Continued leadership in tough times HOME RETAIL GROUP PLC Annual Report and Financial Statements 2010
b b h
We are also online
Hear more about our business, with
video interviews and case studies in
our illustrated review, available online
from our corporate website or at:
www.homeretailgroup.com/reports/
REVIEW OF THE BUSINESS GOVERNANCE 57 Consolidated statement of changes in equity
4 Who we are and what we do 34 Board of Directors and 58 Consolidated statement of cash fl ows
6 Group performance Operating Board 59 Analysis of net cash/(debt)
8 Chairman’s statement 36 Directors’ report 60 Notes to the fi nancial statements
9 Chief Executive’s statement 38 Corporate governance report 98 Independent auditors’ report – Parent
11 Our product markets 43 Directors’ remuneration report 99 Parent Company balance sheet
14 Argos business review 52 Statement of directors’ 100 Parent Company statement of changes in equity
18 Homebase business review responsibilities 100 Parent Company statement of cash fl ows
22 Financial Services business review 101 Notes to the Parent Company
24 Responsible retailing FINANCIAL STATEMENTS fi nancial statements
26 Financial summary 53 Independent auditors’ report – Group 105 Group fi ve-year summary
28 Group fi nancial review 54 Consolidated income statement
32 Principal risks and uncertainties 55 Consolidated statement of MORE INFORMATION
comprehensive income 107 Shareholder information
56 Consolidated balance sheet 109 Index
REVIEW OF THE BUSINESS
Continued leadership in tough times —— The year beingreported has provided further challenges in our markets, andthe next year is likely to remain tough. However, we have beenadjusting all aspects of our operations to deliver further successin a diffi cult environment. This continues to leave our business fundamentally well positioned, and we will use our strengths to bebest placed to meet customer needs when they shop for home andgeneral merchandise goods.
Our Argos and Homebase leading retail brands, the shared
infrastructure and sourcing scale that supports them, and the
dedication of our colleagues throughout the business all help to drive
our competitive advantage. Economic factors mean that sales and
profits will still be under pressure in the short term. But our strengths
will continue to provide opportunities for market outperformance.
Terry Duddy
Chief Executive
Home Retail Group Annual Report 2010 3
REVIEW OF THE BUSINESS
Who we are and what we do —— We are the UK’s leading home and general merchandise retailer.
Argos and Homebase are two of the UK’s leading retail
brands, with large customer bases across the UK and Ireland.
Between them, our retail brands have more than 60 years
of market heritage and consumer awareness. Argos was
founded in 1973 and Homebase in 1981. They have been
shaping modern retailing ever since.
� Argos, the UK’s largest general merchandise retailer, has
an unrivalled blend of choice, value and convenience to meet
customer needs.
� Homebase is the UK’s second largest home improvement
retailer, and offers a growing range of home enhancement
products and services in a differentiated store environment.
52,000Our colleagues are the
foundation of our business
success.
135million The number of Argos customer
transactions last year.
19,300The number of products in the
latest Argos Spring/Summer
catalogue.
30,000The product range available
at Homebase.
4 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
MARKET POSITION As the leader in UK home and general merchandise retailing,
but with only a 10% share of the market, we still have signifi cant
room for growth.
£58 bn UK home and general merchandise market
10% Our share of this market
WIDE COVERAGE We have 1,094 stores in the UK and Ireland across the Argos
and Homebase formats.
1,094stores
GEOGRAPHICAL BREAKDOWN – ARGOS
27 Northern Ireland
39 Republic of Ireland
43 Wales
68 Scotland
568 England
STORE NUMBERS (year-on-year change)
349 Homebase (+4)
745 Argos (+15)
GEOGRAPHICAL BREAKDOWN – HOMEBASE
9 Northern Ireland
15 Republic of Ireland 15 Wales 33 Scotland
277 England
SALES MIX
HOMEBASE GROUPARGOS
4% Electrical goods 15% Toys, jewellery, sports
and leisure equipment
21% Toys, jewellery, sports
23% Gardening/seasonals and leisure equipment
26% Home enhancement 35% Home enhancement 40% Electrical goods
53% Electrical goods 45% Home enhancement,
DIY/decorating and
gardening/seasonals
38% DIY/decorating
Home Retail Group Annual Report 2010 5
REVIEW OF THE BUSINESS
Group performance —— By adapting and being fl exible,operating profits have reduced by only 4% despite somesignificant challenges in our markets. Growing market shares,remaining highly price competitive, reducing costs, generatingcash and further strengthening our operations are thefundamental successes achieved in this tough environment.
