and the results for therest of the Group from 1 April 2006 (approximately 11 months). The new financialreporting periods are the 26-week period commencing 4 March 2007 and ending on 1September 2007 (as announced today) and the 52-week period ending on 1 March2008 (to be announced on 30 April 2008). For comparative purposes, H1 2006/07 on a pro forma basis is the 26-week periodcommencing 5 March 2006 and ending on 2 September 2006; FY 2006/07 restated on apro forma basis is the 52-week period commencing 5 March 2006 and ending on3 March 2007. Reconciliations between pro forma and statutory reported periodsare shown at Appendix 2 on pages 18 and 19. The timing of trading statements has also changed as a result of the newyear-end. At Appendix 3 on page 20, trading statement comparables on the newbasis are provided. Central ActivitiesCentral Activities represents the cost of central corporate functions. As partof GUS, Home Retail Group was not recharged for these types of costs. However,for the purposes of preparing demerger financial information, an approximationwas made of the amount of GUS corporate head office costs to apportion to HomeRetail Group. These apportioned costs were not representative of either thehistorical costs Home Retail Group would have incurred or the costs it willincur going forward. As part of the pro forma restatements, Home Retail Group has thereforeapproximated the additional costs of central corporate functions it would haveincurred over and above that apportioned to it by GUS. This has been done on thebasis it had operated as a standalone plc through the periods being restated. Capital structure and net interestAs part of the demerger, Home Retail Group was allocated pro forma net debt asat 31 March 2006 of £200m. For the purposes of preparing pro forma results, netinterest income has been calculated to illustrate the impact on the Group'sfinancial performance as if this capital structure had existed at 31 March 2006and had been achieved based on the underlying cash flows prior to 31 March 2006.The additional net interest costs attributable to the actual GUS capitalstructure that was in place over the periods are shown separately. Other income statement itemsOther non-trading income statement items have not been restated as they are notimpacted by the change of year-end. These are principally exceptional items,costs related to demerger incentive schemes and financing fair valueremeasurements. Appendix 2. Reconciliations between pro forma and statutory reported periods H1 2006/07 6 months to Pro forma 26 weeks to£m 30 Sept 2006 restatement 2 Sept 2006 Argos 1,794.1 (40.5) 1,753.6Homebase 979.1 (122.3) 856.8Financial Services 46.7 (0.7) 46.0 ---------- ---------- ----------Sales 2,819.9 (163.5) 2,656.4 Cost of sales (1,851.2) 94.8 (1,756.4) ---------- ---------- ----------Gross profit 968.7 (68.7) 900.0 Net operating expenses beforeexceptional items and costs related to demerger incentiveschemes (861.8) 63.5 (798.3) ---------- ---------- ----------Argos 72.4 (6.0) 66.4Homebase 40.8 1.1 41.9Financial Services 4.1 (0.4) 3.7Central Activities (10.4) 0.1 (10.3) ---------- ---------- ----------Benchmark operating profit 106.9 (5.2) 101.7 Net interest income (see below) 5.7 (0.2) 5.5Share of post-tax results of joint - - -ventures and associates ---------- ---------- ----------Benchmark PBT 112.6 (5.4) 107.2 Net interest costs attributableto GUS capital structure (see below) (42.2) 6.5 (35.7)Exceptional items included in operatingprofit (16.4) - (16.4)Costs related to demerger incentive - - -schemesFinancing fair value remeasurements (0.9) - (0.9)Financing impact on retirementbenefit balances 6.6 - 6.6 ---------- ---------- ----------Profit before tax 59.7 1.1 60.8 Taxation (25.1) 2.0 (23.1)of which: taxation attributable to benchmark PBT (36.6) 1.8 (34.8) ---------- ---------- ----------Profit for the period 34.6 3.1 37.7 Basic benchmark EPS 8.7p (0.4p) 8.3p Basic EPS 4.0p 0.3p 4.3p Number of shares for basic EPS 869.0m - 869.0m Net interest reconciliation: Third party net interest expense (2.6) (0.5) (3.1)Financing costs charged to Financial Services 8.3 0.3 8.6 ---------- ---------- ----------Net interest income 5.7 (0.2) 5.5 Interest costs attributable to GUS capital (35.7) - (35.7)structureAdjustment on merger accounting (note a) (6.5) 6.5 -Financing costs charged to Financial Services - - - ---------- ---------- ----------Net interest costs attributable to GUS capital structure (42.2) 6.5 (35.7) Financing fair value remeasurements (0.9) - (0.9)Financing impact on retirement benefit balances 6.6 - 6.6 ---------- ---------- ----------Income statement net financing costs (30.8) 6.3 (24.5) ---------- --------- ---------- a. Information previously provided in the demerger prospectus dated 14 September2006 and the Interim Results released on 21 November 2006 was required to beproduced on an 'aggregated basis' containing certain 'carve out adjustments'.The financial statements were subsequently required to be prepared on aretrospective 'consolidated' basis; as a result, merger accounting and certainreclassification adjustments have been made to reverse "carve out" entriesbetween GUS group companies that were not actually accounted for in theindividual statutory demerged entities. Appendix 2 (continued) FY 2006/07 Short period to Pro forma 52 weeks to£m 3 March 2007 restatement 3 March 2007 Argos 3,912.8 251.2 4,164.0Homebase 1,606.3 (12.1) 1,594.2Financial Services 87.6 5.6 93.2 ---------- ---------- ----------Sales 5,606.7 244.7 5,851.4 Cost of sales (3,680.5) (171.7) (3,852.2) ---------- ---------- ----------Gross profit 1,926.2 73.0 1,999.2 Net operating expenses beforeexceptional items and costs related to demerger incentiveschemes (1,592.5) (47.3) (1,639.8) ---------- ---------- ----------Argos 300.9 24.1 325.0Homebase 51.2 2.2 53.4Financial Services 4.5 0.5 5.0Central Activities (22.9) (1.1) (24.0) ---------- ---------- ----------Benchmark operating profit 333.7 25.7 359.4 Net interest income (see below) n/a 16.6 16.6Share of post-tax results ofjoint ventures and associates 0.7 - 0.7 ---------- ---------- ----------Benchmark PBT n/a 42.3 376.7 Net interest costs attributableto GUS capital structure (see below) (21.0) (18.2) (39.2)Exceptional items included in operatingprofit (22.7) - (22.7)Costs related to demerger incentiveschemes (5.8) - (5.8)Financing fair value remeasurements (0.1) - (0.1)Financing