slides (PDF 3.7 MB)

Analyst Presentation
14 September 2006
Today’s agenda
Presentation (from 2:30pm)
Overview
Terry Duddy, CEO
Argos
Sara Weller, MD Argos
Homebase
Paul Loft, MD Homebase
Purchasing scale, expertise and infrastructure
Maria Thompson, Commercial Director
Multi-channel infrastructure
Eugene Brazil, Customer Services Director
Financial Services
Greg Ball, MD Financial Services
Financial performance
Richard Ashton, FD
Summary
Terry Duddy
Q&A (from 4:30pm)
Section 1:
Overview
Terry Duddy
Home Retail Group competitive strengths
` Market leading position
` Strong retail brands with large customer bases
` Choice and value-led product offering
` Purchasing, sourcing and supply chain scale
` Integrated multi-channel capability
` Shared infrastructure and logistics expertise
` Experienced management team delivering a long-term track
record of growth
1
Home Retail Group is a scale operator in the UK retail
market
` The leading home and general merchandise retailer in the UK
Operating profit before exceptionals (£m)
Sales (£bn)
5.5
426
4.9
385
4.9
338
4.2
235
2.9
215
2.4
1.9
1.5
1.4
111
1.4
30
19
MFI
38
Woolworths
Halfords
John Lewis
DSGi
Kingfisher
Home Retail
Boots
Next
Halfords
MFI
WH Smith
Kesa
Woolworths
John Lewis
Next
Kingfisher
Boots
DSGi
Home Retail
Source: Last financial year UK sales and profit of continuing retail operations as per annual report/prelims; MFI includes Howden
WH Smith
60
0.7
Kesa
89
2
Home Retail Group market leadership
Sold by
Argos
Sold by
Homebase
Home
Retail
position
Housewares
9
9
#1
£8.6bn
Verdict
Furniture
9
9
#1
£8.2bn
Verdict
Home improvement
9
9
#2
£11.0bn
Verdict/Mintel
Horticulture, garden furniture
and outdoor living
9
9
#2
£3.2bn
Verdict
Small domestic appliances
9
9
#1
£1.3bn
Verdict/GfK
Consumer electronics
9
9
#3
£13.8bn
Verdict/GfK
Large domestic appliances
9
9
#3
£4.0bn
Verdict/GfK
Jewellery
9
#1 by vol
£3.2bn
Mintel/EDR
Toys
9
#1
£1.9bn
Mintel/NPD
Sports & leisure equipment
9
#1
£1.2bn
Mintel
Product market
Market
size
Source
3
Strong retail brands with large customer bases
Homebase
Argos
`
Leading UK general merchandise retailer
with 650+ stores
`
2nd largest home improvement retailer
with strong brand stretch and c. 300 stores
`
Reputation for choice, value and
convenience
`
Well known for providing an extensive
range of home enhancement merchandise
`
73% of UK households shopped at Argos in
last 12 months
`
4 million Spend & Save loyalty card holders
70 million transactions a year
`
130 million store transactions and 4 million
remote orders a year
`
`
Core customer: ABC1 Home Enhancers
`
Core customer: Hard Working Families
Home Retail Group
`
Each business strong in distinct consumer
segments
`
Purchasing scale
`
Multi-channel infrastructure
4
Choice and value–led product offering
` Argos and Homebase both offer customers choice and value
` Argos offers unparalleled breadth of product categories
– Catalogue format supports breadth and range
– Logistics expertise ensures availability
` Homebase has benefited from Home Retail Group ownership
– Range broadened to include Argos products
– Significantly increased product availability
– Enhanced purchasing efficiencies
` Purchasing scale and sourcing infrastructure ensure price
competitiveness
Recognised by consumers for choice and value
5
Purchasing scale, expertise and infrastructure
` Established long term relationships:
– cost benefits
– exclusive products
– advantageous quantities
` Importation and sourcing of products from low-cost countries
achieves cost efficiencies
` Home Retail Group currently directly imports over 30% of Argos
goods and over 20% of Homebase goods sold
` Operation of efficient supply chain infrastructure
` Further value chain opportunities
Delivering value for money to consumers while supporting gross margins
6
Home Retail Group has invested to develop leading multichannel capability
` Telephone ordering supporting Argos, Homebase and Home Retail
Group FS
` Transactional web sites
– Argos over £1bn cumulative sales
– Homebase transactional web site relaunched and expanded
with 13,000 products offered
` Catalogue scale and infrastructure
` Home delivery
– Allows pick up in store or home delivery on all products for
Argos
– Supports new big ticket offering for Homebase
Multi-channel is a source of competitive advantage and key point of differentiation
7
‘Own the Home’
vision
To leverage our combined strengths to
deliver ever greater value to our
customers
To be a leading retailing group
that delivers long term sectorleading sales and profit growth
mission
8
‘Own the Home’
What
Customers
Want
Different
Ways to
Order
Large range
of products
Stock
Availability
Value for
money
Financial
Services
Home
Delivery
Installation
Jewellery
Toys
Sports &
leisure
equipment
House
wares
DIY /
Small
Consumer
Large
Furniture
garden domestic Electronics domestic
appliances
appliances
Kitchens
Bathrooms
Core:
Strengthen through world
class low cost sourcing
capability
Headroom:
Grow through service and
infrastructure investment
Other
services
9
Home Retail Group operates in a £55bn+ market and has
only 10% share
Home Retail Group sales: £5.5bn
`
Home enhancement markets
– DIY/Decorating
– Furniture
Other General
Merchandise
16%
– Housewares
– Fitted kitchens and bathrooms
`
Electricals
– Audio/visual equipment
– Small domestic appliances
Home
Enhancement
51%
– Large domestic appliances
– Photographic
Electricals
33%
– Video games hardware
– Emerging technologies
`
Other general merchandise
– Toys
Year ended 31 March 2006
– Jewellery
– Sports and leisure equipment
Substantial opportunity for Home Retail Group to grow in large markets
10
Key components of growth strategy
` Strengthen and grow market leading positions
` Grow market share in targeted large product markets, capitalising
on the strength and flexibility of Home Retail Group’s businesses
– Consumer electronics
– Sports and leisure equipment
– Furniture
– Large domestic appliances
– Fitted kitchens and bathrooms
` Expand Argos and Homebase store networks to provide enhanced
customer convenience
` Extend and exploit multi-channel leadership
` Leverage shared product pool and purchasing scale to deliver
excellent value to customers
11
Strengthen and grow market leading positions
` Housewares: £8.6bn market
` Small domestic appliances: £1.3bn market
` Toys: £1.9bn market
` Jewellery: £3.2bn market
` DIY and Garden: £11bn market
12
Grow share in targeted large markets
` Furniture: £8.2bn market
– Home Retail Group is the market leader but we have <10% market
share
– Market is going through a period of structural change
– We have all the key capabilities required to grow share profitably in
this large market
` Consumer electronics: £13.8bn market
– Home Retail Group is the third largest retailer in the UK
– We are strong in mature and new technology markets
– Our Internet presence is a key strength
` Large domestic appliances: £4.0bn market
` Fitted kitchens and bathrooms: £3.0bn market
` Sports and leisure equipment: £1.2bn market
13
Expand and develop store networks
` Argos and Homebase new store openings meet our hurdle rates
` Plan to open c. 30 Argos stores per year
` Plan to open c. 15 Homebase stores per year
` Potential to grow to over 1,200 stores
` Rollout and rollback of proven home enhancement proposition in
Homebase
` Investing in format development
– Argos – e.g. High tech; display
– Homebase – e.g. small store format
14
Extend and exploit multi-channel leadership
` Product selection options
– Catalogue/Specialogue
– Website
– In store display
` Order channel options
– On the internet
– Over the phone
– In store
` Ways to receive products
– Pick up in store
` Pre order facility
– Home delivery
` All Argos products
` Selected Homebase ranges
15
Home Retail Group businesses leverage shared
infrastructure and expertise
`
Purchasing scale, expertise and infrastructure
`
Catalogue production
– 35 million 1,700 page Argos catalogues per year
– 5 million 80 page Homebase catalogues per year
`
Scale ecommerce operations
– Argos 3rd largest internet retailer
– Homebase 13,000 products on line
`
Home delivery
– Cost efficient and reliable
– 7 million deliveries each year
`
Customer service
– 18m enquiries each year; scalable
`
Financial services
– Over one million Argos and Homebase active storecard holders
`
Other Shared Services
– Property acquisition and management, information systems and media buying
Competitive advantage through leveraging shared infrastructure across Home Retail Group
16
Commitment to delivering shareholder value
` Discipline within GUS plc
` Home Retail Group governance prepared for separation
` Financial discipline and rigour in capital spend evaluations
` Drive the business result to deliver shareholder value
17
Section 2:
Argos
Sara Weller
Long track record of growth
Argos sales and total growth
12%
13%
17%
7%
£1.9bn
1999
£2.1bn
2000
11%
£2.7bn
£3.4bn
8%
£3.7bn
7%
£3.9bn
£3.0bn
£2.3bn
2001
2002
2003
2004
2005
2006
Year to March
Excluding discontinued Additions operations
18
The Argos proposition
Argos overview
Argos vision
` Leading general merchandise retailer
in the UK
“Don’t shop for
it, Argos it!”
