Interim Results

Carpetright plc

Interim Results for the 26 weeks ended 30 October 2010

Carpetright plc, Europe's leading specialist carpet and floor coverings retailer, today announces its interim results for the 26 week trading period to 30 October 2010.

Headlines

Group

• Total Group revenue1 of £248.0m (2009: £258.0m)

• Underlying2 profit before tax of £10.0m (2009: £13.9m)

• Profit before tax of £9.8m (2009: £11.0m)

• Underlying2 earnings per share of 10.7p (2009: 15.5p)

• Basic earnings per share of 10.4p (2009: 11.6p)

• Interim dividend of 8.0p (2009: 8.0p)

• Net debt reduced by £12.8m to £58.5m during the first half

UK and Republic of Ireland

• Total revenue1 declined by 2.7% to £207.6m, with like-for-like sales3 down 6.1%

• Underlying2 operating profit decreased 31.9% to £9.6m (2009: £14.1m)

• Store base reduced by two to 584 stores

Rest of Europe

• Total reported revenue1 declined by 6.9% to £40.4m, Like-for-like3 sales were down by 2.9% in local currency

• Underlying2 operating profit decreased by 26.8% to £3.0m (2009: £4.1m)

• Store base increased by one to 118 stores

Commenting on the results, Lord Harris of Peckham, Chairman and Chief Executive, said:

"The economic and consumer environment remained challenging in the first half. Against this backdrop, the Group continued to trade profitably and generate net cash.

"Whilst we remain cautious about the retail market in the balance of the financial year and throughout 2011, the Board has confidence that the Group is well positioned to deliver future sales growth when consumer demand in our sector improves."

Notes

1. All sales figures are quoted after deducting VAT.

2. 'Underlying' excludes exceptional items and related tax.

3. Like-for-like sales calculated as this year's net sales divided by last year's net sales for all stores that are at least 12 months old at the beginning of our financial year. Stores closed during the year are excluded from both years. No account is taken of changes to store size or introduction of third party concessions. Sales from insurance and house building contracts are supplied through the stores and included in their figures.

Results Presentation

Carpetright will hold a presentation to analysts and investors at Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB at 09.00 am today.

A listen only conference call facility is available on 01452 560297, conference ID: 31437535

A copy of this interim statement can be found on our website www.carpetright.plc.uk today from 7.00am.

Enquiries:

Carpetright plc

Lord Harris of Peckham, Chairman and Chief Executive

Neil Page, Group Finance Director

Telephone 020 7638 9571 (until 2pm), 01708 802000 (thereafter)

Citigate Dewe Rogerson 

Kevin Smith / Lindsay Noton / Clare Simonds

Telephone 020 7638 9571

Forthcoming News flow :

Carpetright will release its Interim Management Statement for the third quarter on2 February 2011.

Certain statements in this report are forward looking. Although the Group believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements contain risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements. We undertake no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

Chief Executive's Review

The economic and consumer environment remained challenging in the first half. Against this backdrop, the Group continued to trade profitably, generate net cash and is in a strong position to deliver future sales growth when consumer demand in our sector returns.

Total sales decreased by 3.9% to £248.0m. During the first half, the Group opened 19 stores and closed 20 which gave a net decrease of one store and a total store base of 702. Total space grew by 0.2% to just over 6.2m square feet.

Underlying operating profit decreased by 27.6% to £12.6m, reflective of the decline in sales. Net finance charges decreased to £2.6m. These factors combined to produce a 28.1% decrease in underlying profit before tax to £10.0m, with a consequent decline in underlying earnings per share to 10.7p. 

Exceptional items accounted for a net loss of £0.2m (2009: loss of £2.9m). This is principally a combination of net property profits offset by non-cash store impairment and onerous lease charges. As a result, profit before tax decreased by 10.9% to £9.8m. Basic earnings per share decreased by 10.3% to 10.4p, reflecting the decrease in post-tax earnings.