impact on retirementbenefit balances 12.1 0.2 12.3 ---------- ---------- ----------Profit before tax 296.9 24.3 321.2 Taxation (109.5) (8.0) (117.5)of which: taxation attributableto benchmark PBT n/a n/a (122.1) ---------- ---------- ----------Profit for the period 187.4 16.3 203.7 Basic benchmark EPS n/a n/a 29.3p Basic EPS 21.6p 1.8p 23.4p Number of shares for basic EPS 869.6m - 869.6m Net interest reconciliation: Third party net interest expense n/a (1.2) (1.2)Financing costs charged to Financial Services n/a 17.8 17.8 ---------- ---------- ----------Net interest income n/a 16.6 16.6 Interest costs attributable to GUS capital (44.3) (1.8) (46.1)structureExceptional finance income 6.9 - 6.9Financing costs charged to Financial Services 16.4 (16.4) - ---------- ---------- ----------Net interest costs attributable to GUS capital structure (21.0) (18.2) (39.2) Financing fair value remeasurements (0.1) - (0.1)Financing impact on retirement benefit balances 12.1 0.2 12.3 ---------- ---------- ----------Income statement net financing costs (9.0) (1.4) (10.4) ---------- ---------- ---------- Appendix 3. Restatement of trading statement comparables Q1 13 weeks to 3 June 2006ArgosSales £855mLike-for-like change in sales 6.1%Net new space contribution tosales change 8.0% ----------Total sales change 14.1% ----------Guidance on gross margin Down c.100bpsmovement HomebaseSales £441mLike-for-like change in sales (4.7%)Net new space contribution tosales change 3.6% ----------Total sales change (1.1%) ----------Guidance on gross margin Up c.200bpsmovement Q2 H1 13 weeks to 26 weeks to 2 Sept 2006 2 Sept 2006ArgosSales £899m £1,754mLike-for-like change in sales 4.5% 5.1%Net new space contribution tosales change 6.3% 6.9% ---------- ----------Total sales change 10.8% 12.0% ---------- ----------Guidance on gross margin Down c.100bps Down c.100bpsmovement HomebaseSales £416m £857mLike-for-like change in sales (1.5%) (3.2%)Net new space contribution tosales change 4.6% 4.1% ---------- ----------Total sales change 3.1% 0.9% ---------- ----------Guidance on gross margin Up c.150bps Up c.200bpsmovement Q3 YTD 18 weeks to 44 weeks to 6 Jan 2007 6 Jan 2007ArgosSales £1,873m £3,627mLike-for-like change in sales (0.1%) 2.5%Net new space contribution tosales change 4.5% 5.6% ---------- ----------Total sales change 4.4% 8.1% ---------- ----------Guidance on gross margin Up c.50bps Down c.25bpsmovement HomebaseSales £519m £1,376mLike-for-like change in sales (2.8%) (3.0%)Net new space contribution tosales change 3.0% 3.6% ---------- ----------Total sales change 0.2% 0.6% ---------- ----------Guidance on gross margin Up c.350bps Up c.250bpsmovement Q4 H2 FY 8 weeks to 26 weeks to 52 weeks to 3 Mar 2007 3 Mar 2007 3 Mar 2007ArgosSales £537m £2,410m £4,164mLike-for-like change in sales 3.0% 0.8% 2.4%Net new space contribution tosales change 3.8% 4.4% 5.5% ---------- ---------- ----------Total sales change 6.8% 5.2% 7.9% ---------- ---------- ----------Guidance on gross margin Up c.50bps Up c.50bps c.0 bpsmovement HomebaseSales £218m £737m £1,594mLike-for-like change in sales 9.9% 0.6% (1.4%)Net new space contribution tosales change 3.4% 3.1% 3.6% ---------- ---------- ----------Total sales change 13.3% 3.7% 2.2% ---------- ---------- ----------Guidance on gross margin Up c.500bps Up c.400bps Up c.300bpsmovement HOME RETAIL GROUP PLC UNAUDITED CONDENSED HALF-YEARLY FINANCIAL INFORMATION CONSOLIDATED INCOME STATEMENTFor the 26 weeks ended 1 September 2007 Short period to 26 weeks to Six months to 3.3.07 1.9.07 30.9.06 £m Notes £m £m ------ ---------------------------------- ----- ---------- ---------- 5,606.7 Revenue 4 2,736.5 2,819.9 (3,680.5) Cost of sales (1,770.3) (1,851.2) ------ ---------------------------------- ----- ---------- ---------- 1,926.2 Gross profit 966.2 968.7 (1,598.3) Net operating expenses before (836.0) (861.8) exceptional items (22.7) Exceptional items 5 20.2 (16.4) ------ ---------------------------------- ----- ---------- ---------- (1,621.0) Net operating expenses (815.8) (878.2) ------ ---------------------------------- ----- ---------- ---------- 305.2 Operating profit 4 150.4 90.5 ------ ---------- ---------- 55.5 - Finance income 30.3 30.3 (71.4) - Finance expense (11.1) (61.1) ------ ---------- ---------- (15.9) Net financing income/(costs) 19.2 (30.8) before exceptional items 6.9 Exceptional finance income 5 - - ------ ---------------------------------- ----- ---------- ---------- (9.0) Net financing income/(costs) 6 19.2 (30.8) 0.7 Share of post-tax results of joint (0.3) - ventures and associates ------ ---------------------------------- ----- ---------- ---------- 296.9 Profit before tax 169.3 59.7 (109.5) Taxation 7 (54.8) (25.1) ------ ---------------------------------- ----- ---------- ---------- 187.4 Profit for the period attributable 114.5 34.6 to equity shareholders ------ ---------------------------------- ----- ---------- ---------- pence Earnings per share 8 pence pence 21.6 - Basic 13.2 4.0 21.4 - Diluted 13.1 3.9 13.0 Proposed dividend per share 9 4.7 4.0 ------ ---------------------------------- ----- ---------- ---------- All activities relate to continuing operations Short period to 26 weeks to Six months to 3.3.07 Non-GAAP measures 1.9.07 30.9.06 £m Reconciliation of profit before tax to £m £m benchmark profit before tax ('PBT') ------ ------------------------------------- ---------- ---------- 296.9 Profit before tax 169.3 59.7 15.8 Effect of exceptional items 5 (20.2) 16.4 0.1 Effect of financing fair value 6 1.2 0.9 remeasurements (12.1) Effect of financing impact on 6 (6.4) (6.6) retirement benefit balances 5.8 Effect of demerger incentive 5.9 - schemes ------ ---------------------------------- ----- ---------- ---------- 306.5 Benchmark PBT 149.8 70.4 ------ ---------------------------------- ----- ---------- ---------- pence Benchmark earnings per share 8 pence pence 23.7 - Basic 11.7 5.1 23.5 - Diluted 11.6 5.1 ------ ---------------------------------- ----- ---------- ---------- Page 21 HOME RETAIL GROUP PLC CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the 26 weeks ended 1 September 2007 Short period to 26 weeks to Six months to 3.3.07 1.9.07 30.9.06 £m £m £m ------ ------------------------------------------ -------- -------- Net income/(expense) recognised directly in equity (2.7) Fair value (losses) (1.2) (6.1) (18.3) Actuarial gains/(losses) in respect of 50.0 (4.5) defined benefit