` Twice yearly 1,700 page catalogue
published
` Unique retail format, over 650 stores
Convenience
` Selling up to 17,000 product lines
` Longstanding reputation for value for
money
` Fully integrated multi-channel model
` 2nd most popular UK internet retail
site
Choice
Value
The Argos Values
` Five years of sales growth averaging
over 10%
19
Argos competitive strengths
` Convenience: Unique way to shop that integrates
stores, internet and telephone channels
` Choice: Information-rich catalogue of up to 17,000
products with capacity for continued expansion
` Value: History of reinvesting cost and buying
efficiency in lower prices
` Supported by extensive infrastructure capabilities
– Store portfolio
– Distribution network
– Home delivery
` Proposition attracts large, loyal customer base of
‘hard working families’
` The Argos values and how we deliver against our
vision
20
Unique retail store format at the heart
` 2 in 3 UK households collect an Argos catalogue from stores every year
` Customers choose at home
` Stores act as fast and efficient pick-up points
` Two main types of store:
– Fully stocked-in ‘Extra’
– Smaller store ‘ordered-in’
` Technology enables better shopping experience
– Kiosks
– stock checker
– call forward
Cost effective formula in a highly competitive environment
21
Convenient multi-channel shopping
Search & Select
Order & Pay
Delivery channels
In-store…
…by telephone…
…or on the internet
National Coverage
A Unique Model
Comprehensive
Product
Range
Check & Reserve for store pick-up
Pre-pay for home delivery
Our fully integrated multi-channel operation consistently delivers a good customer
experience
22
Specialised infrastructure
Warehousing and
distribution
` Single catalogue
number as common
identifier
` Single pick distribution
centres
Sales channels
Home delivery
` Customers can view current
stock availability across channels
` Substantial investment in
infrastructure
` Customers can ‘reach down
supply chain’ to order product
directly into any store
` Highly competitive home
delivery service
Our complex, flexible and specialised multi channel infrastructure is very hard to copy
23
Leading market positions
Sales mix
Description and market position
Other General
Merchandise
23%
Electrical
45%
Home
Enhancement
32%
Year ended 31 March 2006
` Small Domestic Appliances
` #1
` Consumer Electronics
` #3
` Large Domestic Appliances
` #3
` Housewares
` #1
` Furniture
` #1
` DIY / Garden
` #5
` Jewellery
` #1
` Toys
` #1
` Sports and leisure equipment
` #1
Well positioned in large and/or growing markets with scale
Source: Verdict, Mintel, company data
24
Excellent breadth and depth of choice
`
Around 17,000 lines, including 4,000
delivery only and 3,000 Argos Extra
`
Range from “the ordinary to the
extraordinary” – breadth and depth of
choice
`
Argos Extra range available to all
stores since summer 2005
`
Structured and informative presentation
to make choosing easy
‘Breadth of a department store, depth of a specialist’
25
Range breadth brings greater flexibility
` Breadth of range brings benefits to Argos as well as to our
customers
– Around 50% of lines are new in each same season catalogue
vs. the previous one (e.g. Cat 63 to 65)
` Enables product market innovation (eg Hard Disc recorders, HD
ready TV)
– Around 40% range is changed from one catalogue to the next
(e.g. Cat 64 to 65)
` Enables us to maximise seasonal opportunities (eg jewellery/ toys
and garden furniture/outdoor living)
– Enables efficient use of infrastructure
26
Expanded ranges continue to deliver growth
Argos catalogue - number of product lines
16,400
11,600
17,000
17,500
13,000
13,300
17,200
` ‘Extra’ ranges
introduced in 2003
9,300
` Awareness building
since then
Sales per product line (£'000)
2002
70
2003
Argos
2004
2005
Argos Extra
2006
` Ranges improved in
successive catalogues
Sports & Leisure
60
50
40
30
20
10
0
Cat 61
Cat 63
Cat 65
27
Longstanding reputation for value for money
`
EPP range
'Wow' deals
Reputation for offering extremely good value for
money
– Long history of lowering prices on reincluded
lines
– Supported by buying scale
– Highly competitive EPP range
– Breakthrough pricing on “Wow” lines
`
Continued promotions and permanent price
reductions during the life of the catalogue
– Non stop price drop
– Promos/flyers
`
Lowest prices regardless of purchasing channel
`
Supported by
– Low cost store format
Price drops
July sale
– Single pick distribution capability (6 RDCs,
4 NDCs)
– Common infrastructure leverage
Offer greater value for money
28
Large and loyal customer base
` Very broad overall penetration
– 2.5 m customer transactions per week
– 68% of UK households have catalogue
– 73% make at least one purchase a year
– Typical frequency 6 times per year
` High levels of customer satisfaction
` Core customer group of ‘Hard Working Families’
– Limits on their time and money
` Customer growth potential – ‘young professionals’
– Time poor, attracted by multi-channel convenience
` Nearly 1 million active store card holders
` c.2.5m e-mail database, grown 160% in past year
Opportunity to grow beyond our core customer base
29
Argos is consistently rated highly by customers for choice,
value and convenience
Attitudes to Argos – total agreeing
100
96
93
92
85
80
It has a wide range
of goods to choose
from
The catalogue
makes it a
convenient way to
shop
78
Prices are really
good
60
40
Apr Jun '04
Jul Sep
'04
Oct Dec
'04
Jan Mar
'05
Apr Jun'05
Jul Sep
'05
Oct Dec
'05
Jan Mar
'06
Apr Jun '06
Source: HPI Tracking Study, Apr-June 2006 (Base: Current Argos Purchasers: 764)
30
Argos has significant advantage for convenience, price and
range against key competitors
100
90
80
70
Argos
Woolworths
Curry's
Comet
B&Q
60
50
40
30
20
10
0
Wide range to
choose from
Convenient Way to
Shop
Prices are really
good
Source: HPI Tracking Study, Apr-June 2006 (Base: Argos 764, Woolworths
470, Currys 221, Comet 149, B&Q 378)
31
Argos is rated more highly than supermarket competitors
100
90
80
70
60
Argos
Tesco
Asda
Sainsbury's
50
40
30
20
10
0
Sells wide range of
things for the home
Convenient place to Prices really good for
items for the home
buy things for the
home
Source: HPI Tracking Study, Apr-June 2006 (Base: Argos 764, Tesco 269, Asda 412,
Sainsburys 209)
32
Routes to growth
1. Strengthen and drive market leadership in core
markets
2. Continue to take share in large and growing markets
3. Expand the store network and format development
4. Extend and exploit integrated multi-channel offering
5. Leverage scale and infrastructure
33
Product opportunities in ‘core’ and growth markets
Market leader in surprising areas
Growth driven by new technology
Opportunities in bigger ticket
fragmented markets
Take share and grow
Strengthen and drive
Long-established leader
34
Strengthen and drive leadership in core markets - choice
` Choice
– Leading range breadth and depth
– “Good, Better, Best” architecture
– Exploit ‘old technology’ as well as new
– Selection via rigorous ‘Page & Options’ process
"Good"
EPP
"Better"
Own label
"Better"
Exclusive
"Best"
Top brands
35
Strengthen leadership in core markets - value and
convenience
` Value
– Constant drive to reduce catalogue prices
– Leverage buying scale and sourcing expertise
– Rapidly ‘popularise’ to increase affordability
– Competitive benchmarking at ‘final pricing’ and ongoing
– Heavyweight promotion plan and ‘non-stop price drop’
` Convenience
– Improving store process
– Adding speed and convenience through multi-channel innovations
36
Take share in large, fragmented markets
` Already leading positions, but with "high headroom" to grow
` Higher price points, larger products
` Home delivery and point of sale credit are key advantages
` Increasing awareness drive sales, via catalogues and in-store
` Investing in product presentation to reinforce ‘stature’
` Furniture market offers significant potential
‘Adina' sofa
In-store display
Home catalogue
37
Grow share by improving awareness
Share
Landline
phones
Toys
SDA
Floorcare/
Microwaves
Sports
Photo
Garden furniture
‘special-ogue’
DIY/
Garden
Pre-pay
mobiles
Sports Equipment
information pages
CE
Furniture
Office
White
goods
Source: Mintel, Verdict, Gfk, Argos internal data
Awareness
White Goods
press ad.