In determining the interim dividend, the Board considered the level of profit this half year compared with the same period last year, as well as the importance of stability in the dividend flow to our investors. The Board has decided to maintain the interim dividend at the same level as last year. If the Board's current expectations for the full year result are achieved, the full year dividend is likely to be at a similar level to last year. When profitability increases, the Board expects to rebalance the dividend to a lower interim relative to the final dividend, to reflect more accurately the balance of profits earned through the year.

The combination of cash flow from continued profitability, reduced capital expenditure and effective management of working capital, enabled net debt to be reduced by £12.8m since the year end to £58.5m.

Summary of Group Results

A summary of the reported financial results for the 26 weeks ended 30 October 2010 is set out below:

* Where this review makes reference to "Underlying" these relate to profits / earnings before exceptional items.

Business Review

The year to date has been influenced by an extended period of both economic uncertainty and weak consumer demand. The Group remains committed to delivering long term sustainable growth in earnings per share and cash flow through the following five strategies:

1. Primarily focusing on floor coverings

2. Developing a competitive bed proposition

3. Managing our store portfolio

4. Expanding selectively in Continental Europe

5. Reaching more customers through additional sales channels

1. Primarily focusing on floor coverings

We believe the foundations of Carpetright's success rest on the provision of market leading product choice, which offers great value, backed by excellent customer service. This view is supported by externally conducted market research which indicates both strong brand recognition and a reputation for being the 'first choice' for fitted carpet. This research also provided insight into certain areas which, through further development, can strengthen our proposition, specifically around the in-store environment and the communication of our services. This initiative is being developed through an internal programme, under the leadership of the Group Commercial Director, Martin Harris.

During the first half of the year we have changed the method of rug distribution to our stores. Previously, rugs were delivered direct from the manufacturer to each store. They are now centrally replenished from our Purfleet distribution centre which has enabled us to improve in-store availability, reduce stock holding by around £1m and improve margin. The full benefit of this will be realised in the second half of the year.

2. Developing a competitive bed proposition

The development of the bed business continued throughout the period. The focus has been on opening bed departments in existing stores, introducing new products and integrating the sales teams. At the end of October we were trading from 176 locations with plans for further openings in the second half. All of these factors have resulted in total bed sales being up 30.3% in the period, with the second quarter showing accelerating growth.

3. Managing our store portfolio

At the end of October we had 584 stores trading in the UK and RoI. During the last six months we have opened 17 new stores and closed 19 stores. Where available we have taken advantage of opportunities to reduce the size of individual stores, resulting in a corresponding lower rent payable. We have 92 stores where the lease expires within the next five years which will provide opportunities to achieve lower net rental costs.

Although we have broad national coverage in the UK we know there are still opportunities to open profitable stores, particularly in densely populated areas. This is supported by recent analysis which demonstrated the catchment area for our existing stores is an average drive time of less than 15 minutes. During the last year we have opened many smaller, profitable High Street stores. We expect to continue this activity in the second half.

In the Rest of Europe we opened two new stores and closed one store, ending the period with 118 stores. We have also been able to sublet space in three more stores, reducing the net rent charge.

4. Expanding selectively in Continental Europe

We continue to monitor the floor covering markets across Northern Europe, looking for opportunities which we believe would provide the potential for growth in Group profitability.

5. Reaching more customers through additional sales channels

In the autumn of 2009 we launched our transactional and informational websites, which have been further developed over the last twelve months. On a weekly basis we are now achieving over 55,000 unique visitors, sending out over 800 samples and booking nearly 700 appointments. The samples/appointment leads can be specifically tracked to store sales, demonstrating the importance of having an effective and integrated multi-channel proposition. The strength of this proposition was recently recognised at the Retail Systems Awards 2010 when www.carpetright.co.uk was voted Retail Website of the Year.