Operating highlights
� Strength of the operating model and excellent cost management have helped
to offset challenges due to the market environment
� Successful Spring 2009 at Homebase, combined with a strong operational
performance and tight cost control
� Continued development and investment in the overall customer offers at Argos
and Homebase to meet changing consumer needs
� Growth in market shares in virtually all of Argos and Homebase’s major product
categories including consumer electronics, toys, kitchens and outdoor living
� Leadership in multi-channel convenience, driven by continuing strong growth
in Check & Reserve
� Focus on absolute cash gross margin to substantially offset the cost of goods
pressures while remaining highly price competitive
Financial highlights
� Sales up 2% to £6,023m; cash gross margin down 3% to £2,276m
� Operating and distribution costs reduced by £64m or 3% to £1,986m, as increases
attributable to volume growth and inflation were more than offset by cost actions
� Benchmark operating profi t1 down 4% to £290m, with a decline of £37m or 12%
at Argos and an increase of £26m or 177% at Homebase
� Net interest income reduced by £25m to £5m, with an improved net cash position
more than offset by lower interest rates
� Benchmark profit before tax2 down 11% to £293m
� Basic benchmark earnings per share3 down 10% to 23.4p
� Reported profit before tax of £293m; reported basic earnings per share of 24.3p
� Cash generation of £130m; closing net cash position of £414m
� Share buy-back announced; up to £150m to be returned over the next 12 months
� Final dividend of 10.0p recommended; full-year dividend held at 14.7p
NOTES: REFER TO PAGE 26 FOR FINANCIAL DEFINITIONS
6 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
Group key performance indicators
Financial Services
Homebase SALES (£M)
Argos Group sales increased by 2.1% to +2.1%
5,851 5,985 5,897 6,023 £6,023m. Argos accounts for 72% of 5,510 Group sales, and grew by +1.5% or
+1.7% £65m in the year. Homebase accounts
for 26% of Group sales, and grew by +3.9% +3.9% or £59m in the year. Financial
Services accounts for the remaining
2% of Group sales, and grew by +1.7%
in the year.
+1.5%
Defi nition: Income received for goods and services.
Source: 06 07 08 09 10 Audited fi nancial statements.
BENCHMARK PRE-TAX RETURN
ON INVESTED CAPITAL
Benchmark operating profit plus share
12.7% of post-tax results of joint ventures 11.9% 12.2% 12.1%
and associates was £287.7m, down
£10.3m or 3% while year-end invested 10.5% capital reduced by 2%. This resulted
in a pre-tax ROIC of 12.1%.
Defi nition: Benchmark pre-tax return on invested capital (benchmark pre-tax ROIC) is defined as benchmark operating profi t plus share of post-tax results of joint ventures and associates, divided by year-end net assets excluding retirement benefi t balances, tax balances, derivative fi nancial instruments and financing net cash/debt.
Source: 06 07 08 09 10 Audited fi nancial statements.
Operating margin
Financial Services
Homebase
Argos
Central Activities
6.7% 6.0% 6.1%
5.1% 4.8%
398
359
332 300
290 (4%)
(7%)
+177%
(12%)
+4%
06 07 08 09 10
414
284
174
60
(200)
06 07 08 09 10
BENCHMARK OPERATING PROFIT
(£M) AND BENCHMARK OPERATING
PROFIT MARGIN (%)
Group benchmark operating profi t
decreased 4% to £290m. Argos
profit decreased by £37m, Homebase
profit grew by £26m, Financial Services
profit was maintained at £6m and
costs of Central Activities decreased
by £1m. Group benchmark operating
margin reduced to 4.8% in the year.
Defi nition: Benchmark operating profit is defi ned as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.
Source: Audited fi nancial statements.
FINANCING NET (DEBT)/CASH (£M)
The cash generation of £130m in
the year benefited from further good
working capital management and
a reduced level of capital expenditure.