pension schemes 0.9 Currency translation differences (1.1) (0.4) 10.0 Tax (charge)/credit in respect of items (14.6) 3.2 taken directly to equity ------ ------------------------------------------ -------- -------- (10.1) Net income/(expense) recognised directly 33.1 (7.8) in equity for the period 187.4 Profit for the period attributable to 114.5 34.6 equity shareholders ------ ------------------------------------------ -------- -------- 177.3 Total recognised income for the period 147.6 26.8 attributable to equity shareholders ------ ------------------------------------------ -------- -------- Page 22 HOME RETAIL GROUP PLC GROUP BALANCE SHEETAt 1 September 2007 3.3.07 1.9.07 30.9.06 £m Notes £m £m ------- ------------------------------------- ----- --------- -------- ASSETS Non-current assets 1,878.9 Goodwill 1,878.9 1,878.9 73.4 Other intangible assets 76.3 83.3 691.6 Property, plant and equipment 685.1 685.9 9.2 Investment in joint ventures and 8.0 0.5 associates 74.4 Deferred tax assets 48.0 109.0 18.0 Trade and other receivables 10.6 24.9 9.3 Retirement benefit assets 11 59.5 21.9 8.5 Other financial assets 14.7 5.5 ------- ------------------------------------- ----- --------- -------- 2,763.3 Total non-current assets 2,781.1 2,809.9 Current assets 906.4 Inventories 929.9 932.5 569.4 Trade and other receivables 557.7 518.6 3.0 Current tax assets 3.0 7.0 283.8 Cash and cash equivalents 222.9 264.0 ------- ------------------------------------- ----- --------- -------- 1,762.6 Total current assets 1,713.5 1,722.1 ------- ------------------------------------- ----- --------- -------- 4,525.9 Total assets 4,494.6 4,532.0 ------- ------------------------------------- ----- --------- -------- LIABILITIES Non-current liabilities (34.0) Trade and other payables (39.5) (33.8) - Loans and borrowings - (229.2) (57.1) Provisions (63.1) (56.3) (44.8) Deferred tax liabilities (42.7) (66.6) ------- ------------------------------------- ----- --------- -------- (135.9) Total non-current liabilities (145.3) (385.9) Current liabilities(1,025.1) Trade and other payables (1,139.0) (1,094.1) (223.6) Loans and borrowings - (0.4) (25.2) Provisions (22.9) (36.5) (2.2) Other financial liabilities (4.8) (9.3) (35.2) Current tax liabilities (23.1) (45.2) ------- ------------------------------------- ----- --------- --------(1,311.3) Total current liabilities (1,189.8) (1,185.5) ------- ------------------------------------- ----- --------- --------(1,447.2) Total liabilities (1,335.1) (1,571.4) ------- ------------------------------------- ----- --------- -------- 3,078.7 Net assets 3,159.5 2,960.6 ------- ------------------------------------- ----- --------- -------- EQUITY 87.7 Share capital 87.7 2,895.6 (348.4) Merger reserve (348.4) (348.4) (11.4) Other reserves (13.9) (8.3) 3,350.8 Retained earnings 3,434.1 421.7 ------- ------------------------------------- ----- --------- -------- 3,078.7 Total equity 12 3,159.5 2,960.6 ------- ------------------------------------- ----- --------- -------- Page 23HOME RETAIL GROUP PLC CONSOLIDATED CASH FLOW STATEMENTFor the 26 weeks ended 1 September 2007 Short period to 26 weeks to Six months to 3.3.07 1.9.07 30.9.06 £m Notes £m £m ------ -------------------------------------- ------ -------- -------- Cash flows from operating activities 620.9 Cash generated from operations 13 373.3 409.2 13.6 Interest received 8.1 3.6 (51.4) Interest paid (3.6) (51.4) (101.6) Tax paid (57.2) (31.2) ------ -------------------------------------- ------ -------- -------- 481.5 Net cash inflow from operating 320.6 330.2 activities ------ -------------------------------------- ------ -------- -------- Cash flows from investing activities (134.1) Purchase of property, plant and 10 (57.6) (75.1) equipment 3.8 Proceeds from the disposal of 10 1.3 2.1 property, plant and equipment (28.3) Purchase of intangible assets (14.2) (15.0) - Purchase of investment (6.8) - (8.1) Loan to joint venture - - (3.8) Disposal of subsidiary - net of cash - - disposed ------ -------------------------------------- ------ -------- -------- (170.5) Net cash flows used in investing (77.3) (88.0) activities ------ -------------------------------------- ------ -------- -------- Cash flows from financing activities (6.1) Purchase of own shares - - (50.3) Payment of amounts to GUS plc - (50.3) - Repayment of borrowings (225.0) - (1.2) Repayment of finance leases (0.1) (0.8) (62.0) Home Retail Group share of GUS plc 9 - (62.0) final dividend (34.6) Dividends paid 9 (78.1) - ------ -------------------------------------- ------ -------- -------- (154.2) Net cash flows used in financing (303.2) (113.1) activities ------ -------------------------------------- ------ -------- -------- ------ -------------------------------------- ------ -------- -------- 156.8 Net (decrease)/increase in cash and (59.9) 129.1 cash equivalents ------ -------------------------------------- ------ -------- -------- Movement in cash and cash equivalents 130.0 Cash and cash equivalents at the 283.8 130.0 beginning of the period (3.0) Effect of foreign exchange rate (1.0) 4.9 changes 156.8 Net (decrease)/increase in cash and (59.9) 129.1 cash equivalents ------ -------------------------------------- ------ -------- -------- 283.8 Cash and cash equivalents at end of 222.9 264.0 the period ------ -------------------------------------- ------ -------- -------- Page 24 HOME RETAIL GROUP PLC ANALYSIS OF NET DEBTAs at 1 September 2007 ------- ---------------------------------------------- --------- 3.3.07 Non-GAAP measures 1.9.07 £m £m ------- ---------------------------------------------- --------- Financing net cash/(debt) 283.8 Cash and cash equivalents 222.9 (223.6) Loans and borrowings - ------- ---------------------------------------------- --------- 60.2 Total financing net cash/(debt) 222.9 ------- ---------------------------------------------- --------- Operating net debt (2,920.1) Property leases (2,947.8) ------- ---------------------------------------------- --------- (2,920.1) Total operating net debt (2,947.8) -------- ---------------------------------------------- --------- (2,859.9) Total net debt (2,724.9) -------- ---------------------------------------------- --------- Deduct: 2,920.1 Operating leases that are off balance sheet 2,947.8 -------- ---------------------------------------------- --------- 60.2 Total net cash/(debt) reflected in balance sheet 222.9 -------- ---------------------------------------------- --------- The Group uses the term net debt which provides the Group's aggregate netindebtedness to banks and other financial institutions together with debt-likeliabilities, notably property leases. The capitalised value of these property leases is £2,947.8m (3 March 2007:£2,920.1m) based upon discounting the current rentals at the estimated currentlong term cost of borrowing of 5.7% (3 March 2007: 5.4%). The analysis of net debt has not been provided as at 30 September 2006, as it isnon comparable given the demerger of the Group from GUS plc in October 2006. Page 25 HOME RETAIL GROUP PLC NOTES TO THE CONDENSED HALF-YEARLY FINANCIAL INFORMATIONFor the 26 weeks ended 1 September 2007 1. Basis of preparation The unaudited condensed half-yearly financial information comprises the resultsfor the 26 weeks ended 1 September 2007 and six months ended 30 September 2006,and the audited consolidated results for the period from 1 April 2006 to 3 March2007 (the 'short period'). Previously, Home Retail Group prepared its financial information for thefinancial year for the 12 months to 31 March except for the results of Homebasewhich were included for the 12 months to 28 or 29 February each year, withadjustments to reflect the balance sheet movements in cash to the end of March.This was done to facilitate comparability of the income statement by avoidingthe distortions that would arise relating to changes in the timing of Easter. Inorder to align the year end across the Group, the Board of Directors decided toamend the Group's financial year to a 52-week period ending on the Saturdayclosest to the end of February. Therefore, following the change of accountingreference date, the most recent audited financial statements were prepared forthe short period ended 3 March 2007. Prior to this change in accounting reference date, the Group's half-yearlyfinancial information was prepared for the six months to 30 September. In linewith the change in the Group's financial year to a 52-week period ending on theSaturday closest to the end of February, the unaudited condensed half-yearlyfinancial information included within this report comprises the results for the26-week period ended 1 September 2007, with comparatives representing the sixmonths ended 30 September 2006. In the comparative period for the six months ended 30 September 2006, Homebaseresults were included for the seven months from 1 March 2006 to 30 September2006. This approach was followed prior to the above change in accountingreference date, to facilitate comparability of the income statement by avoidingthe distortions that would arise relating to changes in the timing of Easter. The audited consolidated financial information for the short period from 1 April2006 to 3 March 2007 has been extracted from Home Retail Group plc's AnnualReport and Financial Statements, which was approved by the Board of Directors on2 May 2007 and delivered to the Registrar of Companies. The report of theGroup's auditors, PricewaterhouseCoopers LLP, on those accounts was unqualified,did not contain an emphasis of matter paragraph and did not contain anystatement under Section 237 of the Companies Act 1985. The condensed half-yearly financial information is not audited and does notconstitute statutory accounts. This financial information has been formallyreviewed by the Group's auditors, PricewaterhouseCoopers LLP, and their reportis set out on page 35. Home Retail Group reorganisation Home Retail Group demerged from its parent company, GUS plc, with effect from 10October 2006. Shares in Home Retail Group were admitted to the Official List ofthe Financial Services Authority and to trading on the London Stock Exchange'smarket for listed securities on 11 October 2006. All Home Retail Group companieswhich were owned by GUS plc prior to demerger were transferred under the newultimate parent company, Home Retail Group plc, prior to 11 October 2006. Theintroduction of this new ultimate parent company constituted a groupreconstruction and has been accounted for using merger accounting principles.Therefore, although the Group reorganisation did not become effective until 10October 2006, the financial information for the comparative periods, the shortperiod from 1 April 2006 to 3 March 2007 and the six months ended 30 September2006, are presented as if the current Group structure had always been in place. On 12 October 2006, the nominal amount of the Company's 877,445,001 issuedordinary shares was reduced from 330p to 10p by way of a court-approved capitalreduction scheme in accordance with section 135 of the Companies Act 1985. IFRS and accounting policies This condensed consolidated half-yearly financial information for the 26 weeksended 1 September 2007 has been prepared in accordance with the Disclosure andTransparency Rules of the Financial Services Authority and with IAS 34, 'Interimfinancial reporting' as adopted by the European Union. The half-yearly condensedconsolidated financial report should be read in conjunction with Home RetailGroup plc's Annual Report and Financial Statements for the short period from 1April 2006 to 3 March 2007, which have been prepared in accordance withInternational Financial Reporting Standards ('IFRSs') and InternationalFinancial Reporting Interpretations Committee ('IFRIC') interpretations asadopted by the European Union. The accounting policies adopted by Home Retail Group are set out in Home RetailGroup plc's Annual Report and Financial Statements, dated 2 May 2007, which isavailable on Home Retail Group's website www.homeretailgroup.com. These policieshave been consistently applied for all periods presented. Page 26HOME RETAIL GROUP PLC NOTES TO THE CONDENSED HALF-YEARLY FINANCIAL INFORMATIONFor the 26 weeks ended 1 September 2007 Changes in accounting standards A number of new standards, amendments and interpretations are effective for thecurrent period, but have had no material impact on the results or financialposition of the Group, as disclosed within this report. IFRS 7, 'Financial instruments: Disclosures' and IAS 1, the 'Capital disclosureamendment' to IAS 1 'Presentation of financial statements' are both effectivefor annual periods beginning on or after 1 January 2007. As this half yearlyfinancial information contains only condensed financial statements, full IFRS 7disclosures are not required at this stage. The full IFRS 