38
Grow in fast-growing markets
` Technology driven customer
demand
` Accelerate maturity curve
– More space in catalogue
– Enhanced information to make
choosing easier
– Leverage supplier relationships
e.g. in MP3 to create affordable
own label
` Financial services can add further
value
39
Opportunity for further store growth
` Potential to increase store network above 800
` Estimated 30 store openings per year
` Low cost format
– Space efficient
– Operating costs
` Strong returns on capital and payback
New stores deliver excellent returns on investment
40
Two routes for new store growth
` Additional site out of town
– Complementary to in-town offer
– Potential to add Extra
– Typical total average store size 15,000 – 20,000 sq ft with
stock room mezzanine
– Average OOT store turnover £8m per annum
` Smaller towns
– Driven by breadth of offer
– Typical small non-Extra store size 9,000 – 12,000 sq ft
– Average small non-Extra store turnover £3m - £4m
41
Example of taking larger share in town through the
opening of a 2nd store
Ipswich
Market Share Jan 2006
Ipswich
M arket S hare Jan 2005
A14
A14
Market share by area
Nov 2005
Suffolk Retail Park
Carr Street
Over 8%
6.0%-8 .0%
4.0%-6 .0%
3.0%-4 .0%
2.5%-3 .0%
C ar r Str e e t
2
2.0%-2 .5%
1.5%-2 .0%
1.0%-1 .5%
0.5%-1 .0%
under 0.5%
2
single
store
Ipswich (Sales £m)
Ipswich (Sales index)
original
store post
impact
mature
sales at
new store
Total
Argos
6.4
4.5
7.9
12.4
100
70
123
193
42
New stores add to multi-channel offer
` Stores and new channels work “in conjunction” not “in competition”
` Internet feeds store sales
– Check and Reserve via the internet up 85% last year
– 68% of stocked in lines ordered on the internet for collection in
store
` Stores feed home delivery growth
– 50% of home delivered sales ordered in store last year
` Over 3 years, stores have grown both ‘stocked-in’ and ‘home
delivered’ sales
– Average ‘stocked-in’ sales per store up 4%
– Average ‘home delivered’ sales per store up 24%
` Integration of our channels is major competitive advantage
43
New trial store: Thurrock
44
In store technology trial: Malvern
45
Furniture display trial: Watford
46
Leading Internet retailer
Argos.co.uk sales
` >130m visits last 12 months
` >£250m Direct sales last year
` Direct sales up 35% last year
Online sales
(£m)
300
250
Britain's top Internet retailers
Hits
Rank Retailer
(m)
1
amazon.co.uk
606
2
argos.co.uk
133
3
tesco.com
130
4
euro.dell.com
121
5
play.com
120
6
next.co.uk
64
7
comet.co.uk
51
8
marksandspencer.com
<50
9
currys.co.uk
<50
10
johnlewis.com
<50
Source: Hitwise, July 2005 to June 2006
200
150
100
50
0
2001
2002
2003
2004
2005
2006
Year to March
47
Integrated multi-channel offering
Receipt Channel
Pick-up
in Store
Total
Order Channel
Internet
2004
2006
2004
Delivered
to Home
2006
2004
2006
6%
12%
2%
6%
4%
6%
Telephone
11%
8%
5%
4%
6%
4%
In-Store
83%
80%
73%
68%
10%
12%
100%
100%
80%
78%
20%
22%
Total
UK shopping patterns are changing – Argos is positioned to win
48
“Check and reserve” is one of the fastest growing services
Argos.co.uk orders
Online orders
(£m)
% of total
company sales
14%
550
500
450
400
350
300
250
200
150
100
50
0
12%
10%
8%
6%
4%
2%
0%
2001
2002
2003
2004
2005
2006
Year to March
Direct
Source: Midas – Commercial Finance
Reserved
% Total Company Sales
49
Leverage "Operational Excellence"
` Long term trend for cost increases to exceed RPI
` “Operational Excellence” programme drives efficiency
– Simpler, smarter processes
– Lower costs, better for customers
– Focussed on ‘volume’
` Flyers
` Distribution
` In-store
– Supported by IS investment
50
Leverage Home Retail Group scale and infrastructure
` Scale synergies within Home Retail Group
– Better buying and sourcing
– Multi-channel infrastructure
– Financial services
– Shared operations (Property, ISO)
` More capability at lower cost
` Better value for customers
51
Argos summary
Routes to growth
Competitive strengths
`
Convenience: Unique way to shop
`
`
Choice: Information-rich catalogue of
up to 17,000 products
Strengthen and drive market
leadership in core markets
`
Value: History of reinvesting cost and
buying efficiency in lower prices
Continue to take share in large and
growing markets
`
Supported by extensive Home Retail
Group infrastructure capabilities
Expand the store network and format
development
`
Extend and exploit integrated multichannel offering
`
Leverage scale and infrastructure
`
`
`
`
Proposition attracts large, loyal
customer base of hard working
families
The Argos values and ‘How we deliver’
against our vision
52
Section 3:
Homebase
Paul Loft
The Homebase proposition
Homebase overview
`
Second largest home improvement retailer in
the UK
`
High brand awareness
`
Positioned as a leader across the wider home
enhancement market
`
Successfully outperforming in a tough market
`
Leveraging product overlap, infrastructure and
expertise of Home Retail Group
Homebase proposition
`
Comprehensive
offer
`
Over 30,000 products
`
Loyalty
programme and
promotions
`
4 million Spend & Save
members
Conveniently
located stores
High quality
service
Style
6 main departments – DIY,
Decorating, Garden,
Homewares,
kitchens/bathrooms, Furniture
10% days
`
c. 300 out of town stores
`
Mezzanines supporting range
expansion
`
High levels of in store service
`
Reliable home delivery service
`
Known for offering stylish
products
`
Branded and own brand
products
53
The changing home enhancement customer and market
`
Historic long-term growth market
`
Current consumer slowdown having a disproportionate effect, primarily driven by housing
market conditions; remain cautious on short-term outlook for DIY
`
Traditional DIY sheds will need to adapt
– Underlying structural shifts in willingness and ability to carry out DIY
– Consumers still interested in updating and improving their living environment
– More focus on the products that are stylish and useful within the home
– More project-related products
– More products across the broader home enhancement categories
`
Expect that in the medium term the market will return back to growth rates that are above the
average for the retail sector as a whole
Homebase is well positioned to benefit in the changing market
54
Competitive strengths
` Scale player: 2nd largest home
improvement retailer
` Large, loyal customer base
` Strong and differentiated store portfolio
` Balanced mix of products: one stop shop
for the home and garden
` Strongly positioned as a leading home
enhancement retailer
` Home Retail Group scale and expertise
enhances competitive position
– Joint purchase scale
– Operational capability
55
Second largest home improvement retailer
Year end
Number of
stores
Total
sales
Total sales
growth
LFL
growth
B&Q
Jan 06
322
£3.9bn
-4%
-8%
Homebase
Feb 06
297
£1.6bn
-1%
-4%
Wickes1
Dec 05
176
£0.8bn
-6%
-8%
Focus2
Oct 05
255
£0.7bn
-12%
-9%
03/04
04/05
05/06
Market growth3
+9%
+3%
-6%
Homebase growth
+5%
+6%
-1%
Retailer key data
Scale player and outperforming a difficult market
1 Figure calculated as year end December 2005 revenues derived from Note 29 in Travis Perkins PLC annual report 2005,
divided by year end October 2004 revenues from Travis Perkins PLC Circular for the acquisition of Wickes as of January
2005. LFL sales for Wickes as disclosed on page 21 of annual report 2005
2 Source: Focus DIY Holdings Limited bondholder document; Numbers include combined Focus companies
3 Source: GfK
56
Large and broad customer base
` 11 million customers visit Homebase every year
` Over 70 million customer transactions
The Homebase customer – demographics indexed versus total market
140
120
100
80
60
40
20
0
Male
Female
AB
C1
C2
DE
Large, broad customer base; slightly more upmarket and more likely to be female
Source: Verdict, How Britain shops DIY, 2006
57
Two key customer groups
` Together represents 70% of the spend in home improvement market
` Home and Garden Enhancers: more affluent families; female bias;
40% of the market
` DIY Enthusiasts: average income: high spenders on home
improvement; Male bias; 30% of the market
