Preliminary Results

2nd May 2007 07:01

Home Retail Group Plc02 May 2007 2 May 2007 Home Retail Group plc Preliminary Results Home Retail Group, the UK's leading home and general merchandise retailer, todayannounces its Preliminary Results for the financial period ended 3 March 2007.The financial period is shorter than a full year due to the change in year-endand it also includes certain financial impacts of GUS plc's ownership of HomeRetail Group up to the point of demerger1. To assist with analysis andcomparison, certain pro forma information has therefore been provided toeliminate the distortions of these two impacts on the performance of Home RetailGroup. Operating highlights * Delivered on each element of the strategy for growth * Expanded choice, improved ranges and enhanced the customer offer * Extended our leading market share in UK home and general merchandise * Driven gross margin benefits through leverage of purchasing scale and ongoing supply chain initiatives * Enlarged the combined portfolio by 38 stores to reach 990 * Capitalised on clear multi-channel leadership * Established further initiatives and operational improvements to continue driving sustainable growth Financial highlights * Pro forma sales2 up 6% in total to £5,851m (2006: £5,510m) with like-for-like sales up 2.4% at Argos and down 1.4% at Homebase; reported sales of £5,607m * Pro forma benchmark operating profit3 up 8% to £359.4m (2006: £331.8m) with growth at both Argos and Homebase; reported operating profit of £305.2m * Pro forma benchmark profit before tax4 up 12% to £376.7m (2006: £337.1m); reported profit before tax of £296.9m * Pro forma basic benchmark earnings per share5 up 14% to 29.3p (2006: 25.6p); reported basic earnings per share of 21.6p * Benchmark pre-tax return on invested capital6 up 150 basis points to 12.0% * Final dividend of 9.0p recommended, making 13.0p for the year Oliver Stocken, Chairman of Home Retail Group, commented: "These results represent a strong start to Home Retail Group's new life as anindependent company. They are particularly pleasing in a year during which weachieved the successful demerger from GUS and were faced with some difficultconditions in our markets." Terry Duddy, Chief Executive of Home Retail Group, added: "We are pleased to report that both Argos and Homebase have performed well,benefiting from the shared infrastructure and capabilities of the Group whilecontinuing to invest for future growth. The combination of a strong operationalperformance, together with a clear strategy for growth, means we are wellpositioned and confident of making further progress in what we expect to beanother challenging year for UK consumer spending." 1. The change in both the year-end and the Group's capital structure ondemerger result in statutory reported results that are non-comparable. Thestatutory reported results for the most recent financial period include theresults for Homebase from 1 March 2006 (approximately 12 months) and the resultsfor the rest of the Group from 1 April 2006 (approximately 11 months). Thestatutory reported results also reflect certain financial impacts that are aresult of the fact that Home Retail Group was wholly owned by its former parentcompany, GUS plc, until the demerger became effective on 10 October 2006. Theseresults are not therefore representative of a financial period length comparableto the prior year, nor do they reflect the capital structure that Home RetailGroup operated under from the date the demerger occurred. 2. Pro forma sales are calculated on a 52-week basis. This represents the 52weeks to 3 March 2007 and the comparable 52 weeks to 4 March 2006. 3. Pro forma benchmark operating profit is defined as operating profit beforeamortisation of acquisition intangibles, store impairment charges, exceptionalitems and costs related to demerger incentive schemes. It is calculated on a52-week basis. 4. Pro forma benchmark profit before tax ("PBT") is defined as profit beforeamortisation of acquisition intangibles, store impairment charges, exceptionalitems, costs related to demerger incentive schemes, financing fair valueremeasurements, financing impact on retirement benefit balances and taxation.Net interest income within pro forma benchmark PBT is calculated to illustratethe Group's financial performance as if the demerger capital structure hadexisted at 31 March 2006 and had been achieved based on underlying cash flowsprior to 31 March 2006. Benchmark PBT also includes Home Retail Group's share ofpost-tax results of associates. It is calculated on a 52-week basis. 5. Pro forma basic benchmark earnings per share ("EPS") is defined asbenchmark PBT less taxation attributable to benchmark PBT, divided by theweighted average number of shares in issue from the date of demerger (excludingHome Retail Group shares held in its Employee Share Ownership Trust ("ESOT")).It is calculated on a 52-week basis. 6. Benchmark pre-tax return on invested capital is defined as benchmarkoperating profit plus share of post-tax results of associates, divided by proforma net assets excluding retirement benefit balances, tax balances and netcash/debt. 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 KingEdward Hall, 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. Home Retail Group's First Quarter Trading Statement (Interim ManagementStatement) covering the 13 weeks to 2 June 2007 will be announced on 14 June2007. 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 52-week pro forma to Statutory reported to ________________________________________________ £m 3 March 4 March 3 March 31 March 2007 2006 2007 2006 (short (12 months) period) Argos 4,164.0 3,858.8 3,912.8 3,892.6Homebase 1,594.2 1,559.0 1,606.3 1,561.8Financial Services 93.2 92.5 87.6 93.6 ________________________________________________ Sales 5,851.4 5,510.3 5,606.7 5,548.0 Cost of sales (3,852.2) (3,654.6) (3,680.5) (3,686.5) ________________________________________________ Gross profit 1,999.2 1,855.7 1,926.2 1,861.5 Operating expenses before exceptional items and costsrelated to demerger incentive schemes (1,639.8) (1,523.9) (1,592.5) (1,515.5) ________________________________________________ Argos 325.0 297.0 300.9 296.0Homebase 53.4 51.4 51.2 51.8Financial Services 5.0 6.1 4.5 6.1Central Activities (24.0) (22.7) (22.9) (16.2)Adjustment on merger accounting - - - 8.3 ________________________________________________ Benchmark operating profit 359.4 331.8 333.7 346.0 Pro forma net interest income (see below) 16.6 9.5 n/a n/aShare of post-tax results of associates 0.7 (4.2) 0.7 (4.2) ________________________________________________ Benchmark PBT 376.7 337.1 n/a n/a Net interest costs attributable to GUS capital structure (see below) (39.2) (40.9) (21.0) (45.3)Exceptional items included in operating profit (22.7) (24.7) (22.7) (24.7)Costs related to demerger incentiveschemes (5.8) - (5.8) -Financing fair value remeasurements (0.1) (2.4) (0.1) (2.0)Financing impact on retirement benefitbalances 12.3 2.6 12.1 2.6 ________________________________________________ Profit before tax 321.2 271.7 296.9 272.4 Taxation (117.5) (94.9) (109.5) (96.0)of which: taxation attributable to pro forma benchmark PBT (122.1) (114.5) n/a n/a ________________________________________________ Profit for the period 203.7 176.8 187.4 176.4 ________________________________________________ Basic benchmark EPS 29.3p 25.6p n/a n/a Basic EPS n/a n/a 21.6p 20.3p Number of shares for basic EPS 869.6m 869.0m 869.6m 869.0m ________________________________________________ Net interest reconciliation: Pro forma net interest expense (1.2) (8.3) n/a n/aFinancing costs charged to Financial Services 17.8 17.8 n/a n/a ________________________________________________ Pro forma net interest income 16.6 9.5 n/a n/a Interest costs attributable to GUScapital structure (46.1) (40.9) (44.3) (49.2)Exceptional finance income 6.9 - 6.9 -Adjustment on merger accounting - - - (14.0)Financing costs charged to FinancialServices - - 16.4 17.9 ________________________________________________ Net interest costs attributable to GUScapital structure (39.2) (40.9) (21.0) (45.3) Financing fair value remeasurements (0.1) (2.4) (0.1) (2.0)Financing impact on retirement benefitbalances 12.3 2.6 12.1 2.6 ________________________________________________ Income statement net financing costs (10.4) (31.2) (9.0) (44.7) ________________________________________________ Financial information in the above tables and throughout this announcement hasbeen prepared in accordance with Note 1, Basis of Preparation. The basis ofpreparation for pro forma restatements is set out at Appendix 1, withreconciliations between pro forma and statutory reported periods provided atAppendix 2. Pro forma sales up 6% to £5,851m, reflecting growth of 8% at Argos and 2% atHomebase. Pro forma benchmark operating profit up 8% to £359.4m, comprising a £28mincrease at Argos (a £17m increase adjusting for £11m of one-off costs incurredin the first half of the previous year), and a £2m increase at Homebase;Financial Services declined £1m and costs of Central Activities were £1m higher. Pro forma benchmark PBT up 12% to £376.7m, which additionally reflects the £7mlower net interest expense on a reduced average net debt position, together witha £5m improved contribution from Home Retail Group's share of post-tax resultsof associates. An improved effective tax rate based on pro forma benchmark PBT of 32.5%. Theimprovement from 33.5% in the prior year largely reflects a lower level ofdisallowable expenditure for tax purposes. Pro forma basic benchmark EPS up 14% to 29.3p. Final dividend of 9.0p per Home Retail Group share recommended by the Board,making a total dividend of 13.0p per share for the year. The proposed dividendis larger than if it had been on the previously announced basis of reflectingthe shorter statutory reported period. It represents cover, based on pro formabenchmark basic EPS, of 2.25 times. Net cash of £60m at 3 March 2007. From the allocated pro forma net debt as at31 March 2006 of £200m, the net cash inflow has been driven by strong workingcapital management, together with the improved profit performance. The positionat 3 March rather than 31 March 2007 is flattered by excluding a full month ofMarch which has historically been a cash outflow month of approximately £100m. Benchmark pre-tax return on invested capital (ROIC) improvement to 12.0%. Basedon year-end invested capital of £3,012m and pro forma benchmark operating profitplus share of post-tax results of associates of £360.1m, pre-tax ROIC improved150 basis points versus 10.5% at last year's balance sheet date. Outlook The Group has performed strongly for the financial year just completed. However,we remain cautious on a retail environment that is still expected to bechallenging. In addition, comparatives for the retail market as a whole, andparticularly Argos, become tougher as we start to face last year's positiveimpacts of the World Cup as well as certain other product categories thatboosted the first and particularly second financial quarters last year. Home Retail Group continues to position its businesses accordingly, and hasentered the new financial year from a position of operational strength. GROUP STRATEGY Home Retail Group seeks to take advantage of four factors to drive sustainablegrowth. 