7 disclosures,including the sensitivity analysis to market risk and capital disclosuresrequired by the amendment of IAS 1, will be given in the annual financialstatements. IFRIC 8, 'Scope of IFRS 2' and IFRIC 11, 'IFRS 2 - Group and Treasury ShareTransactions' have not had any impact on the recognition of share-based paymentsin the Group. IFRIC 9, 'Re-assessment of embedded derivatives' and IFRIC 10, 'InterimFinancial Reporting and Impairment' have not had any impact on the Group. At the balance sheet date a number of new standards, amendments andinterpretations were in issue but not yet effective. The Group has not early-adopted IFRS 8, 'Operating segments', which is effectivefor annual periods beginning on or after 1 January 2009, subject to EUendorsement. This standard will be fully considered in due course. IFRIC 12, 'Service Concession Arrangements' is effective for periods beginningon or after 1 January 2008 but will not have any impact on the Group. IFRIC 13, 'Customer Loyalty Programmes' and IFRIC 14, 'IAS 19 - The Limit on aDefined Benefit Asset, Minimum Funding Requirements and their Interaction' areeffective for periods beginning on or after 1 July 2008 and 1 January 2008respectively. The impact of these interpretations on the Group will be fullyconsidered in due course. 2. Use of non-GAAP measures Home Retail Group has identified certain measures that it believes will assistunderstanding of the performance of the business. The measures are not definedunder IFRS and they may not be directly comparable with other companies'adjusted measures. The non-GAAP measures are not intended to be a substitutefor, or superior to, any IFRS measures of performance but Home Retail Group hasincluded them as it considers them to be important comparables and key measuresused within the business for assessing performance. The following are the key non-GAAP measures identified by Home Retail Group: Exceptional items Items which are both material and non-recurring are presented as exceptionalitems within their relevant income statement line. The separate reporting ofexceptional items helps provide a better indication of the underlyingperformance of the Group. Examples of items which may be recorded as exceptionalitems are impairment charges, restructuring costs and the profits/losses on thedisposal of businesses. Benchmark profit before tax ('PBT') The Group uses the term benchmark PBT as a measure which is not formallyrecognised under IFRS. Benchmark PBT is defined as profit before amortisation ofacquisition intangibles, store impairment charges, exceptional items, financingfair value remeasurements, financing impact on retirement benefit balances andone-off demerger incentive costs. Net debt The Group uses the term net debt which is considered useful in that it providesthe Group's aggregate net indebtedness to banks and other financial institutionstogether with debt-like liabilities, notably property leases. Page 27HOME RETAIL GROUP PLC NOTES TO THE CONDENSED HALF-YEARLY FINANCIAL INFORMATIONFor the 26 weeks ended 1 September 2007 3. Foreign currency Average Closing -------------------------------------- -------------------------- Short period 26 weeks to Six months to to 1.9.07 30.9.06 3.3.07 1.9.07 30.9.06 3.3.07-------------------------- -------- -------- ------- ------- ------- ------The principal exchangerates used were asfollows:Sterling to US dollar 1.99 1.84 1.90 2.02 1.87 1.94Sterling to euro 1.47 1.45 1.48 1.48 1.47 1.48-------------------------- -------- -------- ------- ------- ------- ------- Assets and liabilities of overseas undertakings are translated into sterling atthe rates of exchange ruling at the balance sheet date and the income statementis translated into sterling at average rates of exchange. 4. Segmental information Home Retail Group's primary reporting format is by business segment. This is inline with the current management structure, which reflects the different risksassociated with the different businesses. The Group is organised into three mainbusiness segments: Argos, Homebase and Financial Services. Central Activitiesrepresents the cost of central corporate functions and the investment costs ofnew development opportunities. 26 weeks ended 1 September 2007 Financial Central Argos Homebase Services Activities Total Notes £m £m £m £m £m------------------------- ------ ------- -------- ------- ------- -------- Revenue 1,835.3 853.9 47.3 - 2,736.5------------------------- ------- ------- -------- ------- ------- -------- Operating profitOperating profit beforeexceptional items 99.5 47.0 2.7 (19.0) 130.2Exceptional items 5 - - - 20.2 20.2------------------------- ------- ------- -------- ------- ------- --------Segmental result 99.5 47.0 2.7 1.2 150.4------------------------- ------- ------- -------- ------- ------- -------- The results for Financial Services are after deducting funding costs of £9.6m(2006: £8.3m). Six months ended 30 September 2006 Financial Central Argos Homebase Services Activities Total Notes £m £m £m £m £m------------------------- ------ ------- -------- ------- ------- -------- Revenue 1,794.1 979.1 46.7 - 2,819.9------------------------- ------- ------- -------- ------- ------- -------- Operating profitOperating profit beforeexceptional items 72.4 40.8 4.1 (10.4) 106.9Exceptional items 5 - - - (16.4) (16.4)------------------------- ------- ------- -------- ------- ------- --------Segmental result 72.4 40.8 4.1 (26.8) 90.5------------------------- ------- ------- -------- ------- ------- -------- Short period ended 3 March 2007 Financial Central Argos Homebase Services Activities Total Notes £m £m £m £m £m------------------------- ------ ------- -------- ------- ------- -------- Revenue 3,912.8 1,606.3 87.6 - 5,606.7------------------------- ------- ------- -------- ------- ------- -------- Operating profitOperating profit beforeexceptional items 300.9 51.2 4.5 (28.7) 327.9Exceptional items 5 - (4.1) - (18.6) (22.7)------------------------- ------- ------- -------- ------- ------- --------Segmental result 300.9 47.1 4.5 (47.3) 305.2------------------------- ------- ------- -------- ------- ------- -------- The results for Financial Services are after deducting funding costs of £16.4m. Page 28 HOME RETAIL GROUP PLC NOTES TO THE CONDENSED HALF-YEARLY FINANCIAL INFORMATIONFor the 26 weeks ended 1 September 2007 5. Exceptional items Short period to 26 weeks to Six months to 3.3.07 1.9.07 30.9.06 £m £m £m -------- ----------------------------------- ---------- ---------- - Accrual release relating to 20.2 - incentive schemes(a) (11.3) Costs relating to the demerger of - (9.1) Home Retail Group and Experian(b) (7.3) Waiver of loan due from Experian(c) - (7.3) (4.1) Store impairment charges(d) - - -------- ----------------------------------- ---------- ---------- (22.7) Exceptional items in operating 20.2 (16.4) profit 6.9 Exceptional finance income(e) - - -------- ----------------------------------- ---------- ---------- (15.8) Total exceptional items 20.2 (16.4) -------- ----------------------------------- ---------- ---------- (a) Represents the release of an accrual in respect of previous GUS-relatedlong-term incentive schemes which were settled in June 2007.