We have continued to focus on gaining additional sales through the insurance replacement business and have received positive feedback about the quality of our products and service. Although the market has been impacted by a lower volume of claims, which has resulted in our sales from this channel being below the previous year, we believe we have a strong proposition which has the ability to deliver incremental benefit in future years.

During the year significant effort has been devoted to developing an appropriate offer for house builders. Although the sales in the period have been minimal in the context of the whole business, they are an increase on the previous year and we believe we have the foundations to grow this in the coming years.

Summary and Outlook

The economic environment in all our markets has made trading tough. The business has focused on the opportunities available and the roll out of our bed offer into more stores is generating a new income stream and adding to the strength of the company.

Whilst we remain cautious about the retail market in the balance of the financial year and throughout 2011, the Board has confidence that the Group is well positioned to capitalise on opportunities when consumer demand in our sector improves.

UK and Republic of Ireland - Operational Review

UK & RoI - Key financial results

Total revenue decreased by 2.7% to £207.6m. We have opened 17 stores and closed 19 stores in the period, which translated into net space growth of 8,000 sq ft, an increase of 0.2% since the start of the year.

The store portfolio is now as follows:

Like for like sales declined by 6.1% in the period. This performance can be attributed to two key factors:

·; Underlying retail flooring performance was down 7.1% reflecting the decline in mortgage approval figures, as more stringent criteria are being exercised by lenders, along with an extended period of fragile consumer confidence.

·; The focus on developing the bed offer and introducing it into more stores contributed 1.0% of growth to the year on year movement.

Gross profit declined by 2.1% to £128.9m, representing 62.1% of sales, an increase of 0.4 percentage points. This is due to:

·; An improvement in the underlying floor covering margin of 0.6 percentage points. This was achieved through a combination of management of promotions, negotiation with suppliers and increased productivity in the Purfleet cutting facility.

·; The growth of bed sales, which accounted for a decline of 0.2 percentage points, as this part of the business operates on a lower gross margin than floor coverings.

The total UK and RoI cost base increased by 1.5% year on year to £119.3m. Store payroll continued to be managed closely to the volume of sales, with average Full Time Equivalents in the first half decreasing by 1.9% to 2,426. Store occupancy costs increased year on year, primarily through underlying rent inflation plus new space. The focus of marketing expenditure was to achieve the same level of media coverage at a lower cost.

All of the above elements combined to produce an underlying operating profit that declined 31.9% to £9.6m.

Rest of Europe - Operational Review

Rest of Europe - Key financial results

In local currency terms, total sales declined by 2.4% with like for like sales down 2.9%. The opening months of the first half were impacted by hot weather and the success of the Dutch football team at the World Cup. There was an improvement in the second quarter, some of which is attributable to the development of the laminate proposition which has partially offset a decline in soft flooring. This overall performance was in the context of a market which it is estimated has declined by around 5% and as a consequence, we have continued to increase our market share. After allowing for the movement in exchange rates, the total sales translate to a 6.9% decline in reported revenue.

The store portfolio is now as follows:

The gross profit declined by 3.4% in local currency terms on the reduced level of sales. The gross profit percentage declined by 0.7 percentage points, reflecting the greater participation of lower margin laminate sales in the mix.

Total costs declined by 0.4% in local currency terms. The year on year decrease was a combination of inflationary pressures from salary and rent indexation offset by store headcount reductions and cost management activities.

In local currency terms the underlying operating profit decreased by 19.1%, which translated into a 26.8% decline in reported profit to £3.0m with an operating margin of 7.4%.

Group Financial Review

Exceptional items

The Group recorded a net charge of £0.2m (2009: charge of £2.9m) in the first half:

We continued to trade our property portfolio, although in current market conditions this is difficult. A net profit of £0.2m was delivered (2009: loss of £0.2m).