1. Leverage extensive product portfolio, market leadership and purchasing scale by: • building upon market leading positions through enhancing and developing both the product range and the offering in core areas • using shared scale and expertise in sourcing and logistics as well as joint product ranges to provide value for money and wide choice Our businesses have continued to carry out extensive range reviews, introducingthousands of new products over the last year. The level of direct importing hasgrown to over 28% of Group sales. Nearly half of this is now being sourceddirectly from the manufacturer by the Group's overseas buying offices. Thisrepresents more than 5,000 products across Argos and Homebase. 2. Increase market share in targeted large product markets by: • capitalising upon the strength of the Argos and Homebase brands to identify opportunities in product markets (particularly large, fragmented markets) • utilising the inherent flexibility of the Argos and Homebase formats • using shared infrastructure efficiently to make these products available to customers quickly and easily Argos and Homebase have this year both expanded their trials of furniture andhousewares catalogues in order to extend the Group's leading position in thesefragmented markets. The growth in sales of furniture and other large productswill see the Group start work in the current financial year on its fourthtwo-man home delivery warehouse. Homebase's utilisation of the shared supplychain and home delivery infrastructure has brought it the scale and costadvantage of the UK's largest home delivery operation of large, bulky products. 3. Expand the Argos and Homebase store networks by: • Opening approximately 30 Argos stores per year • Opening approximately 15 Homebase stores per year, with a further small number of existing Homebase stores also supporting a mezzanine level The Group's store base is approaching 1,000 stores and we continue to see theopportunity over time for Argos to exceed 800 stores and Homebase to exceed 450stores. We also continue to develop formats and store presentations in bothbusinesses, and run property as central function for leverage and spacemanagement opportunities. 4. Extend and exploit multi-channel leadership by: • driving incremental sales growth over and above that which is achieved through new store openings • continuing with a customer focused, fully integrated approach to ensure that whether customers shop with Argos in store, online or over the phone they are able to find, order and receive goods seamlessly across the different channels • leveraging skills, scale and infrastructure to support the Homebase proposition The leadership of Argos in terms of fully integrated multi-channel convenienceis such that over one-third of its sales are ordered and delivered across morethan one channel. Skills and ecommerce infrastructure at Argos have led to there-launch of the Homebase website which is growing sales strongly andprofitably. Both businesses also benefit from our in-house financial servicesbusiness which provides appropriate credit offers to drive product sales and isfully enabled across all customer channels. BUSINESS REVIEWS To assist with analysis and comparison, the following business reviews are basedupon pro forma information. The basis of preparation for pro forma restatementsis set out at Appendix 1, with reconciliations between pro forma and statutoryreported results provided at Appendix 2. Argos ________________________________________________________________________________ Pro forma 52 weeks to 3 March 2007 4 March 2006 Sales (£m) 4,164.0 3,858.8 Benchmark operating profit (£m) 325.0 297.0 Benchmark operating margin 7.8% 7.7%________________________________________________________________________________ Like-for-like change in sales 2.4% (1.4%)New space contribution to sales change 5.5% 7.5%Total sales change 7.9% 6.1% Benchmark operating profit change 9% n/a Number of stores at period end 680 655Of which Argos Extra stocked-in 238 189________________________________________________________________________________ As the UK's leading general merchandise retailer, Argos provides a highlysuccessful and unique offer of choice, value and convenience. Argos - operational review Further market share gains achieved. With sales growing 8% to £4.2bn, Argoscontinued to extend its share of the overall home and general merchandisemarket. Argos was named as the UK's biggest furniture retailer by VerdictResearch. Once again, Argos was the number one toy retailer in the UK for 2006,and increased its lead over the second player according to NPD Group. Sharegains also continued within other categories, including the broad electricalgoods category. More catalogue prices lowered. The price reduction on reincluded lines in theSpring/Summer 2007 catalogue is approximately 3%. Argos has lowered prices onreincluded lines in every catalogue since 1999 to constantly reinforce its valueproposition for customers. Prices lowered further during life of catalogue. Argos employs a dynamic pricingapproach, continuing to lower around 20% of prices during the six-month life ofthe catalogue. Since the launch of the current catalogue in January, over 3,000prices have been lowered. Prices are either lowered permanently or through aseries of promotions throughout the year with between 500 and 1,000 pricestypically cut each time. In addition to television, newspaper and onlinepromotional messaging, every month up to 10 million flyers or brochures aredelivered to homes to further communicate price reductions. A unique facilityalso allows customers to use text messaging to check both the latest price aswell as the stock level in an individual store, and then to reserve goods forimmediate or later collection. Widest ever customer choice. The current Argos catalogue offers over 17,000lines across all stores and channels. Since national roll-out of the additionalArgos Extra ranges, awareness of the wider offering has continued to build. Atthe end of the financial period, there were 238 stores that stocked-in theadditional 3,000 lines; this is an increase of nearly 50 stores compared to thesame time last year and is driven by a roughly equal mix of new stores andexisting store conversions. All the remaining stores offer customers the optionto either order-in for later collection from store or to have goods delivered tohome. Argos "Home" catalogue trial extended. The latest edition of this separatecatalogue was in 228 stores by the end of the period. It features 348 pages and3,200 products, with over 100 new lines now exclusive to this catalogue.Research has shown that the Home catalogue is helping Argos further defineitself as the clear market leader, raise awareness and increase qualityperception. The catalogue is supported in store with a comprehensive marketingpackage and a virtual brochure on the Internet. Multi-channel leadership further strengthened. Internet orders grew 45% torepresent over 16% of total Argos sales; online reservations for latercollection in store now represent over half of this, and grew 60% in the year. Afurther 8% of total sales are via telephone or text. In addition, of the 22% oftotal sales that are delivered to home, around half of these are still orderedin store. Together, this means that over one-third of all Argos' sales areordered or received by customers using more than one channel. In the recent Hitwise UK Online Performance Awards, www.argos.co.uk was thesecond most visited site within the 'Shopping & Classifieds' category, behindonly Amazon and therefore ahead of all other UK retailers. Argos was also thethird most searched for brand during 2006, behind only eBay and 'Bebo'. Home delivery convenience enhanced. Argos Direct is the largest two-man deliveryinfrastructure in the UK, with around five million products delivered in thelast year. Using a fleet of around 800 vehicles, it now makes deliveries inthree slots across the day - morning, midday and afternoon. This leading levelof service also includes drivers calling ahead to customers to confirm delivery.Argos' delivery of smaller products through the third-party provider HomeDelivery Network is also now operated on morning or afternoon delivery slots. Argos Direct is completing its roll out of a new warehouse management solution.Originally implemented at the purpose-built Faverdale distribution centre nearDarlington that was opened in 2005, the system has now been implemented in MarshLeys, with a final roll out to Acton Gate beginning shortly. The system isbringing benefits in terms of enhanced operational efficiency, improved orderaccuracy levels and reduced clerical work. New stores extending customer reach. There were 30 store openings and 5 storeclosures during the year, bringing the total at the end of the year to 680stores. Of the 30 store openings, 3 were relocations and 10 were in newcatchments, with the remainder being additional stores in an existing catchment.The openings included 26 as Argos Extra stocked-in stores. Kiosks further improving customer convenience and efficiency. Average salesparticipation in