(b) Demerger-related expenditure including costs in relation to early vesting ofshare incentive schemes, banking set up fees and other professional fees.(c) Represents a loan due from Experian which was waived as part of the demergerprocess.(d) IFRS requires individual stores to be designated as cash generating unitsfor the purposes of testing for impairment. For the short period to 3 March 2007, this resulted in a net impairment charge in respect of the Homebase store portfolio of £4.1m.(e) Fair value gain made on transfer of interest rate swap novated from GUS plcon demerger. 6. Net financing income/(costs) Short period to 26 weeks to Six months to 3.3.07 1.9.07 30.9.06 £m Note £m £m -------- -------------------------------- ----- ---------- ---------- Finance income 13.8 Bank deposits 8.6 5.6 37.8 Expected return on retirement 21.7 20.7 benefit assets 3.9 Interest receivable from GUS - 4.0 group companies -------- -------------------------------- ----- ---------- ---------- 55.5 Total finance income 30.3 30.3 -------- -------------------------------- ----- ---------- ---------- Finance expense (11.1) Interest cost of perpetual (3.3) (5.6) securities (1.9) Discount unwind on provisions (0.9) (1.4) (0.1) Financing fair value (1.2) (0.9) remeasurements (25.7) Interest expense on retirement (15.3) (14.1) benefit liabilities (1.5) Interest expense on OFT fine - (1.2) (47.5) Interest payable to GUS group - (46.2) companies -------- -------------------------------- ----- ---------- ---------- (87.8) Total finance expense (20.7) (69.4) 16.4 Less: finance expense charged to 4 9.6 8.3 Financial Services cost of sales -------- -------------------------------- ----- ---------- ---------- (71.4) Total net finance expense (11.1) (61.1) -------- -------------------------------- ----- ---------- ---------- (15.9) Net financing income/(costs) pre 19.2 (30.8) exceptional 6.9 Exceptional finance income - - -------- -------------------------------- ----- ---------- ---------- (9.0) Net financing income/(costs) 19.2 (30.8) -------- -------------------------------- ----- ---------- ---------- The Group repaid loans and borrowings totalling £225.0m in June 2007. Page 29 HOME RETAIL GROUP PLC NOTES TO THE CONDENSED HALF-YEARLY FINANCIAL INFORMATIONFor the 26 weeks ended 1 September 2007 7. Taxation Short period to 26 weeks to Six months to 3.3.07 1.9.07 30.9.06 £m £m £m -------- ----------------------------------- ---------- ---------- (105.1) UK tax (53.3) (24.1) (4.4) Overseas tax (1.5) (1.0) -------- ----------------------------------- ---------- ---------- (109.5) Total tax expense (54.8) (25.1) -------- ----------------------------------- ---------- ---------- The tax charge for the period of £54.8m (2006: £25.1m) is based on an estimatedeffective rate of tax of 32.4% (2006: 42.0%). The effective rate of tax based on benchmark PBT, defined as the total taxexpense, adjusted for the tax impact of non-benchmark items, divided bybenchmark PBT (excluding joint ventures and associates), is 32.0% (2006: 37.1%).The benchmark effective tax rate excludes a one-off £0.4m deferred tax chargefor the prospective reduction in the UK corporation tax rate from 30% to 28%. 8. Basic and diluted earnings per share ('EPS') The calculation of basic and diluted EPS is based on the following data: Short period to 26 weeks to Six months to 3.3.07 1.9.07 30.9.06 £m Note £m £m --------- --------------------------------- ----- ---------- ---------- Earnings 187.4 Profit after tax for the 114.5 34.6 financial period 15.8 Effect of exceptional items 5 (20.2) 16.4 0.1 Effect of financing fair value 1.2 0.9 remeasurements (12.1) Net financing impact on pension (6.4) (6.6) balances 5.8 Demerger incentive schemes 5.9 - 9.2 Attributable taxation 6.8 (1.0) --------- -------------------------------- ----- ---------- ---------- 206.2 Benchmark profit after tax for 101.8 44.3 the financial period --------- -------------------------------- ----- ---------- ---------- millions Number of shares millions millions 869.6 Number of ordinary shares for the 868.2 869.0 purpose of basic EPS 7.6 Dilutive effect of shares 8.7 7.6 incentive awards --------- -------------------------------- ----- ---------- ---------- 877.2 Number of ordinary shares for the 876.9 876.6 purpose of diluted EPS --------- -------------------------------- ----- ---------- ---------- pence EPS pence pence 21.6 Basic EPS 13.2 4.0 21.4 Diluted EPS 13.1 3.9 23.7 Basic benchmark EPS 11.7 5.1 23.5 Diluted benchmark EPS 11.6 5.1 --------- -------------------------------- ----- ---------- ---------- Basic and diluted EPS have been calculated on the basis of the number of HomeRetail Group plc ordinary shares in issue at the date of demerger for thepre-demerger period together with the weighted average number of shares postdemerger, excluding ordinary shares held in Home Retail Group's Employee ShareOption Trust ('ESOT'). Page 30 HOME RETAIL GROUP PLC NOTES TO THE CONDENSED HALF-YEARLY FINANCIAL INFORMATIONFor the 26 weeks ended 1 September 2007 9. Dividend An interim dividend of 4.7 pence (2006: 4.0 pence) per Home Retail Group plcordinary share has been proposed (but not provided) and will be paid on 23January 2008 to shareholders on the register at the close of business on 16November 2007. The amount absorbed by this dividend is £40.8m (2006: £34.6m). In July 2007, a final dividend of 9.0 pence per Home Retail Group plc ordinaryshare was paid to shareholders. The amount absorbed by this dividend was £78.1m.In August 2006, £62m was paid to GUS plc as Home Retail Group's share of the GUSplc final dividend in respect of the year ended 31 March 2006. 