Home and Garden Enhancers
DIY Enthusiasts
Homebase aims to be Number 1 for the Home Enhancer and a credible destination for the
DIY enthusiast
Source: Verdict, How Britain shops DIY, 2006
58
Loyal customers
` Spend & Save loyalty programme drives value for money and a
high degree of loyalty
` 4 million active users
` Account for 42% of sales
` Tiered discounts
` Encourages repeat visits
` Targeted marketing to responsive customer base
Homebase has one of the largest loyalty programmes in the UK – Spend & Save
59
Strong and differentiated store portfolio
` Large out of town superstores with garden display space and
parking – 2nd largest space operator outside of supermarkets
` ‘Shop not a shed’
– Effective use of mezzanines
– More department store
– More female friendly
– Easy to shop, easy to find things
– Dynamic seasonal areas
` Product presentation and service differentiates Homebase from
other DIY shed operators
Strong store portfolio that positions Homebase as a ‘shop not a shed’
60
Comprehensive offer for the home and garden
Sales mix
Product description
`
Other
5%
Other home
enhancement
32%
DIY and
decorating
41%
`
DIY and decorating
−
Tools, equipment, building materials
and accessories
−
Paint
−
Tiling, flooring and decorative fittings
Gardening and outdoor living
−
`
Gardening
and outdoor
living
22%
Year ended 31 March 2006
Horticulture, garden furniture,
gardening tools
Other home enhancement
−
Kitchens and bathrooms
−
Furniture
−
Lighting
−
Housewares
‘One stop shop’ for home and garden; substantial overlap with Argos product pool
61
Positioning Homebase as the leader in the home
enhancement market
` Enhanced shopping experience
` Improving the product offer
` Development of the proposition through mezzanines
` Leveraging Home Retail Group’s scale and expertise
62
Enhanced shopping experience
Engagement
`
`
`
`
`
Service
Staff Survey
Homebase Way Programme
'Choose your attitude'
Product training
Objectives for all staff
Easy to find/Easy to buy
`
`
`
`
Retail disciplines
Shop floor layout redesigned
‘Value alley’
Store signage
` Mystery Shopping
` Staff bonus based on results
Availability
`
`
`
`
`
`
On shelf availability programme
SAP licence advance
SAP audit
Retail inventory disciplines
Distribution capacity
Warehouse clearout
Improving retail disciplines to meet the needs of customers
63
Enhanced shopping experience – key metrics
Initially
Now
Aspiration
Availability
89%
96%
98%
Store service
74%
78%
80%
Staff engagement
19%
53%
55%
Our continuous measurement of these programmes shows dramatic improvements
Source: Availability - company data on all lines availability; store service - ABA Mystery Shopper research;
staff engagement - company annual staff survey
64
Improved product offer
` Over 100 range reviews completed since acquisition
` Improved process and implementation
– Change sourcing
– Sharpened EPPs
– Establish structure of "Good, Better, Best"
– Enhanced product display
– Improve own branding and packaging
` New product introduction
` Jointly undertaken with Argos where there is overlap
Continually improving product ranges to benefit both the customer and the business
65
Improved product offer - sharpened EPPs
Silver Effect Floor Lamp
2 for £9.99
Sorrento Gas BBQ
£79.99
Seville Garden Furniture
£99.99
Three Piece Pan Set
£9.99
66
Improved product offer - range structure
Good
Better
Best
67
Improved product offer - layout and displays
68
Improved product offer - packaging
69
Improved product offer - new products
* Source: Verdict
70
Development of the proposition through mezzanines
`
c.150 mezzanines, or about half the store portfolio
`
Differentiates the shopping experience – ‘shop not
shed’
`
Kitchen and bathroom displays key mezzanine feature
`
Upgrade of furniture offer
`
Bathroom accessories and lighting typically moved
upstairs
`
More space for core DIY and decorative products on
the ground floor
`
More space for new product ranges
`
Sales uplift >15% in total across the store; sustained
after first year
`
Achieving investment hurdle rate
Mezzanines have been a major enabler to positioning the business successfully across
the wider home enhancement market
71
Leveraging Home Retail Group’s scale and expertise
`
Supplier terms harmonisation
`
Supplier reviews
`
Leverage extensive product portfolio
`
Increased importation of product
`
Catalogue production
`
Home delivery
`
E-commerce
`
Roll-out of financial services operation (store card / financial
products)
`
Transfer of people, cultural approach and best practise
`
Enhance property pipeline
`
Reduced cost of fixtures and fittings
`
Media buying benefits
`
Speed to market with new products and offers
`
Enhanced ability to recruit senior retailers
Leverage on sourcing, expertise, infrastructure, assets and capabilities
72
What do customers think?
Improvement in customer feedback scores – November 2004 v March 2006
up 40%
up 38%
% improvement in
market research score
up 35%
up 33%
up 26%
Prices are good
as competition
Sell stylish items Rarely run out of
stock
Easy to shop
First store I go to
Improved customer perception across key performance measures is reflective of why we
have gained market share
Source: HPI Research Group; 660 customer telephone interviews carried out each quarter
73
Strategy for growth
1. Opportunity to roll out proven home enhancement
formula
2. Expand the store portfolio
3. Take share in key categories
– Kitchens
– Bathrooms
– Furniture
4. Leverage Home Retail Group purchasing scale, shared
product pool and infrastructure
74
Homebase home enhancement offer
Decorating
Gardening
Kitchens/bathrooms
Furniture
Other new product areas
Development areas
Core areas of strength
Core DIY
75
Opportunity to roll out and rollback
`
Only part way through transformation process of consistent offer across stores
`
Previous product range and mezzanine initiatives support roll out plan
`
Trials to test two investment types later this year
`
If successful, expect to roll out to 30-50 stores a year to bring consistency across
the chain
Stores
% Space
Attributes
Latest format
99
35%
Full Homebase range
Latest fixtures/store environment
Original format
82
33%
Lacks full range
Improved environment
Uninvested
116
32%
Lacks full range
Sub optimal store environment
TOTAL
297
100%
Successful wider home enhancement proposition that we can deliver nationally
76
Expand store portfolio
`
Plan to open around 15 net new
stores per annum
`
Larger locations where currently no
presence
`
Smaller (25,000 ft2) stores in smaller
markets
– Opens up new locations where
Homebase can profitably trade
`
Identified over 100 new locations
Growth and leverage through additional new stores
77
Take share in key categories
Kitchens
Market
size
Homebase
CAGR growth
03/04-05/06
Market leader
(share)
£1.9bn
c.25-35%
c.25% (MFI)
Bathrooms
£1.2bn
c.10-15%
Highly fragmented
(c.75% trade and
specialists)
Furniture
£8.2bn
c.15-25%
<10% (Argos)
Large markets with headroom to grow in each
Source: Verdict; company data
78
Take share in key categories - kitchens
Targeted market
Why an
opportunity?
What are we
doing?
What will we do
to take share?
* Source: Verdict
Kitchens
` £1.9bn market*
` Changing market
structure with weak
market leader
` Natural extension of
Homebase offer
` Full range in mezzanine
stores with wider range
of appliances
` Good home delivery
service
` Operational and selling
enhancements
` Full range in all stores
` Installation trial
` Expanded ranges and
accessories
79
Take share in key categories - bathrooms
Targeted market
Bathrooms
Why an
opportunity?
` £1.2bn market*
` Growing market driven
by fashion, new
product introductions
` Natural extension of
Homebase offer
What are we
doing?
` Range in mezzanine
stores
` Operational and selling
improvements
` Good home delivery
service
What will we do
to take share?
` Full range in all stores
` Extend bathroom /
showering ranges and
accessories
80
Take share in key categories - furniture
Targeted market
Why an
opportunity?
What are we
doing?
What will we do
to take share?