As a result of the challenging retail environment we have reviewed the carrying value of the store assets in our balance sheet. The models used to value these assets include a number of assumptions relating to market growth and inflationary expectations. The tests have led to a net impairment of £0.2m in relation to six loss making stores, primarily located in the Republic of Ireland. In addition, there are two properties where we previously traded, where we have made an onerous lease provision on the basis of the difference between the expected inflows and outflows for these properties.

Taxation

The taxation charge is based on an estimated full year effective tax rate of 29.7% (2009: 29.5%).

Net debt and cash flow

The Group's net debt at 30 October 2010 was £58.5m, a reduction of £12.8m from the year end position of £71.3m. This decrease was primarily driven by the operational profit performance and a decrease in working capital.

The average net debt figure in the first half was £70.1m (2009: £97.5m) and the Group's average cost of funding was 7.3% (2009: 6.8%).

Summary cash flow

Net capital expenditure was £3.6m (2009: £5.6m). This can be broken down into the following principal categories:

Gross bank borrowings at the balance sheet date were £60.8m (2009: £76.5m) of which £51.3m is term based with the balance of £9.5m being drawn down from overdraft facilities. The Group had further undrawn, committed facilities of £49.4m at the balance sheet date. The term of the majority of these facilities is to July 2012 and they are subject to a number of covenants, against which the Group monitors compliance. The Group has sufficient headroom to enable it to comply with covenants on its existing borrowings.

Pensions

At 30 October 2010 the IAS 19 net retirement benefit deficit was £4.1m (1 May 2010: £4.8m). The change is predominantly due to a decrease in the discount rate used to calculate the liability at the half year. The half year discount rate was 5.2% (year end 5.5%), reflecting prevailing corporate bond rates and together with a decrease in the inflation rate used of 3.1% (year end 3.6%), has led to a decrease of £0.7m in the calculation of the net pension liability for accounting purposes at 30 October 2010. The decrease in the deficit has also been impacted in part by an increase of £0.3m in the market value of the assets arising from a combination of higher equity prices and a tightening of corporate bond yields. As previously announced, the scheme was closed to future accrual with effect from 1 May 2010.

The company agreed a recovery plan with the Trustees in 2009 and this will be reviewed following the next triennial valuation, which will be performed at 5 April 2011.

Dividend

The Board has declared an interim dividend of 8.0p per share.

In determining the interim dividend, the Board considered the level of profit this half year compared with the same period last year, as well as the importance of stability in the dividend flow to our investors. The Board has decided to maintain the interim dividend at the same level as last year. If the Board's current expectations for the full year result are achieved, the full year dividend is likely to be at a similar level to last year. When profitability increases, the Board expects to rebalance the dividend to a lower interim relative to the final dividend, to reflect more accurately the balance of profits earned through the year.

The dividend will be paid on 18 February 2011 to shareholders on the register on4 February 2011. 

Lord Harris of Peckham

13 December 2010

Carpetright plc

Condensed consolidated income statement for 26 weeks ended 30 October 2010

Carpetright plc

Condensed consolidated statement of changes in equity for 26 weeks ended 30 October 2010

Carpetright plc

Condensed consolidated balance sheet as at 30 October 2010

The notes on pages 15 to 21 form an integral part of this consolidated interim financial information.

Carpetright plc

Condensed consolidated statement of cash flows for 26 weeks ended 30 October 2010

For the purposes of the cash flow statement, cash and cash equivalents are reported net of overdrafts repayable on demand. Overdrafts are excluded from the definition of cash and cash equivalents disclosedin the balance sheet.

The notes on pages 15 to 21 form an integral part of this consolidated interim financial information.

1. General information

This condensed consolidated half-yearly financial information was approved for issue on 13 December 2010.

This interim report does not comprise statutory accounts within the meaning of Section 434(3) of the Companies Act 2006. It has been reviewed but not audited by the Group's auditors. The statutory accounts for the year ended 1 May 2010 were approved by the Board of Directors on 28 June 2010 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement made under section 498 of the Companies Act 2006.