stores with kiosks is now approximately 12%, with some storesreaching as high as 40%. There are now over 1,000 kiosks across just over halfof the store portfolio. In-store operational improvements. The vast majority of stores carry the full10,000 products that represent the core stocked-in range. Goods that arecollected in store account for 78% of total sales. Ongoing improvements in theunique systems, processes and layouts of stockrooms have further enhancedcustomer choice, service and convenience. Infrastructure changes for network optimisation. In the financial year justbegun, Argos will implement changes to its infrastructure that will lead togreater network optimisation and less complexity. The direct importing elementof the Argos Direct home delivery operation will be moved from Corby to thepurpose-built direct importing facility opened last year at Kettering. This willenable a rented central distribution facility at Wolverhampton to be closed, asits operations will be relocated to the capacity released at Corby. Argos - financial review Sales in the 52 weeks to 3 March 2007 increased by 7.9% in total; like-for-likesales grew 2.4%. There was exceptional growth in TVs and video games systemsthroughout the year, driven by new digital technology and gaming platforms,together with a further boost in relation to the World Cup in the first half ofthe year. This offset some continued market weakness in the audio, DVD/VCR andcompact digital camera categories. Other areas that had good growth during theyear included white goods, bedroom furniture, in-car child safety and othernursery-related lines. The contribution to sales growth from net new space was 5.5%, boosted in thefirst half of the year by the 33 Index stores acquired in 2005. This factor,together with the larger total sales base, leads to a lower expectedcontribution to sales growth of between 3% and 4% going forward from continuingto open around 30 new stores a year. The stronger sales performance in the first half was substantially offset by arelated reduction in gross margin of approximately 100 basis points, driven bythe shift in the product mix and the popularity of Argos' promotional offers. Inthe second half of the year, gross margin was ahead by around 50 basis points asa result of ongoing supply chain initiatives, a less promotional stance duringthe key seasonal period and improved management of stock clearance activity. Theresulting gross margin for the full year was therefore in line with the prioryear. Benchmark operating profit for the 52 weeks to 3 March 2007 grew 9% to £325m.Growth excluding £11m of one-off charges incurred in the first half of theprevious year was 6%. Underlying operating cost inflation continued to beapproximately 4%. A further 4% growth in operating costs (excluding the £11m ofone-off charges) reflects the direct costs of higher sales, new space includingthe incremental operating costs of the acquired Index stores and additionalsupply chain infrastructure, partially offset by robust cost control. Homebase ________________________________________________________________________________ Pro forma 52 weeks to 3 March 2007 4 March 2006 Sales (£m) 1,594.2 1,559.0 Benchmark operating profit (£m) 53.4 51.4 Benchmark operating margin 3.4% 3.3%________________________________________________________________________________ Like-for-like change in sales (1.4%) (3.1%)New space contribution to sales change 3.6% 3.1%Total sales change 2.2% 0.0% Benchmark operating profit change 4% n/a Number of stores at period end 310 297Of which contain a mezzanine floor 165 144________________________________________________________________________________ Homebase is positioning itself as the UK's leading home enhancement retailer. Homebase - operational review Successful trading strategy. Following a step-up in promotional activity in theprior year, Homebase successfully reverted to its previous levels of promotions.This, together with improved stock management and the continued benefit fromsupply chain initiatives, resulted in gross margins being strongly ahead in theyear. Good execution of this trading strategy and margin management was a keyoperational highlight given a further year of challenging market conditions. New space improving reach and product offering. Homebase opened 17 new storesand closed 4 (including two store relocations), bringing the total number ofstores to 310. The majority of the new stores were of a smaller store format andin new catchments. As a result of the opening programme since acquisition,Homebase now has 10% of its portfolio in a smaller store format (around 20,000sq feet internal ground floor area, typically with an 8,000 square footmezzanine and an 8,000 square foot garden centre). These smaller stores are ableto offer an authoritative range across the broader home enhancement categories,and are often the only national retailer in smaller catchments such as markettowns for categories including core DIY, garden and showroom. Mezzanine floors in over half the store portfolio. There are 165 mezzanines,with 7 of the 21 increase in the year coming from existing store conversions andthe balance from new store openings. The latest mezzanine floors continue toreinforce the Homebase brand as a destination for kitchens, bathrooms andfurniture which are typically displayed on the mezzanine, while creating animproved environment for retailing homewares, furnishings and accessories on theground floor space beneath. Most new stores will continue to be opened with amezzanine, with a limited number of existing stores remaining to be converted. Latest format roll out trials progressing to plan. Trials are in place toevaluate rolling out the proven home enhancement offering throughout theHomebase chain. The opportunity remains to provide a comprehensive andcompelling set of merchandise ranges in a more consistent manner throughout thestore portfolio. Around one-third of the portfolio has received minimal or nostore refurbishment investment for a number of years. As a result, only aroundhalf of the store portfolio carries a comprehensive display of the Homebasekitchen range and only a similar number of stores have a significant FurnitureExtra display in place. Initial trials began in late 2006 to review how best to reconfigure space foradditional ranges and improve customer perception in these stores. These trialswill be fully evaluated after Homebase's key selling months in the first half ofthe current financial year. Differentiation through broader home enhancement offer. Homebase's enhanced andextended home furnishing offer continues to successfully differentiate it fromthe competition. The "big book of furnishings" trial, which has been extended to100 stores, now has 1,700 of the Furniture Extra products and a further 1,300other home enhancement products across a total 276 pages. As well as productsthat are cutting edge and new stylish designs, there are also 'Smart Buy'design-led lines offering value for money and "WOW" deals that offer great valueat low prices. The initiative is a further example of leveraging the existingGroup sourcing and supply chain skills. The Homebase Ideas magazine reinforces its style-led home enhancement ranges.With a circulation of over 400,000, it is one of the UK's top consumer magazinesand it extended its leadership of the 'home interests' category in the latestABC circulation figures. New product ranges. A further 50 range reviews have been completed in the lastyear. These have included homewares and furnishings, horticulture and core DIYand decorating categories. One of the most recent launches has been a new ownbrand paint range - 'Flawless' - which has been specially formulated for ease ofapplication, coverage, durability and consistent finish. The range will helpHomebase gain additional market share in a core category that represents an£800m market. It will give further authority alongside the leading Dulux andCrown brands, together with specialist paint ranges from Farrow & Ball, FiredEarth and Laura Ashley, as well as a broad offer of other Homebase own-brands. Kitchen installation trial progressing well. Approximately one-third of thestore base now offers a full kitchen installation service to customers, helpingto capture additional orders from those customers seeking installation and alsosupporting the sale of higher priced ranges and accessories. Opportunity remainsto roll out further to more stores and potentially to other product categories. Leveraging multi-channel skills, scale and infrastructure. Furniture has been astrong sales category during the year, enabled by the shared supply chain andhome delivery infrastructure. Visits to www.homebase.co.uk have also risenstrongly; the website is now the third most popular in the 'house and garden'category according to the Hitwise 2006 UK Annual Online Performance Awards.Further products are being added in order to better reflect the in-store rangesand allow customers to research individual products or ranges. Recent additionsalso include virtual bathroom and kitchen brochures. Further operational improvements. Rationalising the many ways that differentstores approach a process into the single most efficient way began with the'Homebase Way' programme launched in 2003 and has continued in the latest '300to 1' store operations consistency programme. As part of this, store managementteams were restructured during the year to reflect a clear focus on deliveringsales through better customer service, the wider product range that Homebase nowsells and improved systems and processes. Operational improvements leading to positive employee feedback. In the 2007all-employee opinion survey, 60 out of 64 measures improved on the year before.The level of overall employee engagement has risen from less than 20% in thefirst survey in 2003 to over 59% in the latest survey; this is a score doublethat of a UK benchmark of other comparable organisations. Homebase - financial review Sales in the 52 weeks to 3 March 2007 increased by 2.2% in total; like-for-likesales declined 1.4%. Sales of furniture and kitchens were strong over the year,while core DIY and decorating ranges were weak particularly in the first half.There were good