* Source: Verdict
Furniture
` £8bn market*
` Fragmented
competition
` Many facing challenges
` Home Retail Group
leverage
` Leverage Homebase
footfall
` Furniture Extra:
Leverages joint product
pool and home delivery
infrastructure; rolled
out to all stores
` Roll out to all stores
` Larger catalogue trial
` Extend into Office
furniture
` More upmarket product
81
Leverage Home Retail Group capability
` Purchasing scale benefits still to be harvested
` Argos product pool offers further new product introduction
opportunities over time
` Multi-channel infrastructure supports key targeted growth areas
` Catalogue and e-commerce capability increases speed to market
and development
– Larger catalogue in trial in 100 stores
– Transactional web site driving incremental sales
` Financial services offerings enable more customers to buy high
ticket items from Homebase
Continue to leverage scale, infrastructure and expertise of Home Retail Group
82
Homebase summary
Competitive strengths
Routes to growth
` Scale player: 2nd largest home
improvement retailer
` Opportunity to roll out proven
home enhancement formula
` Balanced mix of products: one
stop shop for the home and
garden
` Expand the store portfolio
` Strongly positioned as a leading
home enhancement retailer
` Take share in key categories
` Leverage Home Retail Group
purchasing scale, shared product
pool and infrastructure
` Large, loyal customer base
` Strong and differentiated store
portfolio
` Home Retail Group scale and
capability
83
Section 4:
Purchasing scale, expertise and infrastructure
Maria Thompson
Home Retail Group benefit drivers
` Sourcing
` Value Chain – analysis and review
` Expertise and infrastructure
84
Sourcing – Home Retail Group buying scale
Other General
Merchandise
16%
Home
Enhancement
51%
Electricals
33%
Argos and Homebase
combined sales FY05/06
£5.5bn
Scale and product overlap driving buying benefits
85
Sourcing - direct importing 2005/6
` Argos
-
> 30% of sales directly imported
` Homebase -
> 20% of sales directly imported
` However <50% of import is direct sourced
Significant move towards importing with substantial further benefits still achievable
86
Strategic Sourcing - potential benefits
5-10%
50
Savings potential %
45
e-procurement
10-15%
40
35
Direct
sourcing
30
5-10%
25
20
15
10
5
30-50%
10-15%
Cumulative
potential
One agent
vs
multiple
Import
vs
domestic
0
Stage 1
Stage 2
Stage 3
Stage 4
87
Some examples of strategic sourcing
Direct import to
direct source
Direct sourcing
consolidation
Reverse auction
>10%
cost saving
c.50%
cost saving
>20% 2nd round cost
saving
88
Value Chain approach
Trading Focus
Can we get a better
price?
` Product selection and
retail pricing
` Opportunistic buying
to ensure margin
targets are achieved
` Incremental
negotiation
Savings by Negotiation
Price Focus
How much
should we pay?
` Price benchmarking
` Tenders and auctions
` Leveraging whole
enterprise volumes
Cost Focus
Can it be done
for less?
` Evaluate cost
structures
` Understand drivers of
cost
` Define cost
advantaged suppliers
` Net price understanding
(DPP and deal histories)
` Understand brand /
own-brand trade-offs
` Understand supplier
pricing policy
Savings by Competitive Insight
Savings by Cost Insight
Innovation Focus
Can we redesign the
product?
` Capture value through
better design
– Specifications
– Performance
– Packaging
` Develop in-house innovation
capability
– Consumer insight
– Product development
– Own-brand
management
Value through (Re)design
Collaborative Approach (build relationship “with” suppliers)
Trading Approach (often working “against” suppliers)
89
Value Chain example - furniture
Context / Background
`
Furniture strategic category for Home
Value Chain priorities
`
Retail Group
– Key range in Argos and Homebase
growth
`
and housewares
– Lowest cost (UK, Eastern Europe,
Asia)…
– ‘High Headroom’
`
– …for required performance
Growth plans leverage our strengths
– Range
Ensure availability of world-class
supply base
– Group sales over £1bn in furniture
`
Ensure sufficient capacity to support
`
Leverage group volumes
– Catalogues
– Best prices / terms
– Infrastructure e.g. Home Delivery
– Standardise products
Value Chain capability ensures our
– Rationalise suppliers
supply-base delivers competitive
– Value of Growth (historic and
advantage
future)
90
We conduct rigorous evaluation of supply requirements
and opportunities driven off the range strategies
1. Understand customer proposition
and range strategy
2. Understand drivers of total cost, e.g.
(example cost structure)
10
100
3
27
100
8
80
60
5
7
40
40
20
a)
ice
pr
g
Se
llin
is
Pr
of
it
tr a
tio
n
&D
Ad
m
in
&
R
g
m
ar
ke
tin
io
n
rib
ut
ist
D
uf
ac
t
4. Identify new suppliers and availability
of raw materials
Labour cost
160
e.g. indigenous Oak in Croatia vs birch in the Baltics
120
80
5. Define target supply base
40
`
`
0
UK
b)
Sa
le
s
R
3. Evaluate cost advantage by
region, e.g.
M
an
aw
m
at
er
ia
ls
ur
in
g
0
W Europe
E Europe
Asia
Freight rates
`
Assess suppliers’ capabilities, performance & finances
Define strategic/development suppliers and growth plans;
identify reduce/exit suppliers
New supplier requirement defined by region
6. Commercial
500
400
`
300
200
100
0
UK
W Europe E Europe
Asia
`
Assess “Value of Growth” opportunity; opportunities to
improve underlying costs
Negotiate commercial terms to support future growth,
new and current suppliers
91
Value Chain activities
` Value Chain – analysis and review
` Continuous improvement
– Supply base review
– Supplier management
` Product standardisation
– Source of supply
– Technical specification
92
Leveraging expertise and infrastructure
` Sourcing operation
` Import logistics and distribution
` Services and processes
Leveraging expertise and infrastructure produces further incremental benefits
93
Home Retail Group sourcing
Milestones
2001 The Group’s Asia office opens in HK
Indexed growth in imported and
directly sourced purchases
2002 Homebase joins the Group
Indexed on 2001 directly sourced
purchases
2004 The Group’s Asia office opens in
Shanghai
The Group’s office in Shenzen
Offshore warehousing and
consolidation
2600
2100
1600
1100
600
100
2001
2006 Eastern Europe sourcing team
established
More off shore warehousing and
consolidation
2002
2003
2004
2005
Directly sourced purchases US $m indexed
Total imports (FOB) US $m indexed
94
Logistics and distribution
` Freight forwarding
` Off-shore warehousing and consolidation
` Off-dock storage
` Import warehouses
– 600,0002 ft main Argos unit
– New warehouse 2007
– Outsourced warehousing and break bulk
95
Services and processes
` Product specifications
` Quality control
` Packaging
– Cube optimisation
– Cost savings
– Improved customer presentation
` Ethical sourcing
96
Home Retail Group sourcing, Value Chain, leveraging
expertise and infrastructure
` Significant sourcing benefits achieved – still much more to come
` Established off-shore sourcing operations – new markets to be
explored
` Established and expert in-house Value Chain knowledge and
application
` Effective leverage of Home Retail Group scale in logistics and
distribution
97
Section 5:
Multi-channel infrastructure
Eugene Brazil
Multi-channel enabler
` Scale and expertise in e-commerce, customer services, home
delivery operations and catalogue production supports profitable
multi-channel retailing and creates competitive advantage
Home Retail Group’s multi-channel infrastructure underpins profitability and competitive
advantage
98
Scale
E-commerce
`
Scale and expertise from long-established, award winning, innovative and market leading
internet operations
Customer service
`
Shared customer service operation for product orders, delivery enquiries and credit services
online and over the phone
`
Around 2,000 employees handling over 18 million enquiries a year
Home delivery
`
Large scale national home delivery operation, 7 million deliveries to customers each year
`
Deliver to 1 in 7 UK homes
`
Bigger than Next, JLP, M&S, DSGi, Comet
`
Significant investment in home delivery infrastructure over the last four years
Catalogue production
`
Largest print run in the UK; 20 million catalogues – twice a year
Multi-channel infrastructure operates with huge scale advantage
99
Home delivery scale and expertise
Fundamentals to low costs
1. Stem distance
` Limit the distance between warehouse and customer
2. Vehicle Fill
` Maximise the number of items you get on a vehicle
3. Drop density
` Shorten the journey between each customer delivery
4. Achieve delivery success
The scale of operations translates into low costs across each of the fundamental drivers
100
Home Retail Group’s two man home delivery network –
regional warehouses
Faverdale: c.700k sq ft; 105k unit capacity
Acton Gate: c.500k sq ft; 66k unit capacity
Marsh Leys: c.650k sq ft; 95k unit capacity
101
Superior efficiency
` On average 30 customer orders per box
` Distance between each delivery is less than 5 miles on average
` >97% successful deliveries each day
– 3 delivery slots
– Telephone ahead
Home delivery model is very efficient and highly cost advantaged
102
Competitive advantage
1.
