Current positioning
The Group has achieved a good outcome in a challenging year, delivered by our appropriate approach on an operational, financial and strategic basis. Going forward, we will be increasing our investment in the businesses, and given the Group’s strong cash generation, we will also be returning capital to our shareholders by way of a share buy-back programme.
Home Retail Group, as the UK’s leading home and general merchandise retailer, will continue to demonstrate clearly its competitive advantage and its strong financial position.
Household spending and consumer confidence have been severely hit. Hard goods and those products more closely linked to the housing market have suffered the most. In the year to February 2010, market data indicates that retail sales declined by 2.6% in ‘household goods stores’ (the ONS measure that estimates retail sales across furniture, homewares, electricals and DIY-related categories). The aggregate value of the product markets in which the Group operates declined by approximately 3%, to £58bn. Home Retail Group’s total sales increased by £125m or 2.1% over the same period. Importantly, Argos and Homebase have held or increased market share in virtually all of their individual product markets.
In addition to reduced consumer spending in our product markets, the year also brought significant challenges in terms of product cost pressures driven principally by the weakened value of sterling. This inflationary pressure has been successfully managed while remaining highly price competitive for our customers.
To further offset these challenges, significant cost actions have been taken across the Group. Despite cost increases attributable to volume growth and underlying operating cost inflation, our cost base has been reduced by £64m, or 3%. This is equivalent to cost productivity of approximately £135m or 7% and has been achieved while measures of customer service and operational standards have been maintained or improved.
The net result of consumer spending and product cost pressures, largely offset by the excellent cost management across the Group, was benchmark operating profit down by just £11m, or 4%, to £290m.
Through our continued focus on cash generation, and building upon the successful track record since demerger, a further £130m of net cash was generated during the year. Working capital continued to be managed tightly, at the same time as we have maintained or improved measures of product availability for customers. The closing cash position of £414m is also after £87m of net capital expenditure that included continued investment in growth initiatives, and payment of a maintained £126m dividend for our shareholders.
Given the challenges and uncertainty at the start of the financial year, cautious planning assumptions were used by the businesses in order to set targets for both stock levels and costs. This did not constrain the outcome for the year; both Argos and Homebase demonstrated the flexibility of their operating models to fulfil the better than expected demand. The significant cost actions over the last 12 months to volume-adjust or gain further efficiencies throughout the cost base have also improved the flexibility of our businesses for the future.
The Group has remained absolutely committed to delivering customer value during the consumer slowdown. All UK retailers in our product markets have been impacted by the weakness of sterling, but the Group targeted a level of customer price inflation that aimed to pass on the impact of cost of goods inflation in absolute terms. This cash gross margin approach resulted in our businesses remaining highly price competitive, although the gross margin rate reduced as a consequence.
Given customer trends through the downturn, Argos and Homebase have been further adapting the customer offer in terms of product development and range architecture, pricing and promotional activity, and the wider customer service proposition. For example, we strengthened own brand ranges, added more products to save consumers money on their household bills, and made further improvements to our multi-channel convenience. Argos and Homebase also continue to benefit from their widespread customer appeal, broad product offerings and relatively high purchase frequency.
Looking forward, capital expenditure will increase in the next financial year to £125-150m from £87m in the year just ended. While we will open fewer new stores, we see significant opportunities for further multi-channel, customer offer and format developments; these include expanded online product ranges and new tools and services on the Argos and Homebase websites, as well as the Argos brand refresh and store refurbishment programmes. These opportunities will ensure our businesses are well invested and positioned to continue leading the way in delivering the most appropriate home and general merchandise shopping experience of the future.
As a separately listed company, Home Retail Group has demonstrated four successive years of strong cash generation and has returned approximately £500m to shareholders by way of dividends over this period. While the Board intends to maintain a prudent approach to balance sheet management, the strong cash position has created the opportunity to continue investing in value-enhancing growth opportunities while also returning capital to shareholders. Over the next 12 months up to £150m of shares are expected to be bought back. The Board will continue to regularly review the Group’s capital structure.
Home Retail Group is the UK’s leading home and general merchandise retailer, with clear scale advantage and well invested infrastructure built up over a period of many years. We continue to expect a return to attractive growth rates in spending in our product markets in due course, driven particularly by the long-term trend of consumers investing in their home environment and from the pace of technology and other product development. Argos and Homebase are further strengthening their customer propositions ahead of the market recovery, investing in expanding choice, developing ranges and enhancing product presentation in store, in catalogues and online.
Both formats are well positioned and clearly differentiated from other retailers. Argos will maintain its leadership as a truly multi-channel, value-orientated format across a wide range of product categories, distinct from the more service-orientated models of specialists or the more adjunct offerings of the supermarkets. Homebase will continue to be differentiated with a more style-led offer across a broader range of home enhancement categories.
The Group’s scale supports our price competitiveness relative to most other retailers operating in the same product markets. The Group’s skills and infrastructure, particularly in overseas product sourcing and multi-channel operations, will also leverage financial benefits and synergies which are difficult to replicate given the investment required and period of time over which these competitive advantages have been established. In particular, our highly developed sourcing operations enable the Group to deal more competitively with cost of goods pressures that all retailers in our product markets experience, as well as support improvements in our range architectures, particularly in the ability to provide great value own brands on a directly sourced basis.
Our businesses continue to adapt well to the consumer environment and are delivering share gains in their markets. Given our strong financial position, we are investing ahead of the recovery in the wider economy and, more specifically, recovery in consumer demand. We therefore remain confident in the Group’s ability to deliver growth in shareholder value over the long term by maintaining our clear competitive advantage as the UK’s leading home and general merchandise retailer.