performances in seasonal categories at relevant selling timesduring the year, including air conditioning, horticulture and gardenmaintenance. The contribution to sales growth from net new space was 3.6%. In the newfinancial year, while Homebase still expects to open a similar number of newstores, the contribution to sales growth is expected to be between 2% and 3% asa result of the planned size and phasing of store openings. Gross margin was ahead by approximately 200 basis points in the first half ofthe year as a result of a reduced level of promotional activity together withthe benefits from supply chain initiatives. This continued in the second half,together with improved stock management. As a result, gross margin for the fullyear was ahead by approximately 300 basis points. Benchmark operating profit for the 52 weeks to 3 March 2007 grew 4% to £53.4m.In total, operating costs grew 9% in the year. Underlying cost inflationcontinued to be approximately 4%, with the remaining 5% being driven byadditional investment in new space, together with the costs of strategic andoperational initiatives. Financial Services ________________________________________________________________________________ Pro forma 52 weeks to 3 March 4 March 2007 2006 Sales (£m) 93.2 92.5 Benchmark operating profit before financingcosts 22.8 23.9Financing costs (17.8) (17.8) _______________________________ Benchmark operating profit (£m) 5.0 6.1________________________________________________________________________________ 3 March 2007 31 March 2006 Store card gross receivables 448 378 Personal loans gross receivables 24 55________________________________________________________________________________ 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. Credit offers support initiatives in the retail businesses. For example, thetrial of the "Home" catalogue in Argos and growing kitchen sales in Homebasebenefit from in-house financial services. While approximately 50% of existinggross receivable balances as at 3 March 2007 are promotional credit offer-based,approximately 70% of credit sales have been driven by promotional credit offersduring the year. Financial Services' financial objective is to achieve a returnon the revolving (i.e. non-promotional) element of receivables in line withfinancial 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. The Financial Services offering is fully multi-channel. Customers can apply forcredit and use the account during the same online visit. The Internet is thefastest growing channel for card applications and £1 of every £6 spent on theArgos website is spent using the Argos store card. Development of the financial services product portfolio continues. An Argoscredit card will begin being launched this month as part of the joint venturearrangement with Barclays Bank PLC. This will offer a unique three-monthinterest-free credit period on all purchases and access to a new exclusiveloyalty scheme. Financial Services - financial review Store card gross receivables grew by £70m versus the previous balance sheetdate, driven by the continued success of the range of promotional creditproducts offered. The store cards funded 8% of Group retail sales. The continuedplanned run-off in personal loans saw a £31m reduction in gross receivables overthe period. Growth in benchmark operating profit before financing costs was held back byreduced income of about £2m relating to the lowering of customer late paymentfees from December 2006. A further impact from late payment fees of around £5mis expected in the current year. 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 will beproviding its brand, catalogue and multi-channel expertise and IT support. Thebusiness will be launched towards the end of the year under the'HyperCITY-Argos' brand name, initially in the Mumbai region. At this stage, itis envisaged that the proposition will be based largely on the existing Argosmulti-channel proposition. On 25 April 2007, Home Retail Group completed the acquisition of a 33% stake in'home store + more', the Irish retailer. 'home store + more' is an out-of-townhomewares format, currently with two stores in the Dublin area. The investmentof around £7m (Euro 10m) will be used to fund an agreed plan to expand theout-of-town homewares chain in Ireland. It expects to open approximately threestores a year over the next few years. Separate from this investment, the management team of 'home store + more' willalso support Home Retail Group in its own development of a homewares format inthe UK. Home Retail Group expects the initial pilot phase to include up to threeUK stores in the next 12 months. Central Activities ________________________________________________________________________________ Pro forma 52 weeks to 3 March 2007 4 March 2006 Central Activities (£m) (24.0) (22.7) ________________________________________________________________________________ Central Activities represents the cost of central corporate functions and, goingforward, the investment costs of new development opportunities. Cost growth inthe year was slightly ahead of previous expectations as a result of recording a£1m loss on the disposal of Whiteaway Laidlaw Bank. Central Activities are expected to include an additional £5m of costs in each ofthe next two years in relation to the investment in new developmentopportunities. GROUP FINANCIAL REVIEW Sales and operating profit Pro forma sales for the Group grew 6% to £5,851m (2006: £5,510m) and pro formabenchmark operating profit grew 8% to £359.4m (2006: 331.8m). Group pro formabenchmark operating margin was 6.1% (2006: 6.0%). The drivers of thisperformance have been analysed as part of the preceding divisional reviews. The definition of pro forma benchmark operating profit is operating profitbefore amortisation of acquisition intangibles, store impairment charges,exceptional items and costs related to demerger incentive schemes. As with proforma sales, it is calculated on a 52-week basis. This represents the 52 weeksto 3 March 2007 and the comparable 52 weeks to 4 March 2006. Net interest costs Pro forma net interest income for the year was £16.6m. This reflects £1.2m ofestimated net interest expense on Home Retail Group's net debt/cash positionduring the course of the year on the basis of a pro forma allocation of £200mnet debt as at 31 March 2006, improving to a net cash position of £60m as at 3March 2007. Against this is the credit of £17.8m reflecting the financing costscharged within Financial Services' benchmark operating profit. Interest costs attributable to the GUS capital structure prior to the demergerwere £46.1m (2006: £40.9m) and have been excluded from pro forma benchmark PBT. Share of post-tax results of associates These amounted to income of £0.7m (2006: loss of £4.2m). The improvement isprincipally due to the costs incurred in the previous year associated with thewind-down of AAGUS, a consumer finance company in the Netherlands in which HomeRetail Group has a 33% holding. Exceptional items Demerger-related costs of £11.3m were incurred by Home Retail Group. Aspreviously disclosed, these included costs in relation to early vesting of GUSplc share incentive schemes, banking set-up fees and other professional fees. Anadditional exceptional cost on demerger of £7.3m in relation to the waiver of aloan due from Experian was also taken in the first half of the financial year.Store impairment charges in respect of the Homebase store portfolio were £4.1m(2006: £12.8m). Within net financing costs, exceptional finance income of £6.9m was recorded inthe second half of the financial year. This relates to the gain made on thetransfer of an interest rate swap associated with the £225m fixed rate financingfacility novated from GUS plc on demerger. 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 £0.1m(2006: £2.4m). 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 £12.3m (2006: £2.6m). The increase in the creditis principally as a result of the special contribution of £100m made inMarch 2006. The ongoing accounting charge, 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 Pro forma benchmark profit before tax for the year grew 12% to £376.7m (2006:£337.1m). Reported profit before tax was £296.9m (2006: £272.4m). The definition of pro forma benchmark profit before tax is profit beforeamortisation of acquisition intangibles, store impairment charges, exceptionalitems, costs related to demerger incentive schemes, financing fair valueremeasurements, financing impact on retirement benefit balances and taxation.Net interest income within pro forma benchmark PBT is calculated to illustratethe Group's financial performance as if the demerger capital structure hadexisted at 31 March 2006 and had been achieved based on underlying cash flowsprior to 31 March 2006. Benchmark PBT also includes Home Retail Group's share ofpost-tax results of associates. It is calculated on a 52-week basis. Taxation Taxation attributable to pro forma benchmark PBT for the year was £122.1m (2006:£114.5m), representing an effective tax rate (excluding associates) of 32.5%(2006: 33.5%). The improvement in the effective rate largely reflects a lowerlevel of disallowable expenditure for tax purposes. The reported effective tax rate (excluding associates) is 37.0% (2006: 34.7%),representing a total tax expense for the period of £109.5m (2006: £96.0m). Number of shares and earnings per share On demerger, Home Retail Group was admitted to the Official List and to tradingon the London Stock Exchange's market for listed securities with 877.4m issuedordinary shares. The number of shares for the purpose of calculating earnings per share in theprior year has been taken as 869.0m, representing the number of shares in issueat the date of demerger, excluding 8.4m ordinary shares held in Home RetailGroup's Employee Share Ownership Trust ("ESOT"). For the financial period justended, the weighted average number of shares since demerger has been used,which, excluding shares held in the ESOT, was 869.6m. 