2.
Offer a national delivery service at low cost
–
For a wide range of products at great prices
–
With short lead times
–
With flexible delivery times
Created a flexible infrastructure, which
–
Can respond to rapid growth
–
Argos Direct unit sales grew by 58% in 3 years
–
Can enable new customer proposition to be launched quickly
`
–
Continual enhancement to the service
`
3.
Furniture Extra for Homebase
3 day express delivery on white goods
Difficult to replicate
–
Economically and quickly
Scale and expertise translates into competitive advantage
103
Leveraging home delivery for Homebase
` Homebase garden furniture
` National delivery service
` Short lead time
` Over 40% cost saving versus third
party carrier
The benefits of home delivery scale and expertise have been leveraged for Homebase
104
Catalogue scale and expertise
` 33 years of catalogue production expertise
` 40 million catalogues produced each year
` Drives significant scale benefits
– Image creation
– Paper purchase
– Print buying
The scale of operations reinforces competitive advantage
105
Speed to market
` Argos ‘Home’ catalogue
– 2 million copies
– 100 stores
` Concept to market in four months
Expertise and cost advantage translates into rapid speed to market
106
Leveraging catalogue and home delivery for Homebase
` Furniture Extra trial (July 2004)
– 12 stores, 3,000 sq ft displays
– Supported by a collection from the Argos furniture range
– Leveraging Home Delivery network, contact centres and
catalogue products
` National rollout (completed December 2005)
– 135 furniture display stores, remainder catalogue only
stores
– 5 million 80 page catalogues
– Over 700 products
` Positive consumer response; positive sales growth
` New 200 page extended home furnishings catalogue now
being trialled in 100 stores
The benefits of full multi-channel operations have been leveraged for Homebase
107
Conclusion
` Key element in enabling our multi-channel, multi-brand business
to operate profitably
` Source competitive advantage
– Create great service at low cost
– Innovate quickly
– Create flexible infrastructure which we can leverage
108
Section 6:
Financial Services
Greg Ball
Role of Financial Services
` Support and grow retail sales
` Develop and sell credit and insurance products direct to customers
Home Retail Group FS operates to drive sales in the retail businesses as well as also selling
other financial services products
109
How we operate
In House
Retail Credit &
Warranties
Commission /
Profit Share
Direct
Insurances
Partnerships
Consumer
Lending
NEW
` Argos Storecard
` Motor & Home
` Homebase Storecard
` (Lloyds TSB)
` Creditor Insurance
` Travel & Pet
` Warranty Insurance
` (Specialist providers)
` Future development of consumer
lending propositions
` Joint venture with Barclaycard
for new Argos credit card and
Argos/Homebase personal loan
products
The business operates distinct models to suit the underlying products on offer
110
Why retail credit is important
Credit penetration
30%
Revolving
3 mth BNPL
6 mth BNPL
9 mth BNPL
Credit penetration
25%
20%
15%
10%
5%
0%
<£95
£95 - £195
£195 - £295
£295+
Spend
Argos
Homebase
Retail credit enables purchases of bigger ticket items
111
Why retail credit is important
Growth in moving annual total Argos sales, grouped into card penetration bands
180.0%
160.0%
140.0%
% Growth since Dec-01
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
< 10% Penetration
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
> 10% Penetration
Credit supports retail sales growth
112
Multi-channel capability
In Store & Kiosk
Telephone
E-Commerce
Credit sales
£387m
£15m
£38m
Penetration
6.8%
7.7%
12.5%
Applications
592k
140k
140k
Ability to apply and use storecards across all channels
113
Achieving scale
Storecard loan book (gross)
£349m
Number of active customers
>1m
£378m
£252m
£155m
458k
£105m
2002
2003
2004
2005
2006
2002
2003
2004
2005
2006
Growing loan book and customer base
114
Section 7:
Financial Performance
Richard Ashton
Home Retail Group Income Statement
£m
FY05
FY06
Sales
5,313
5,548
Cost of sales
(3,493)
(3,687)
Gross profit
1,820
1,861
Net operating expenses
(1,398)
(1,523)
Operating profit before exceptionals
Exceptionals
Operating profit after exceptionals
422
(22)
400
338
(25)
313
115
Home Retail Group sales
£m
FY05
FY06
Argos
3,652
3,893
Homebase
1,580
1,562
81
93
+15%
5,313
5,548
+4%
Financial services
Total
Variance
+7%
(1%)
116
Home Retail Group – cost of sales and gross profit
£m
FY05
FY06
Variance
Sales
5,313
5,548
4%
Cost of sales
(3,493)
(3,687)
6%
Gross profit
1,820
1,861
2%
Gross profit - % sales
34.3%
33.5%
`
Cost of sales comprise both the cost of merchandise and the cost of the National
and the Regional Distribution Centres (“NDC” and “RDC”)
`
Distribution costs amount to approximately 5% of sales
`
Merchandise gross margin in FY06 was “in line” with supply chain benefits being reinvested in lower prices to customers
`
Distribution costs increased slightly due to a new warehouse opened to support
strategic growth initiatives together with the effect of underlying cost inflation
117
Home Retail Group – net operating expenses
£m
FY05
FY06
Sales
5,313
5,548
Selling costs
(1,139)
(1,252)
10%
(259)
(271)
5%
(1,398)
(1,523)
9%
21.4%
22.6%
4.9%
4.9%
26.3%
27.5%
Administrative costs
Net operating expenses
Selling costs - % sales
Administrative costs - % sales
Net operating expenses - % sales
Variance
4%
118
Home Retail Group – operating profit before exceptionals
£m
FY05
FY06
Argos
320
291
(9%)
Homebase
114
52
(54%)
0
6
434
349
Financial Services
Total reported
Central Costs1
Operating profit before exceptionals
(12)
422
(11)
338
Variance
n/a
(20%)
8%
(20%)
Sales % ratios
Operating profit before exceptionals
EBITDA before exceptionals
1
7.9%
6.1%
10.2%
8.5%
The Central Costs are a “carve out” allocation of the GUS plc Central Costs of £22m reported in May 2006.