10. Capital expenditure In the period, there were additions to intangible assets of £14.2m (2006:£15.0m). In the period, there were additions to property, plant and equipment of £57.6m(2006: £75.1m) and disposals of property, plant and equipment generated proceedsof £1.3m (2006: £2.1m). Capital commitments contracted but not provided for by the Group amounted to£69.8m. 11. Post employment benefits As at the balance sheet date, the obligation in respect of the Argos definedbenefit pension plans was £599.1m (3 March 2007: £628.0m) and the market valueof the plan assets was £658.6m (3 March 2007: £637.3m), resulting in a netsurplus on the plans of £59.5m (3 March 2007: £9.3m). The increase in the value of the surplus arises almost entirely due to changesin the underlying actuarial assumptions. The assumed discount rate has increasedto 5.5% (3 March 2007: 4.9%), giving rise to a decrease to the defined benefitobligation. This reduction is partly offset by the impact of increases in theassumptions for the rate of inflation, to 3.3% (3 March 2007: 3.1%), and for therate of increases for salaries, to 4.6% (3 March 2007: 4.4%), which results in anet £50.0m actuarial gain reported in the Statement of Recognised Income andExpense. There has been no change in the mortality assumptions used. During the period, the Group has paid contributions totalling £7.0m (2006:£7.3m) to the Argos defined benefit pension plans. 12. Reconciliation of movements in equity 3.3.07 1.9.07 30.9.06 £m £m £m ------ -------------------------------------- ---------- ---------- 187.4 Profit for the period attributable to 114.5 34.6 shareholders (10.1) Movements in Statement of Recognised Income and 33.1 (7.8) Expense 16.3 Movement in share-based compensation reserve 11.3 8.0 (6.1) Net movement in own shares - - (34.6) Equity dividends paid during the period (78.1) - (24.1) Other movements - (24.1) ------ -------------------------------------- ---------- ---------- 128.8 Increase in net equity 80.8 10.72,949.9 Opening net equity 3,078.7 2,949.9 ------ -------------------------------------- ---------- ----------3,078.7 Closing net equity 3,159.5 2,960.6 ------ -------------------------------------- ---------- ---------- Page 31 HOME RETAIL GROUP PLC NOTES TO THE CONDENSED HALF-YEARLY FINANCIAL INFORMATIONFor the 26 weeks ended 1 September 2007 13. Notes to the consolidated cash flow statement Short period to 26 weeks to Six months to 3.3.07 1.9.07 30.9.06 £m £m £m -------- --- ----------------------------------- ---------- ---------- Cash generated from operations: 305.2 Operating profit 150.4 90.5 0.9 Loss on sale of property, plant and 0.1 - equipment 1.1 Loss on sale of subsidiary - - 146.4 Depreciation and amortisation 73.9 77.0 4.1 Impairment losses - - 16.4 Finance expense charged to 9.6 8.3 Financial Services cost of sales (23.4) (Increase) in inventories (23.5) (51.5) (42.7) (Increase)/decrease in 24.7 26.9 receivables 193.3 Increase in payables 113.4 239.9 -------- ----------------------------------- ---------- ---------- 127.2 Movement in working capital 114.6 215.3 (6.3) Increase/(decrease) in provisions 7.2 3.9 for liabilities and charges 10.0 Movement in retirement benefits 6.2 6.2 15.9 Share-based payment expense 11.3 8.0 -------- ----------------------------------- ---------- ---------- 620.9 Cash generated from operations 373.3 409.2 -------- ----------------------------------- ---------- ---------- Reconciliation of net increase in cash and cash equivalents tomovement in net debt: (178.0) Net cash/(debt) at the beginning of 60.2 (178.0) the period (3.0) Effect of foreign exchange rate (1.0) 4.9 changes 156.8 Net (decrease)/increase in cash and (59.9) 129.1 cash equivalents 84.4 Decrease in debt 223.6 78.4 -------- --- ----------------------------------- ---------- ---------- 60.2 Net cash at the end of the period 222.9 34.4 -------- --- ----------------------------------- ---------- ---------- 14. Seasonality The retail sales for Argos and Homebase are subject to seasonal fluctuations.Demand for Argos products is highest during the months of November and December,whilst demand for Homebase products is highest through the spring, at Easter andduring the summer months and, for big ticket items, during the January sales. 15. Related parties The Group's related parties are its joint ventures and associates, keymanagement personnel and the Argos defined benefit pension plans. The onlymaterial transactions between the Group and any of these parties were inrelation to the Argos defined benefit pension plans, and are set out in note 11. In the prior periods, GUS plc and other GUS related companies were relatedparties until the demerger which came into effect on 10 October 2006. In the sixmonths to 30 September 2006 the Group purchased services totalling £5.6m fromthese related parties and was charged £7.0m in respect of corporate head officecosts borne by GUS plc. At 30 September 2006 a balance of £10.0m was owed to theGroup by these related parties. Following the demerger these companies are nolonger related parties, however this balance remains outstanding at the balancesheet date. Page 32 HOME RETAIL GROUP PLC NOTES TO THE CONDENSED HALF-YEARLY FINANCIAL INFORMATIONFor the 26 weeks ended 1 September 2007 16. Post balance sheet events On 11 October 2007, the Group announced that it had signed a contract for thepurchase of 27 leasehold properties from Focus DIY, for a purchase price of £40min cash. The properties are expected to be transferred to Home Retail Group overthe period up to 31 December 2007. No other infrastructure and no merchandisestock are being acquired as part of the transaction. The re-fit capitalinvestment is expected to amount to approximately £30m. There will also be anamount of transitional operating costs incurred from the date of transfer to there-commencement of trading the properties. The current estimate of the level ofthese costs to be incurred in the second half of this financial year isapproximately £15m. Staff previously employed by Focus will be transferred fromFocus and continue employment with Homebase. It is impracticable to providefurther information regarding this acquisition at this time due to the proximityof the transaction to the date of this report. 