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 7.6m to 877.2m (2006: 876.6m). Pro forma basic benchmark EPS is 29.3p (2006: 25.6p), with pro forma dilutedbenchmark EPS of 29.0p (2006: 25.4p). Reported basic EPS is 21.6p (2006: 20.3p),with reported diluted EPS of 21.4p (2006: 20.1p). Dividends As indicated at the time of demerger, a policy whereby the full year dividend isordinarily covered at least twice by basic benchmark EPS has been established bythe Board. For the financial period to 3 March 2007, the Board are now proposingto pay the final dividend based on the higher figure of the 52-week pro formabasic benchmark EPS, rather than on a lower statutory reporting period basis ashad previously been indicated. A final dividend of 9.0p is therefore being recommended, making 13.0p for theyear. Based on pro forma benchmark EPS of 29.3p, this represents cover of 2.25times. Based on reported basic EPS of 21.6p, it represents cover of 1.66 times. The final dividend, subject to approval by shareholders at the AGM, will be paidon 25 July 2007 to shareholders on the register at the close of business on 25May 2007. Cash flow and net debt As part of the demerger, Home Retail Group was allocated pro forma net debt of£200m as at 31 March 2006. Cash flows from operating activities (before incurring outflows related tointerest, tax, investing and financing activities) were £604.5m in the period(2006: £367.4m). The principal drivers of the strong cash generation have beengood management of working capital, together with the non-repeat of the prioryear £100m special pension contribution to the Argos UK defined benefit pensionscheme. As the cash generation is for a short period (i.e. c. 11 months) as aresult of the change in year-end, there is also a benefit within it from theexclusion of March, historically a cash outflow month. It is estimated, based onprevious cash flows for the month of March, that cash generation would thereforehave been approximately £100m lower on a full year basis. There has also been a lower level of capital expenditure at £162.4m in theperiod (2006: £254.9m). This is partly as a result of approximately £25m ofcapital expenditure that would ordinarily have occurred in the month of March,together with approximately £25m of capital expenditure delayed into the nextfinancial year. At 3 March 2007, the Group had a net cash position of £60.2m. Disposals The disposal of Whiteaway Laidlaw, a commercial bank which offers bankingfacilities to small businesses and personal customers, was completed in January2007. Cash consideration was approximately £5m, resulting in a loss on disposalof £1m which was charged within Central Activities. Balance sheet and return on capital ________________________________________________________________________________ As at 3 March 2007 31 March 2006 Goodwill 1,878.9 1,878.9Intangible assets 73.4 61.5Property, plant and equipment 691.6 696.8Inventories 906.4 881.0Instalment receivables 416.8 398.5Other trading assets 188.3 169.6 ___________________________________ 4,155.4 4,086.3 Trade and other payables (1,059.1) (890.5)Other trading liabilities (84.5) (88.6) ___________________________________ (1,143.6) (979.1) ___________________________________ Invested capital 3,011.8 3,107.2 Retirement benefit assets 9.3 25.5Net tax liabilities (2.6) (4.8)Pro forma net cash/(debt) 60.2 (200.0) ___________________________________ Pro forma net assets 3,078.7 2,927.9 Net GUS group balances - 22.0 ___________________________________ Reported net assets 3,078.7 2,949.9________________________________________________________________________________ Reported net assets amounted to £3,078.7m, an increase of £128.8m on theprevious balance sheet date. This is equivalent to 354p per share, excludingshares held in the ESOT (2006: 339p). Benchmark pre-tax return on invested capital, based on benchmark operatingprofit plus share of post-tax results of associates of £360.1m and investedcapital of £3,011.8m, was 12.0%, representing a 150 basis point improvement onthe previous balance sheet date. The improvement represents the combination ofthe £32.5m improvement in profit, together with the £95.4m reduction in investedcapital. Retirement benefit assets The Group provides a number of post-employment benefit arrangements coveringboth funded defined benefit and defined contribution schemes. Pensionarrangements are operated principally through the Argos UK defined benefitscheme together with the GUS defined contribution scheme, which was replacedpost year-end by the Home Retail Group defined contribution scheme. The last actuarial valuation of the Argos UK defined benefit scheme was carriedout as at 31 March 2006. The IAS 19 surplus as at 3 March 2007 for the UKdefined benefit scheme was £9.3m (2006: £25.5m). Capital structure The Group finances its operations through a combination of retained profits,bank borrowings and property leases. The Group has significant liabilities through its obligations to pay rents underproperty leases. The capitalised value of these liabilities is £2.6 billionbased upon a simple eight-times multiple of last year's operating lease charge,or £2.9 billion based upon discounted cash flows of the expected futureoperating lease charges. The Group, in common with the credit rating agencies,treats its lease liabilities as debt when evaluating financial risk andinvestment returns. The Group's net debt varies throughout the year due to trading seasonality. Liquidity and funding Liquidity is achieved through arranging funding ahead of requirements andmaintaining sufficient un-drawn committed facilities to meet short term needs. At 3 March 2007, the Group had un-drawn committed borrowing facilities availableof £700m which expire in 2011. These facilities are in place to enable the Groupto finance its working capital requirements and for general corporate purposes. Treasury policy and risk management The Group's treasury function seeks to reduce exposures to foreign exchange,interest rate and other financial risks, and to ensure sufficient liquidity isavailable to meet foreseeable needs and to invest cash assets safely andprofitably. Policies and procedures are subject to review and approval by theBoard as well as subject to audit review. Counterparty credit risk management The Group's exposure to credit risk is managed by dealing only with banks andfinancial institutions with strong credit ratings and within limits set for eachorganisation. Dealing activity is closely controlled and counterparty positionsare monitored daily. Interest rate risk management The Group's interest rate exposure is managed by the use of fixed and floatingrate borrowings and by the use of interest rate swaps to adjust the balance offixed and floating rate liabilities. Currency risk management The Group's key objective is to reduce the effect of exchange rate volatility onprofits. Transactional currency exposures that could significantly impact theIncome Statement are hedged using forward purchases of foreign currencies. Post balance sheet event On 25 April 2007, Home Retail Group completed the acquisition of a 33% stake in'home store + more', the Irish retailer, for a consideration of around £7m(€10m). Share price and total shareholder return The share price of Home Retail Group ranged from a low of 399.25p to a high of444.5p during the financial year post demerger. On 2 March 2007, the mid market price was 420.0p, giving a market capitalisationof £3.7bn at that date. Total shareholder return (the increase in the value of a share includingreinvested dividends) has been 3.4% in the approximate five-month period sincedemerger. This compares favourably with the total shareholder return for theFTSE 100, which was 1.5% over the same period. Accounting standards and use of non-GAAP measures The Group has prepared its consolidated financial statements under InternationalFinancial Reporting Standards for the period ended 3 March 2007. Accountingpolicies are outlined in Note 3 to the Financial Statements. 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 3 to the Financial Statements. Appendix 1. Basis of preparation for pro forma restatements Reporting periods Home 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 is this year reportingon a statutory basis the financial period ended 3 March 2007. This includes theresults for Homebase from 1 March 2006 (approximately 12 months) and the resultsfor the rest of the Group from 1 April 2006 (approximately 11 months). For comparative purposes, FY 2006/07 restated on a pro forma basis is the52-week period commencing 5 March 2006 and ending on 3 March 2007; H1 2006/07 ona pro forma basis is the 26 week period commencing 5 March 2006 and ending on2 September 2006; and FY 2005/06 on a pro forma basis is the 52-week periodcommencing 6 March 2005 and ending on 4 March 2006. Reconciliations between proforma and statutory reported periods are shown at Appendix 2. The timing of trading statements will also change as a result of the newyear-end. At Appendix 3, we have provided trading statement comparables on thenew basis. Central Activities Central 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 interest As 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 items Other 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 FY 2006/07 Short period Pro forma 52 weeks to£m to 3March 2007 restatement 3March 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 Operating expenses before exceptionalitems and costs related to demergerincentive schemes (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 Pro forma net interest income (see below) n/a 16.6 16.6Share of post-tax results of associates 0.7 - 0.7 _______________________________________ Benchmark PBT n/a 42.3 376.7 Net interest costs attributable to GUS capital structure (see below) (21.0) (18.2) (39.2)Exceptional items included in operatingprofit (22.7) - (22.7)Costs related to demerger incentive schemes (5.8) - (5.8)Financing fair value remeasurements (0.1) - (0.1)Financing impact on retirement benefitbalances 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 attributable to pro forma benchmark PBT n/a n/a (122.1) _______________________________________ Profit for the period 187.4 16.3 203.7________________________________________________________________________________ Pro forma 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: Pro forma net interest expense n/a (1.2) (1.2)Financing costs