They are NOT intended to be an estimate of the central costs for Home Retail Group plc
119
Home Retail Group – exceptional items
£m
FY05
OFT fine
(16)
Homebase Head Office relocation
Impairment charges
TOTAL
`
FY06
-
(6)
(12)
-
(13)
(22)
(25)
GUS plc previously reported Homebase Head Office relocation costs of £18m in their
results for the year ended 31 March 2005
Complies with different presentation required for Home
Retail Group plc
120
Home Retail Group Balance Sheet - assets
FY05
Actual
FY06
Actual
FY06
Pro forma
1,834
1,879
1,879
Property, plant, equipment and intangibles 656
759
759
Inventories
889
881
881
Instalment receivables
427
399
399
Other assets
255
314
314
Group balances
525
1,064
-
93
131
24
4,679
5,427
4,256
TOTAL LIABILITIES
(2,082)
(2,652)
(1,324)
TOTAL NET ASSETS
2,597
2,775
2,932
£m
Goodwill
Cash and cash equivalents
TOTAL ASSETS
121
Home Retail Group Balance Sheet - liabilities
£m
FY05
Actual
FY06
Actual
FY06
Pro forma
Trade and other payables
(905)
(893)
(891)
Other liabilities
(269)
(209)
(209)
(1,174)
(1,102)
(1,100)
Loans and borrowings - external
(298)
(224)
(224)
Loans and borrowings - group
(610)
(1,326)
Total loans and borrowings
(908)
(1,550)
(224)
(2,082)
(2,652)
(1,324)
Total trade and other payables
and liabilities
TOTAL LIABILITIES
-
122
Home Retail Group – working capital
£m
FY05
FY06
Variance
Stock
889
881
8
Debtors
142
164
(22)
Creditors and accruals
(905)
(872)
(33)
Sub-total trade
126
173
(47)
Loan book
427
399
28
TOTAL
553
572
(19)
123
Home Retail Group Summary cash flow
£m
FY05
FY06
Operating profit (before exceptionals)
422
338
Depreciation and amortisation
121
135
EBITDA (before exceptionals)
543
473
Movements in working capital
(219)
(19)
Movement in retirement benefit
(43)
(88)
Other operational cash flows
(40)
(1)
Cash generated from operations1
Percentage of EBITDA
1
Cash generated from operations is before incurring outflows related to capital
expenditure, interest, taxation and dividends
241
44%
365
77%
124
Home Retail Group capital expenditure
£m
FY05
FY06
62
80
103
81
Distribution and supply chain
50
63
Other
27
31
Total
242
255
Property, plant and equipment
217
232
25
23
242
255
New stores
Store enhancement and refurbishment
Intangible assets
Total
125
Return on Capital Employed
1
2
3
4
5
£m
FY05
FY06
Total assets1
4,061
4,2063
Total trade and other payables and liabilities2
(1,103)3
(1,100)
Invested capital
2,958
3,106
Capital employed (excludes goodwill)
1,124
1,227
Operating profit before exceptionals4
422
338
Pre-tax ROIC4,5
14.3%
10.9%
Pre-tax ROCE4,5
37.5%
27.5%
Excludes Group loan balances, cash and cash equivalents, and pension asset
Excludes pension liability
31 March 2006 pension asset excluded was £26m
31 March 2005 pension liability excluded was (£71m)
Operating profit for Financial Services includes the interest cost of servicing its loanbook
Calculated on 31 March year end balances
126
Pro forma assumptions
`
It is anticipated that Home Retail Group will be allocated net debt effective at 31
March 2006 of about £200m, in addition to its substantial leasehold obligations
`
Subject to any changes in legislation, it is expected that the effective tax rate based
upon Benchmark PBT for Home Retail Group will be in the low 30%s
`
The dividend policy will be a matter for the Home Retail Group Board to consider
following demerger. However, at this stage, it is anticipated that Home Retail Group
will have a cover of no less than two times
`
The central costs of Home Retail Group plc are expected to be in the range of
£20m–£25m of which approximately £5m are already incurred by, and will be
transferred from, Argos
`
Anticipate underlying cost inflation remains at approximately 4% for FY07
`
Loanbook expected to grow in FY07 with growth in storecard offset partially by
continued, but slowing, personal loans run-off
`
Home Retail Group FS is trading in line with expectations. However, its response to
the recommendations of the recent OFT enquiry in respect of late payment fees is
expected to impact current year reported profit from early in the second half by
about £3-4m. The impact is expected to annualise in the following year
127
Pro forma assumptions – one-off costs
`
Additional costs will be incurred in respect of a number of one-off demerger
incentive schemes:
– Share Grant to approx 50,000 employees
– Reinvestment scheme for approx 100 senior staff
`
It is expected that these costs will amount to approximately £45 million spread
over a 3 year period commencing at demerger and will be accounted for below
Benchmark PBT
`
Home Retail Group will incur one-off demerger related costs of approximately £15
million. These will be treated as exceptional and charged in the first half of FY07
128
Financial summary
` Track record of delivering growth
` Resilient business model
` Well invested asset base
` Financial discipline in investment appraisal
` Strong cash flow generated from operations
129
Summary
Terry Duddy
Home Retail Group summary
Competitive strengths
` Market leading position
` Strong retail brands with large
customer bases
` Choice and value-led product
offering
` Purchasing, sourcing and supply
chain scale
` Integrated multi-channel
capability
` Shared infrastructure and
logistics expertise
Routes to growth
` Strengthen and grow market
leading positions
` Grow market share in targeted
large product markets
` Expand Argos and Homebase
store networks
` Extend and exploit multi-channel
leadership
` Leverage shared product pool and
purchasing scale to deliver
excellent value to customers
` Experienced management team
delivering a long-term track
record of growth
130
Q&A
Appendix
Argos – sales
(£ billions)
2.7
3.0
3.4
3.7
+8%
3.9
+7%
+12%
+13%
+17%
LFL
Space
Gross margin %
FY02
FY03
FY04
FY05
FY06
13%
7%
5%
3%
(1%)
4%
6%
7%
5%
8%
“firm”
“firm”
Excludes Argos Additions and Jungle.com
“slightly ahead” “slightly ahead”“in line”
131
Homebase – sales
(£ billions)
1.4
1
1.5
+5%
1
1.6
1.6
+6%
(1%)
FY03
FY04
FY05
FY06
LFL
n/a
3%
3%
(4%)
Space
n/a
2%
3%
3%
Gross margin %
n/a
“in line”
“slightly ahead”
“in line”
Pro forma results – Homebase acquired in December 2002
132
Argos – operating profit before exceptionals
(£ millions)
212
UK GAAP1
241
297
326
+10%
IFRS
320
+24%
291
(9%)
+14%
+26%
Op. margin
1
FY02
7.8%
FY03
8.0%
FY04
8.8%
FY05
8.9%
FY05
8.8%
FY06
7.5%
UK GAAP operating profit is also before goodwill amortisation
Excluding Argos Additions
133
Homebase – operating profit before exceptionals
1
UK GAAP
(£ millions)
102
102
IFRS
110
114
52
+8%
+1%
(54%)
Op. margin
1
FY03
FY04
FY05
FY05
FY06
7.2%
6.9%
7.0%
7.2%
3.3%
UK GAAP operating profit is also before goodwill amortisation
134
Home Retail Group 2005 operating profit restatement as
reported under GUS
£m
May 05
IFRS
UK GAAP Adjustments
June 05
IFRS
May 06
UK GAAP Adjustments UK GAAP
Argos
326
(5)
321
(1)
320
Homebase
110
(1)
109
5
114
0
-
0
430
4
434
Financial Services
0
Total continuing
436
Wehkamp
TOTAL
20
456
(6)
3
(3)
23
453
135
Home Retail Group – working capital
£m
FY04
FY05
Variance
Stock
706
889
(183)
Debtors
138
142
(4)
(863)
(905)
Sub-total trade
(19)
126
(145)
Loan book
353
427
(74)
TOTAL
334
553
(219)
Creditors and accruals
42
136
Investment decisions
` Under GUS, Post Tax WACC is 7%
` Hurdle rate approach applied to investment decisions to provide
“headroom” versus WACC
` Consistent methodology applied to store investment proposals across
Home Retail Group:
– Divisional store development committees review initial proposals
– Divisional operating boards review and approve final proposals
– Home Retail Group Operating Board approval required for all proposals
>£2.0 million
` Home Retail Group Finance Director reviews every investment proposal
above £2.0 million
` Monthly reporting of all new store and mezzanine performance vs viability
` Post Investment Appraisal process is applied to major elements of
expenditure
Strong rigour around investment decisions
137
Home Retail Group store portfolio
Property portfolio predominantly leasehold
796
834
879
287
954
297
Homebase
273
278
Argos
523
556
592
FY03
FY04
FY05
FY06
Argos Extra
‘Stocked In’
-
42
128
191
Homebase
mezzanines
36
67
111
144
657
138
Home Retail Group infrastructure portfolio
22
22
7
6
19
16
Home Delivery
RDC
NDC
Sq feet (millions)
Home Delivery
RDC
NDC
Total
6
4
7
7
8
8
5
6
7
8
FY03
FY04
FY05
FY06
1.7
2.4
1.7
5.8
2.2
2.4
2.4
7.0
3.0
2.7
2.2
7.9
2.8
2.7
2.7
8.2
139
Bank facilities
`
On demerger Home Retail Group will operate with the following facilities:
`
£225 million existing GUS facility with Citibank repayable in January 2008
`
£700 million multi-currency revolving loan facility with syndicate of banks
– Term 5 + 1 + 1
– Two tier structure comprising 10 banks
– Facility includes a financial covenant of 1.5 times in respect of:
–
(Benchmark PBT + DA + Rent + Interest) / (Rent + Interest)
140
Financial measures
Data Points (£ millions)
Benchmark PBT
303
Depreciation & Amortisation 135
Rent
Proforma Net Debt
200
Capitalised Leases (@8) 2,280
285
Interest (31 + 15)
46
Performance Metrics
(Benchmark PBT + DA + Rent + Interest) / (Rent + Interest)
= 2.3 times
Adjusted Net Debt / EBITDAR
= 3.2 times
Benchmark PBT is defined as profit before amortisation of acquisition intangibles,
store impairment charges, exceptional items (i.e. gains or losses on disposal,
demerger or closure of businesses and goodwill impairment charges), financing
fair value re-measurements, one-off demerger incentive costs and taxation.