17. Home Retail Group website The maintenance and integrity of the Home Retail Group website,www.homeretailgroup.com, is the responsibility of the Company's directors. Thework carried out by the auditors does not involve consideration of these mattersand, accordingly, the auditors accept no responsibility for any changes that mayhave occurred to the condensed half-yearly financial information since it wasinitially presented on the website. Legislation in the United Kingdom governingthe preparation and dissemination of financial information may differ fromlegislation in other jurisdictions. Page 33 HOME RETAIL GROUP PLC Statement of directors' responsibilities The directors confirm that this condensed set of financial statements has beenprepared in accordance with IAS 34 as adopted by the European Union, and thatthe interim management report herein includes a fair review of the informationrequired by DTR 4.2.7 and DTR 4.2.8. The directors of Home Retail Group plc are listed in the Home Retail Group plcAnnual Report and Financial Statements 2007. There have been no changes ofdirectors since the Annual Report. A list of current directors is maintained onthe Home Retail Group website www.homeretailgroup.com. By order of the Board Terry DuddyChief Executive24 October 2007 Richard AshtonFinance Director24 October 2007 Page 34 HOME RETAIL GROUP PLC INDEPENDENT REVIEW REPORT TO HOME RETAIL GROUP PLC Introduction We have been instructed by the Company to review the financial information forthe 26 weeks ended 1 September 2007 which comprises the consolidated interimbalance sheet as at 1 September 2007 and the related consolidated interim incomestatement, cash flows and recognised income and expense for the 26 weeks thenended and related notes. We have read the other information contained in thehalf-yearly report and considered whether it contains any apparent misstatementsor material inconsistencies with the financial information. Directors' responsibilities The half-yearly report is the responsibility of, and has been approved by, thedirectors. The directors are responsible for preparing the half-yearly financialreport in accordance with the Disclosure and Transparency Rules of the UnitedKingdom's Financial Services Authority. As disclosed in note 1, the annual financial statements of Home Retail Group plcare prepared in accordance with IFRSs as adopted by the European Union. Thefinancial information included in this half-yearly financial report has beenprepared in accordance with International Accounting Standard 34, 'InterimFinancial Reporting', as adopted by the European Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of management and applying analyticalprocedures to the financial information and underlying financial data and, basedthereon, assessing whether the disclosed accounting policies have been applied.A review excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit and therefore provides a lower level of assurance. Accordingly we do notexpress an audit opinion on the financial information. This report, includingthe conclusion, has been prepared for and only for the Company for the purposeof the Disclosure and Transparency Rules of the Financial Services Authority andfor no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the 26 weeks ended1 September 2007. PricewaterhouseCoopers LLPChartered AccountantsLondon 24 October 2007 Notes: (a) The maintenance and integrity of the Home Retail Group plc web site is theresponsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept noresponsibility for any changes that may have occurred to the interim reportsince it was initially presented on the web site. (b) Legislation in the United Kingdom governing the preparation anddissemination of financial information may differ from legislation in other jurisdictions. Page 35HOME RETAIL GROUP PLC SHAREHOLDER INFORMATION Registrar Enquiries concerning holdings of the Company's shares and notification of theholder's change of address should be referred to Equiniti (formerly Lloyds TSBRegistrars), Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA(telephone: 0845 603 9903). Electronic communications Shareholders can arrange to receive email notification that important documents,such as the Company's annual reports and notices of shareholder meetings, areavailable electronically and to submit voting instructions on-line in the run upto Annual General Meetings, by registering at www.shareview.co.uk. The serviceis provided by Equiniti and gives access to a comprehensive range of shareholderinformation, including dividend payment details. Home Retail Group plc website A full range of investor information is available at www.homeretailgroup.com.This includes webcasts of results presentations given to analysts and fundmanagers together with the slides accompanying those presentations. Dividend reinvestment plan The Home Retail Group Dividend Reinvestment Plan ('DRIP') enables shareholdersto use their cash dividends to purchase Home Retail Group shares. Shareholderswho wish to participate in the DRIP for the first time, in respect of theinterim dividend to be paid on 23 January 2008, should return a completed andsigned DRIP mandate form to be received by the Registrar, by no later than 2January 2008. For further details, please contact Equiniti, Aspect House,Spencer Road, Lancing, West Sussex, BN99 6DA (telephone: 0870 241 3018). Share price information The latest Home Retail Group share price is available on the Home Retail Groupwebsite, as well as through other information services such as Ceefax, Teletextand also on the Financial Times Cityline Service telephone 0906 843 2740 (callscharged at 60p per minute). Share dealing facility Existing or potential investors can buy or sell Home Retail Group ordinaryshares using an Internet or telephone share dealing service provided by Equinitiby logging onto www.shareview.co.uk or by calling 0870 850 0582 between 8.30amand 4.30pm weekdays. Financial calendar Interim ex-dividend date 14 November 2007Interim Management Statement 17 January 2008Interim dividend to be paid 23 January 2008Full-year trading statement 13 March 2008Full-year results for the 52 weeks to 1 March 2008 30 April 2008Final ex-dividend date 21 May 2008Interim Management Statement 12 June 2008Final dividend to be paid 23 July 2008 Registered office Home Retail Group plc, Avebury, 489 - 499 Avebury Boulevard, Milton Keynes MK92NW Page 36 This information is provided by RNS The company news service from the London Stock Exchange

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