charged to Financial Services n/a 17.8 17.8 _______________________________________ Pro forma net interest income n/a 16.6 16.6 Interest costs attributable to GUS (44.3) (1.8) (46.1)capital structureExceptional finance income 6.9 - 6.9Financing costs charged to Financial Services 16.4 (16.4) - _______________________________________ Net interest costs attributable to GUScapital structure (21.0) (18.2) (39.2) Financing fair value remeasurements (0.1) - (0.1)Financing impact on retirement benefit 12.1 0.2 12.3balances _______________________________________ Income statement net financing costs (9.0) (1.4) (10.4) _______________________________________ Appendix 2 (continued) ________________________________________________________________________________ H1 2006/07 6 months to Pro forma 26 weeks to£m 30Sept 2006 restatement 2Sept 2006 Argos 1,794.1 (40.5) 1,753.6Homebase 979.1 (122.3) 856.8Financial Services 46.7 (0.7) 46.0Sales 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 Operating expenses before exceptionalitems and costs related to demergerincentive schemes (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 Pro forma net interest income (see below) 5.7 (0.2) 5.5Share of post-tax results of associates - - - ________________________________________ Benchmark PBT 112.6 (5.4) 107.2 Net interest costs attributable to GUS capital structure (see below) (42.2) 6.5 (35.7)Exceptional items included in operating profit (16.4) - (16.4)Costs related to demerger incentive schemes - - -Financing fair value remeasurements (0.9) - (0.9)Financing impact on retirement benefitbalances 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 pro forma benchmark PBT (36.6) 1.8 (34.8) _______________________________________ Profit for the period 34.6 3.1 37.7 _______________________________________ Pro forma 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: Pro forma net interest expense (2.6) (0.5) (3.1)Financing costs charged to Financial Services 8.3 0.3 8.6 _______________________________________ Pro forma net interest income 5.7 (0.2) 5.5 Interest costs attributable to GUS (35.7) - (35.7)capital structureAdjustment on merger accounting1 (6.5) 6.5 -Financing costs charged to Financial Services - - - _______________________________________ Net interest costs attributable to GUScapital 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) _______________________________________ 1. 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 being reported today are 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 2005/06 12 months to Pro forma 52 weeks to£m 31March 2006 restatement 4March 2006 Argos 3,892.6 (33.8) 3,858.8Homebase 1,561.8 (2.8) 1,559.0Financial Services 93.6 (1.1) 92.5Sales 5,548.0 (37.7) 5,510.3 Cost of sales (3,686.5) 31.9 (3,654.6) ______________________________________ Gross profit 1,861.5 (5.8) 1,855.7 Operating expenses before exceptionalitems and costs related to demergerincentive schemes (1,515.5) (8.4) (1,523.9) ______________________________________ Argos 296.0 1.0 297.0Homebase 51.8 (0.4) 51.4Financial Services 6.1 - 6.1Central Activities (16.2) (6.5) (22.7)Adjustment on merger accounting1 8.3 (8.3) - ______________________________________ Benchmark operating profit 346.0 (14.2) 331.8 Pro forma net interest income (see below) n/a 9.5 9.5Share of post-tax results of associates (4.2) - (4.2)Benchmark PBT n/a (4.7) 337.1 ______________________________________ Net interest costs attributable to GUS capital structure (see below) (45.3) 4.4 (40.9)Exceptional items included in operating profit (24.7) - (24.7)Costs related to demerger incentive schemes - - -Financing fair value remeasurements (2.0) (0.4) (2.4)Financing impact on retirement benefit balances 2.6 - 2.6 ______________________________________ Profit before tax 272.4 (0.7) 271.7 Taxation (96.0) 1.1 (94.9) of which: taxation attributable to pro forma benchmark PBT n/a n/a (114.5) ______________________________________ Profit for the period 176.4 0.4 176.8________________________________________________________________________________ Pro forma basic benchmark EPS n/a n/a 25.6p________________________________________________________________________________ Basic EPS 20.3p - 20.3p Number of shares for basic EPS 869.0m - 869.0m________________________________________________________________________________ Net interest reconciliation Pro forma net interest expense n/a (8.3) (8.3)Financing costs charged to Financial n/a 17.8 17.8Services _____________________________________ Pro forma net interest income n/a 9.5 9.5 Interest costs attributable to GUS (49.2) 8.3 (40.9)capital structureAdjustment on merger accounting1 (14.0) 14.0 -Financing costs charged to Financial Services 17.9 (17.9) - _____________________________________Net interest costs attributable to GUScapital structure (45.3) 4.4 (40.9) Financing fair value remeasurements (2.0) (0.4) (2.4)Financing impact on retirement benefit balances 2.6 - 2.6 _____________________________________ Income statement net financing costs (44.7) 13.5 (31.2) _____________________________________ 1. 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 being reported today are 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 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 to saleschange 8.0% ___________ Total sales change 14.1% ___________ Guidance on gross margin movement Down c.100bps HomebaseSales £441mLike-for-like change in sales (4.7%)Net new space contribution to saleschange 3.6% ___________ Total sales change (1.1%) ___________ Guidance on gross margin movement Up c.200bps 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 to saleschange 6.3% 6.9% _________ __________ Total sales change 10.8% 12.0% _________ __________ Guidance on gross margin movement Down c.100bps Down c.100bps HomebaseSales £416m £857mLike-for-like change in sales (1.5%) (3.2%)Net new space contribution to saleschange 4.6% 4.1% _________ __________ Total sales change 3.1% 0.9% _________ __________ Guidance on gross margin movement Up c.150bps Up c.200bps 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 to saleschange 4.5% 5.6% _________ __________ Total sales change 4.4% 8.1% _________ __________ Guidance on gross margin movement Up c.50bps Down c.25bps HomebaseSales £519m £1,376mLike-for-like change in sales (2.8%) (3.0%)Net new space contribution to saleschange 3.0% 3.6% _________ __________ Total sales change 0.2% 0.6% _________ __________ Guidance on gross margin movement Up c.350bps Up c.250bps 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 to saleschange 3.8% 4.4% 5.5% __________ _________ __________ Total sales change 6.8% 5.2% 7.9% __________ _________ __________ Guidance on gross margin movement Up c.50bps Up c.50bps c.0 bps HomebaseSales £218m £737m £1,594mLike-for-like change in sales 9.9% 0.6% (1.4%)Net new space contribution to saleschange 3.4% 3.1% 3.6% __________ _________ __________ Total sales change 13.3% 3.7% 2.2% __________ _________ __________ Guidance on gross margin movement Up c.500bps Up c.400bps Up c.300bps Consolidated Income StatementFor the short period 1 April 2006 to 3 March 2007 Short period to 3 March 2007 Year to 31 March 2006 ___________________________________ ___________________________________ Before Exceptional 2007 Before Exceptional 2006 exceptional items exceptional items items items Notes £m £m £m £m £m £m_______________________________________________________________________________________________ Revenue 5,606.7 - 5,606.7 5,548.0 - 5,548.0 Cost of sales (3,680.5) - (3,680.5) (3,686.5) - (3,686.5)_______________________________________________________________________________________________ Gross profit 1,926.2 - 1,926.2 1,861.5 - 1,861.5 Net operatingexpenses 3 (1,598.3) (22.7) (1,621.0) (1,515.5) (24.7) (1,540.2)_______________________________________________________________________________________________ Operating profit 327.9 (22.7) 305.2 346.0 (24.7) 321.3 - Finance income 55.5 6.9 62.4 45.7 - 45.7 - Finance expense (71.4) - (71.4) (90.4) - (90.4) Net financingcosts 3, 4 (15.9) 6.9 (9.0) (44.7) - (44.7) Share of post-taxprofit/(loss)of jointventures andassociates 0.7 - 0.7 (4.2) - (4.2)_______________________________________________________________________________________________ Profit beforetax 312.7 (15.8) 296.9 297.1 (24.7) 272.4 Taxation (104.2) (5.3) (109.5) (103.4) 7.4 (96.0)_______________________________________________________________________________________________ Profit for theperiodattributableto equityshareholders 208.5 (21.1) 187.4 193.7 (17.3) 176.4_______________________________________________________________________________________________ Earnings per pence penceshare - Basic 6 21.6 20.3 - Diluted 6 21.4 20.1_______________________________________________________________________________________________ Short period to Year to 3 March 2007 31 March 2006 Notes £m £m ______ __________________ __________________ _________________ Non-GAAP measures_________________ Reconciliation of profit before tax (PBT)to benchmark PBTProfit before tax 296.9 272.4Effect of exceptional items 3 15.8 24.7Effect of financing fairvalue 4 0.1 2.0remeasurementsFinancing impact onretirement 4 (12.1) (2.6)benefit balancesEffect of demerger incentiveschemes 5.8 -________________________________________________________________________________________ Benchmark PBT 306.5 296.5________________________________________________________________________________________ Benchmark earnings per share pence pence - Basic 6 23.7 22.2 - Diluted 6 23.5 22.1 Consolidated Statement of Recognised Income and ExpenseFor the short period 1 April 2006 to 3 March 2007 2007 2006 £m £m_____________________________________________________________________________________ Net (expense)/income recognised directly in equityFair value (losses)/gains in the period (2.7) 5.7Actuarial (losses)/gains in respect of defined benefitpension schemes (18.3) 5.7Currency translation differences 0.9 (0.3)Tax credit/(charge) in respect of items taken directly to equity 10.0 (2.3)_____________________________________________________________________________________ Net (expense)/income recognised directly in equity for the period (10.1) 8.8Profit for the period attributable to