141
Pension schemes
`
Defined Benefit
`
Defined Contribution
`
Already operates as a standalone
Home Retail Group scheme
`
Approx 3,600 members
`
2,000 members in GUS scheme and
1,600 members in Home Retail Group
scheme
`
Open to new members
`
Members contribute:
`
Approx 10,300 members – closed to
new members
`
Members contribute:
– 8% salary for 1/60ths accrual
`
`
– 6% salary for 1/80ths accrual
– 3% + 3%
Special contributions of £100m,
£50m and £70m in FY06, FY05 and
FY04 respectively
– 4% + 4%
– 5% + 5%
31 March 2006 : balance sheet
position
– Assets
– Liabilities
– Surplus
605
(579)
26
142
Disclaimer
This presentation has been prepared and issued by Home Retail Group plc (the “Company”) solely for your information and for use at the presentation to research analysts to be made on or about 14 September 2006 in connection with the proposed admission of the Company’s
ordinary shares to the Official List of the Financial Services Authority and to trading on the London Stock Exchange plc's market for listed securities (together, the “Admission”). By attending the meeting where this presentation is made and/or by accepting this document, you
agree to be bound by the following limitations.
This presentation is an advertisement and not a prospectus and potential investors should not subscribe for or purchase any shares referred to in this presentation except on the basis of information in the prospectus to be published by the Company
in due course in connection with the Admission. Copies of the prospectus will, following publication, be available from the Company’s registered office.
This presentation does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any ordinary shares in the Company or any other securities, nor shall it or any part of it nor the
fact of its distribution form part of or be relied on in connection with any contract or investment decision relating thereto. Any offer, invitation or solicitation shall be made solely by means of the prospectus and recipients of this presentation who are
considering a purchase of shares in the Company following distribution of the prospectus in connection therewith are reminded that any such purchase should be made solely on the basis of the information contained in such prospectus and any
supplementary prospectus(es). This presentation does not constitute a recommendation regarding the securities of the Company.
This document and its contents are confidential and may not be further copied, distributed or passed on, directly or indirectly, to any other person or published or reproduced directly or indirectly, in whole or in part, by any medium or in any form for any purpose. The
information contained in this document is being provided to you solely for the purpose of the preparation and publication of a research report in relation to the Company and may not be used for any other purpose. If such research is not published or Admission does not proceed,
the information in this presentation and any draft research based upon such information must be kept confidential and not used for any other purpose.
Neither this document nor any part or copy of it may be taken or transmitted into or distributed in or into, directly or indirectly, the United States, its territories or possessions, Australia, Canada or Japan. Any failure to comply with these restrictions may constitute a violation of
US, Australian, Canadian or Japanese securities laws, respectively. The distribution of this document in other jurisdictions may also be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.
This document is not an offer of securities for sale in the United States or elsewhere. The Company's ordinary shares have not been and will not be registered under the United States Securities Act of 1933 (the “Securities Act”) and may not be offered or sold in the United States
unless they are registered under the Securities Act or pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. No public offer of the securities referred to herein is being made in the United States.
The Company's ordinary shares have not been and will be not registered under the applicable laws of any state or jurisdiction of Australia, Canada or Japan and, subject to certain exceptions, may not be offered or sold within Australia, Canada or Japan or to or for the benefit of
any national, resident or citizen of Australia, Canada or Japan.
This document is intended for distribution in member states of the European Economic Area to persons who are “qualified investors” within the meaning of Article 2(1)(e) of the Prospectus Directive (Directive 2003/71/EC) (“Qualified Investors”). This document must not be acted
or relied upon in any member state of the European Economic Area by persons who are not Qualified Investors. Any investment or investment activity to which this communication relates is available in any member state of the European Economic Area only to, and will be
engaged in only with, Qualified Investors.
This document is intended for distribution in the United Kingdom only to: (i) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order"); or
(ii) persons falling within Article 49(2)(a) to (d) of the Order or to those persons to whom it can otherwise lawfully be distributed (all such persons together being referred to as "relevant persons"). This document must not be acted upon by persons who are not relevant persons.
Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons.
The information in this presentation is given in confidence and the recipients of this presentation should not base any behaviour, in relation to qualifying investments or relevant products (as defined in the Financial Services and Markets Act 2000 (“FSMA”)) and the Code of
Market Conduct (made pursuant to FSMA), which would amount to either market abuse for the purposes of FSMA, or insider dealing for the purposes of the Criminal Justice Act 1993 on the information in this presentation until after the information has been made generally
available. Nor should the recipient use the information in this presentation in any way which would constitute “market abuse” or “insider dealing”.
UBS Limited and Merrill Lynch International (together the “Joint Sponsors”) and their respective affiliates are each acting exclusively for the Company and GUS plc (“GUS”) and for no one else in connection with Admission and will not be responsible to any other person for
providing the protections afforded to their respective clients, or for providing advice in relation to Admission or any other transaction or arrangement referred to in this presentation.
This presentation has been prepared by, and is the sole responsibility of, the Company. Some of the information in this presentation is still in draft form and has not been legally verified by the Company, GUS, their advisers, the Joint Sponsors or any other person and may be
subject to updating, completion, revision and amendment and such information may change materially. It will only be finalised at the time of Admission. This presentation speaks at the date hereof. No representation or warranty, express or implied, is or will be made by or on
behalf of the Company, GUS, their advisers, the Joint Sponsors or any of their respective directors, officers or employees, or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this presentation and any reliance you place on
them will be at your sole risk. In particular the market data has been obtained by the Company and GUS from third party sources. Neither the Company nor GUS has independently verified such data and whilst the Company and GUS have compiled and extracted the market
data, they can provide no assurances of the accuracy and completeness of such information and take no responsibility for such data. Neither the Company nor GUS is under any obligation to update or keep current the information contained in this presentation or to correct any
inaccuracies which may become apparent, and any opinions expressed in it are subject to change without notice. None of the Company, GUS, their advisers, the Joint Sponsors or any of their respective members, directors, officers or employees nor any other person accepts any
liability whatsoever for any loss howsoever arising from any use of this presentation or its contents or otherwise arising in connection therewith.
Statements, beliefs and opinions contained in this presentation, including those related to Admission, particularly those regarding the possible or assumed future or other performance of the Company or the Group, industry growth or other trend projections, are or may be
forward looking statements, beliefs or opinions and reflect the Company’s or, as appropriate, the Company’s directors’ current expectations and projections about future events and are subject to risks and uncertainties that may cause actual results to differ materially. By their
nature, forward-looking statements involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements, beliefs, or opinions. These risks, uncertainties and
assumptions could adversely affect the outcome and financial effects of the plans and events described herein. These risks and uncertainties include, among other factors, changing business or other market conditions and the prospects for growth anticipated by the management
of the Company. These and other factors could adversely affect the outcome and financial effects of the plans and events described herein. As a result, there can be no assurance that projected results or developments will be attained and you are cautioned not to place undue
reliance on such forward-looking statements. Forward-looking statements contained in this document regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. The Company, its advisers, the Joint
Sponsors and each of their respective directors, officers and employees disclaim any obligation to update the Company's view of such risks and uncertainties or to publicly announce the result of any revision to the forward-looking statements made herein, except where it would
be required to do so under applicable law.
By attending the presentation to which this document relates and/or by accepting this document you will be taken to have represented, warranted and undertaken that: (i) you have read and agree to comply with the contents of this notice, including, without limitation, the
obligation to keep this presentation and its contents confidential, (ii) you have accepted the terms of the invitation to attend this presentation and (iii) you will not at any time have any discussion, correspondence or contact concerning the information in this presentation or
Admission with any of the directors or employees of the Company or GUS or their respective subsidiaries nor with any of their suppliers, customers, sub-contractors or any governmental or regulatory body without the prior written consent of the Company.
Disclaimer
`
The information, and any opinion contained in this document does not constitute a public offer under any applicable legislation or an
offer to sell or a solicitation or an offer to buy any securities or financial instruments or any advice or recommendation with respect to
such securities or other financial instruments.
The information contained in this document is subject to, and must be read in conjunction with, all other publicly available information,
including, where relevant, any fuller disclosure document published by Home Retail Group plc. Any person at any time acquiring the
securities must do so only on the basis of such person's own judgement as to the merits of the suitability of the securities for its
purposes and only on such information as is contained in public information having taken all such professional or other advice as it
considers necessary or appropriate in the circumstances and not in reliance on the information contained herein. The information
contained in this document is not tailored for any particular investor and does not constitute individual investment advice.
`
Any information in this document of the price at which investments have been bought or sold in the past or the yield on investments
cannot be relied upon as a guide to future performance.
`
This document is being distributed by Home Retail Group plc only to, and is directed only at (a) persons who have professional
experience in matters relating to investments who fall within Article 19(1) of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 and (b) persons to whom it may otherwise lawfully be communicated (together "relevant persons"). Any
investment or investment activity to which this document relates is available only to and will be engaged in only with, relevant persons.
Any person who is not a relevant person should not act or rely on this document or any of its contents.