2. Basis of preparation

These condensed consolidated half-yearly financial statements for the 26 weeks ended 30 October 2010 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The half-yearly condensed consolidated financial report should be read in conjunction with the annual financial statements for the 52 weeks ended 1 May 2010, which have been prepared in accordance with IFRSs as adopted by the European Union.

The Directors are satisfied that it is appropriate for these financial statements to be prepared on a going concern basis.

3. Accounting policies

Except as described below the accounting policies adopted are consistent with those of the annual financial statements for the 52 weeks ended 1 May 2010, as described in those annual financial statements.

Taxes on income for interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

The following new standards and amendments to standards, which are mandatory for the first time in the financial year beginning 2 May 2010, are either not currently relevant or material for the Group:

IFRS3 (revised), 'Business combinations'

IAS27 (revised), 'Consolidated and separate financial statements'

IAS38 (amendment), 'Intangible assets'

IFRIC16 'Hedges of net investment in a foreign operation'

IFRIC17 'Distribution of non-cash assets to owners'

IFRIC18 'Transfer of assets from customers'

There are no new standards and amendments to standards which are relevant to the Group.

4. Segmental analysis

The operating segments have been determined based on reports reviewed by the Board that are used to make strategic decisions. Following the closure of the Polish operation in 2009/10 the management structure for Europe has been changed. The Netherlands and Belgium are now managed as a combined business by a single management team who have no other responsibilities. Information is presented to the Board of Carpetright plc (the Chief Operating Decision Maker) on a combined basis. As a result it is considered that the combined business forms a single reportable operating segment under IFRS 8. The comparative segmental information has been restated to the new basis.

The reportable operating segments derive their revenue primarily from the retail of floor coverings and beds. Central costs are incurred principally in the UK and are immaterial. As such these costs are included within the UK & RoI segment. Sales between segments are carried out at arm's length.

The segment information provided to the Board for the reportable segments for the 26 weeks ended 30 October 2010 is as follows:

Carpetright plc is domiciled in the UK. The Group's revenue from external customers in the UK is £203.4m (2009: £208.6m) and the total revenue from external customers from other countries is £44.6m (2009: £49.4m). The total of non-current assets (other than financial instruments, deferred tax assets and employment benefit assets) located in the UK is £171.8m (2009: £182.9m) and the total of those located in other countries is £77.3m (2009: £89.1m).

Carpetright's trade has historically shown no distinct pattern of seasonality with trade cycles more closely following economic indicators such as consumer confidence and mortgage approvals.

The segment information based on last year segments provided to the Board for the reportable segments for the 26 weeks ended 30 October 2010 is as follows:

5. Exceptional items

6. Taxation

The effective tax rate is defined as the tax charged or credited as a percentage of the accounting profit before tax. The underlying tax rate is defined as the effective tax rate after adjusting for, when relevant, profit/(loss) on property disposals and other exceptional items and tax adjustments in respect of such items.

7. Dividends

The proposed interim dividend of 8.0p per share was approved by the Board of Directors on 13 December 2010 but has not been included as a liability in these financial statements. The proposed dividend will be paid on 18 February 2011 to shareholders who are on the register of members on 4 February 2011.

8. Earnings per share

The Directors have presented an additional measure of earnings per share based on underlying earnings as they believe this provides a more comparable measure on an ongoing basis. Underlying earnings is defined as profit after adjusting for post tax profits/(losses) on exceptional items.

9. Capital expenditure

During the period, the Group spent approximately £0.3m (2009: £0.6m) on intangible assets; £3.8m (2009: £5.2m) on the acquisition and fit out of stores. Net proceeds from vacating properties during the period were £0.5m (2009: £0.2m).

Capital commitments of £2.9m at 30 October 2010 for which no provision has been made in the accounts relate to the acquisition of tangible and intangible assets (2009 : £2.4m).

10. Borrowings