equity shareholders 187.4 176.4_____________________________________________________________________________________ Total recognised income for the period attributable to equityshareholders 177.3 185.2_____________________________________________________________________________________ Consolidated Balance SheetAt 3 March 2007 3 March 31 March 2007 2006 £m £m__________________________________________________________________________________ ASSETSNon-current assetsGoodwill 1,878.9 1,878.9Intangible assets 73.4 61.5Property, plant and equipment 691.6 696.8Investment in joint ventures and associates 9.2 0.4Deferred tax assets 74.4 108.8Trade and other receivables 18.0 43.1Retirement benefit assets 9.3 25.5Other financial assets 8.5 5.5__________________________________________________________________________________ Total non-current assets 2,763.3 2,820.5__________________________________________________________________________________ Current assetsInventories 906.4 881.0Trade and other receivables 569.4 1,478.1Current tax assets 3.0 6.7Other financial assets - 1.8Cash and cash equivalents 283.8 130.0__________________________________________________________________________________ Total current assets 1,762.6 2,497.6__________________________________________________________________________________ Total assets 4,525.9 5,318.1__________________________________________________________________________________ LIABILITIESNon-current liabilitiesTrade and other payables (34.0) (27.8)Loans and borrowings - (222.5)Provisions (57.1) (55.0)Deferred tax liabilities (44.8) (67.2)__________________________________________________________________________________ Total non-current liabilities (135.9) (372.5)__________________________________________________________________________________ Current liabilitiesTrade and other payables (1,025.1) (862.7)Loans and borrowings (223.6) (1,046.3)Provisions (25.2) (33.6)Other financial liabilities (2.2) -Current tax liabilities (35.2) (53.1)__________________________________________________________________________________ Total current liabilities (1,311.3) (1,995.7)__________________________________________________________________________________ Total liabilities (1,447.2) (2,368.2)__________________________________________________________________________________ Net assets 3,078.7 2,949.9 __________________________________________________________________________________ EQUITYShare capital 87.7 2,895.6Merger reserve (348.4) (348.4)Other reserves (11.4) (4.3)Retained earnings 3,350.8 407.0__________________________________________________________________________________ Total equity 3,078.7 2,949.9__________________________________________________________________________________ Consolidated Cash Flow StatementFor the short period 1 April 2006 to 3 March 2007 2007 2006 Notes £m £m_____________________________________________________________________________________________ Cash flows from operating activitiesCash generated from operations 8 a 604.5 367.4Interest received 13.6 19.0Interest paid (35.0) (65.1)Tax paid (101.6) (91.0)_____________________________________________________________________________________________ Net cash inflow from operating activities 481.5 230.3_____________________________________________________________________________________________ Cash flows from investing activitiesPurchase of property, plant and equipment (134.1) (231.6)Proceeds from the disposal of property, plant andequipment 3.8 3.0Purchase of intangible assets (28.3) (23.3)Loan to joint venture (8.1) -Disposal of subsidiary - net of cash disposed (3.8) -Acquisition of businesses - (45.1)_____________________________________________________________________________________________ Net cash used in investing activities (170.5) (297.0)_____________________________________________________________________________________________ Cash flows from financing activitiesPurchase of own shares (6.1) -(Payments)/receipts of amounts (to)/from GUS plc (50.3) 177.7Repayment of finance leases (1.2) (1.0)Home Retail Group share of GUS plc final dividend (62.0) -Dividends paid (34.6) -_____________________________________________________________________________________________ Net cash used in financing activities (154.2) 176.7_____________________________________________________________________________________________ Net increase in cash and cash equivalents 156.8 110.0_____________________________________________________________________________________________ Movement in cash and cash equivalentsCash and cash equivalents at the beginning of the period 130.0 20.0Effect of foreign exchange rate changes (3.0) -Net increase in cash and cash equivalents 156.8 110.0_____________________________________________________________________________________________ Cash and cash equivalents at the end of the period 283.8 130.0_____________________________________________________________________________________________ Notes For the short period 1 April 2006 to 3 March 2007 1. BASIS OF PREPARATION Previously, Home Retail Group (then ARG) prepared its financial information for the financialyear for the 12 months to 31 March except for the results of Homebase Limited which wereincluded for the 12 months to 28 or 29 February each year, with adjustments to reflect thebalance sheet movements in cash to the end of March. This was done to facilitate comparabilityof the income statement by avoiding the distortions that would arise relating to changes inthe timing of Easter. In order to align the year end across the Group, the Board of Directorshave decided to amend the Group's financial year to a 52-week period ending on the Saturdayclosest to the end of February. Therefore, following the change of accounting reference date,the audited accounts have been prepared for the short period ended 3 March 2007 with comparatives for the 12 months to 31 March 2006. Unless otherwise stated, references to 2007 within the notes to the financial statements are for the short period 1 April 2006 to 3 March 2007, in the case of balance sheet notes, to the balance sheet as at 3 March 2007 with comparatives at 31 March 2006. The Group consolidated financial statements are presented in sterling, rounded to the nearesthundred thousand. They are prepared on the historic cost basis modified for the revaluation ofcertain financial instruments. The principal accounting policies applied in the preparation of these consolidated financialstatements are set out below. These policies have been consistently applied to all the periodspresented, unless otherwise stated, and are in line with the listing particulars. Group reorganisation Home Retail Group demerged from its parent company, GUS plc, with effect from 10 October 2006.Shares in Home Retail Group were admitted to the Official List of the Financial ServicesAuthority and to trading on the London Stock Exchange's main market for listed securities on11 October 2006. All Home Retail Group companies which were owned by GUS plc prior to demergerwere transferred under the new ultimate parent company, Home Retail Group plc, prior to 11October 2006. The introduction of this new ultimate holding company constitutes a groupreconstruction and has been accounted for using merger accounting principles. Therefore,although the Group reorganisation did not become effective until 10 October 2006, theseconsolidated financial statements of Home Retail Group are presented as if the current Groupstructure had always been in place. In the Prospectus, funding balances between the Group and GUS plc which were interest bearingand had the characteristics of debt, were presented as debt in the balance sheet, with theinterest taken to the income statement. Prior to demerger, the net funding balances werereduced by £240.0m by means of a capitalisation and the financial statements reflect thiscapitalisation as having taken place just prior to 31 March 2005. 2. NON-GAAP FINANCIAL INFORMATION Exceptional items Items which are both material and non-recurring are presented as exceptional items withintheir relevant income statement line. The separate reporting of exceptional items helpsprovide a better indication of underlying performance of the Group. Examples of items whichmay be recorded as exceptional items are impairment charges, restructuring costs and theprofits/losses on the disposal of businesses. Benchmark PBT The Group uses the term benchmark profit before tax (PBT) as a measure which is not formallyrecognised under IFRS. Benchmark PBT is defined as profit before amortisation of acquisitionintangibles, store impairment charges, exceptional items, financing fair valuere-measurements, financing impact on retirement benefit balances, and one-off demergerincentive costs. This measure is considered useful in that it provides investors with an alternative means toevaluate the underlying performance of the Group's operations. Net debt The Group uses the term net debt which is considered useful in that it provides the Group'saggregate net indebtedness to banks and other financial institutions together with debt-likeliabilities, notably property leases. Notes For the short period 1 April 2006 to 3 March 2007 2007 20063. EXCEPTIONAL ITEMS £m £m______________________________________________________________________________________________ Costs relating to the demerger of Home Retail Group andExperian (a) (11.3) -Waiver of loan due from Experian (b) (7.3) -Store impairment charges (c) (4.1) (12.8)Re-organisation costs (d) - (11.9)______________________________________________________________________________________________ Exceptional items in operating profit (22.7) (24.7)Exceptional finance income (e) 6.9 -______________________________________________________________________________________________ Total exceptional items (15.8) (24.7)______________________________________________________________________________________________ (a) Demerger-related expenditure including costs in relation to early vesting of share incentiveschemes, banking set up fees and other professional fees. (b) Represents a loan due from Experian which has been waived as part of the demerger process. (c) IFRS requires individual stores to be designated as cash generating units for the purposesof testing for impairment. This resulted in a net impairment charge in respect of the Homebasestore portfolio of £4.1m (2006: £12.8m). (d) In 2005, Home Retail Group (then ARG), undertook a reorganisation whereby approximately 500Homebase roles, including the merchandising and buying functions previously based in Wallington,Surrey, relocated to the Group's head office in Milton Keynes. The costs of the move totalled£11.9m in 2006. (e) Fair value gain made on transfer of interest rate swapnovated from GUS plc on demerger. 2007 20064. NET FINANCING COSTS £m £m______________________________________________________________________________________________ Finance income: Bank deposits 13.8 7.9Expected return on retirement benefit asset 37.8 27.5Interest receivable from GUS group companies 3.9 10.3______________________________________________________________________________________________ Total finance income 55.5 45.7______________________________________________________________________________________________ Finance expense: Interest cost of perpetual securities (11.1) (11.2)Discount unwind on provisions (1.9) (0.5)Financing fair value remeasurements (0.1) (2.0)Interest expense on retirement benefit liabilities (25.7) (24.9)Interest expense on OFT fine (1.5) -Interest payable to GUS group companies (47.5) (67.6)______________________________________________________________________________________________ Total finance expense (87.8) (106.2)Less: finance expense charged to Financial Services cost ofsales 16.4 15.8______________________________________________________________________________________________ Total net finance expense (71.4) (90.4)______________________________________________________________________________________________ Net financing costs pre exceptional (15.9) (44.7)Exceptional finance income 6.9 -______________________________________________________________________________________________ Net financing costs (9.0) (44.7)______________________________________________________________________________________________ Notes For the short period 1 April 2006 to 3 March 2007 2007 2007 2006 20065. DIVIDENDS pence £m pence £m_____________________________________________________________________________________________ Amounts recognised as distributions to equity holdersin the year Interim 4.0 34.6 - -_____________________________________________________________________________________________ Ordinary dividends on equity shares 4.0 34.6 - -_____________________________________________________________________________________________ Proposed final dividend for the year ended 3 March 2007 9.0 78.3 The proposed final dividend was approved by the Board of Directors on 24 April 2007 and issubject to approval by the shareholders at the Annual General Meeting. The proposed dividendhas not been included as a liability at 3 March 2007 in accordance with IAS 10 'Events afterthe balance sheet date'. It will be paid on 25 July 2007 to shareholders who are on theregister of members at close of business on 23 May 2007. In August 2006, £62m was paid to GUS plc as Home Retail Group's share of the GUS plc finaldividend in respect of the year ended 31 March 2006. The Home Retail Group Employee Share Ownership Trust (ESOT) has waived its entitlement todividends in the amount of £0.7m. 6. BASIC AND DILUTED EARNINGS PER SHARE (EPS) Basic and diluted EPS for comparative periods have been calculated on the basis of the numberof Home Retail Group plc ordinary shares in issue at the date of demerger, excluding ordinaryshares held in Home Retail Group's ESOT. Basic and diluted EPS for 2007 have been calculated on the number of shares in issue at thedate of demerger for the pre-demerger period together with the weighted average number ofshares post demerger, excluding ordinary shares held in Home Retail Group's ESOT. 2007 2006Earnings £m £m_____________________________________________________________________________________________ Profit after tax for the financial period 187.4 176.4Effect of exceptional items 15.8 24.7Effect of financing fair value remeasurements 0.1 2.0Financing impact on retirement benefit balances (12.1) (2.6)Demerger incentive schemes 5.8 -Attributable taxation 9.2 (7.2)_____________________________________________________________________________________________ Benchmark profit after tax for the financial period 206.2 193.3_____________________________________________________________________________________________ Weighted average number of shares millions millions Number of ordinary shares for the purpose of basic EPS 869.6 869.0Dilutive effect of share incentive awards 7.6 7.6_____________________________________________________________________________________________ Number of ordinary shares for the purpose ofdiluted EPS 877.2 876.6_____________________________________________________________________________________________ EPS pence pence Basic EPS 21.6 20.3Diluted EPS 21.4 20.1 Basic benchmark EPS 23.7 22.2Diluted benchmark EPS 23.5 22.1 Notes For the short period 1 April 2006 to 3 March 2007 7. RECONCILIATION OF MOVEMENTS IN EQUITY Other Reserves ______________ Share Merger Other Retained capital reserve reserves earnings Total £m £m £m £m £m________________________________________________________________________________________________ At 1 April 2006 2,895.6 (348.4) (4.3) 407.0 2,949.9Profit for the financial period - - - 187.4 187.4Share reduction (2,807.9) - - 2,807.9 -Net (cost) recognised in equity for thefinancial period - - (1.0) (9.1) (10.1)Movement in share based compensation reserve - - - 16.3 16.3Net movement in own shares - - (6.1) - (6.1)Equity dividends paid during the period - - - (34.6) (34.6)Other movements - - - (24.1) (24.1)________________________________________________________________________________________________ Total equity at 3 March 2007 87.7 (348.4) (11.4) 3,350.8 3,078.7________________________________________________________________________________________________ Other Reserves ______________ Share Merger Other Retained capital reserve reserves earnings Total £m £m £m £m £m________________________________________________________________________________________________ At 1 April 2005 2,895.6 (348.4) (9.2) 217.4 2,755.4Profit for the financial year - - - 176.4 176.4Net income recognised in equity for thefinancial period - - 4.9 3.9 8.8Movement in share based compensation reserve - - - 9.2 9.2Net movement in own shares - - - - -Equity dividends paid during the year - - - - -Other movements - - - 0.1 0.1________________________________________________________________________________________________ Total equity at 31 March 2006 2,895.6 (348.4) (4.3) 407.0 2,949.9________________________________________________________________________________________________ Merger reserve The merger reserve arose on the demerger of the Group from GUS plc during 2006 as outlined in Note2 "Group reorganisation". Other reserves Other reserves principally consist of shares held in trust, the hedging reserve and thetranslation reserve. Net movement in own shares represents shares purchased for the purpose of satisfying obligationsarising from Home Retail Group plc share-based compensation schemes. Shares in Home Retail Groupare held in the following Trusts which have been established since demerger: Home Retail Group Employee Share Ownership Trust (ESOT) The ESOT provides for the issue of shares to Group employees under share option and share grantschemes (with the exception of the Share Incentive Plan). At 3 March 2007 the ESOT held 7,449,855 shares with a market value of £31.3m The shares in theTrust are held in the balance sheet of the Group at nil value. The shares were acquired as part ofthe demerger from GUS at no cost. Dividends on these shares are waived. Home Retail Group Share Incentive Scheme Trust The Home Retail Group Share Incentive Scheme Trust provides for the issue of shares to Groupemployees under the Share Incentive Plan. At 3 March 2007 the Trust held 1,477,105 shares with a market value of £6.2m. These shares werepurchased during the year at a cost of £6.1m. Notes For the short period 1 April 2006 to 3 March 2007 8. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT 2007 20068(a) Cash generated from operations £m £m_______________________________________________________________________________________________ Profit before tax 296.9 272.4Adjustments for:Share of post-tax profits of joint ventures andassociate (0.7) 4.2Net financing costs 9.0 44.7_______________________________________________________________________________________________ Operating profit 305.2 321.3 Loss on sale of property, plant and equipment 0.9 1.0Loss on sale of subsidiary 1.1 -Depreciation and amortisation 146.4 134.9Impairment losses 4.1 12.8 (Increase)/decrease in inventories (23.4) 7.6(Increase)/decrease in receivables (42.7) 0.3Increase/(decrease) in payables 193.3 (30.9)_______________________________________________________________________________________________ Movement in working capital 127.2 (23.0) (Decrease)/increase in provisions (6.3) 1.0Movement in retirement benefits 10.0 (90.2)Share based payment expense 15.9 9.6_______________________________________________________________________________________________ Cash generated from operations 604.5 367.4_______________________________________________________________________________________________ 8(b) Reconciliation of net increase in cash and cash equivalents to movementin net debt Net debt at 1 April (178.0) (103.9)Effect of foreign exchange rate changes (3.0) -Net decrease in cash and cash equivalents 156.8 110.0Decrease/(increase) in debt 84.4 (184.1)_______________________________________________________________________________________________ Net debt at the end of the financial year 60.2 (178.0)_______________________________________________________________________________________________ 8(c) Major non-cash transactions Home Retail Group did not enter into any new finance lease arrangements during the period (2006:nil). This information is provided by RNS The company news service from the London Stock Exchange

---

Related Shares:

Home Reit