Defi nition: Year-end balance sheet fi nancing net (debt)/cash.
Source: Audited fi nancial statements.
HOME RETAIL GROUP SHARE PRICE PERFORMANCE
200p
11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 27 Feb 2006 2006 2007 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2009 2009 2009 2009 2009 2009 2010
500p
400p
300p
Home Retail Group FTSE 350 General Retail FTSE 100
FOR ALL CHARTS, 06 AND 07 ARE ON A 52-WEEK PRO FORMA BASIS
Home Retail Group Annual Report 2010 7
REVIEW OF THE BUSINESS
Chairman’s statement —— The UK home and generalmerchandise market has experienced reduced levels ofcustomer demand and industry-wide pressures on the cost of goods over the last year. On all measures, the Grouphas produced a good result against this backdrop.
Oliver Stocken
Chairman
Maintaining the dividend, increasing
our future investment plans and the
announcement of a programme to return
capital have all been supported by another
year of strong cash generation. These points
also reflect the Board’s confidence in the
Group’s long-term prospects.
Home Retail Group has been facing the challenging
backdrop from a position of operational and
financial strength. The Group’s broad product
offerings and low average transaction values
offer measures of resilience. Our strength and
leadership in multi-channel retailing ensure the
relevance of our business model by offering true
customer convenience. Product cost pressures
have been dealt with by appropriate trading
strategies and our competitive scale advantage,
skills and infrastructure in Group-wide sourcing
operations. The drive for further cost effi ciencies
and our overall focus on cash generation has
further protected our position.
All of this has been delivered by our colleagues,
with their commitment, effort and passion for
success being a critical element of the strength
of Home Retail Group. Our achievement is very
much a team effort and I would like to thank
the Board, the management team and all our
colleagues in every part of our business.
Home Retail Group has been facingthe challenging backdrop from aposition of operational and fi nancialstrength. The Group’s broad productofferings and low average transactionvalues offer measures of resilience.
I am also very pleased to welcome Mike Darcey
to the Board. Mike is the Chief Operating Offi cer
of British Sky Broadcasting and joined us as a
non-executive director on 20 April 2010.
You will read in Terry’s statement opposite
how our approach to this last year has delivered
a good outcome. As part of this, further strong
cash generation has led to the Board’s
recommendation of a 10.0p fi nal dividend,
which represents shareholder dividend income
maintained at the level of the prior year. You
will also read how we are now able to move to
increasing our investment in the businesses,
more details of which you will find in the business
reviews on pages 14-23. The strong cash fl ow
of the Group and the Board’s confidence in the
Group’s prospects are also leading to a return
of capital, with up to £150m of shares expected
to be purchased over the next 12 months; the
background and detail to this are covered in the
Group financial review on page 28.
Finally, I would note that our dedication to
responsible retailing is unwavering, with further
progress on waste and recycling, supplier
management and the charitable giving of our
colleagues, customers and the Company, all
covered in the corporate responsibility review
on page 24, and in our online review,
www.thebasisofgoodbusiness.com.
Oliver Stocken
Chairman
8 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
Chief Executive’s statement —— The results for both Argos and Homebase exceeded initial expectations as wetraded through the year.
We have achieved further market share gains,
demonstrated our commitment to remaining
highly price competitive and controlled costs
extremely tightly to support both operating
profit and cash generation. Our approach
over the last year has also prepared us for the
year ahead, which is likely to remain diffi cult
for UK retail. By continuing to invest and
constantly develop our multi-channel
leadership and differentiated formats, we
will retain our competitive advantage and
therefore remain well placed for the future.
The Group has achieved a good outcome in a
challenging year, delivered by our appropriate
approach on an operational, fi nancial 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 fi nancial position.
Good outcome in a challenging year
Household spending and consumer confi dence
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 3.7% 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, signifi cant
cost actions have been taken across the Group.
Despite cost increases attributable to volume
growth and underlying operating cost infl ation,
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.
Approach to the last 12 months
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
meet the better than expected demand. The
significant cost actions over the last 12 months
to volume-adjust or gain further effi ciencies
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 infl ation 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,
Terry Duddy
Chief Executive
Hear Terry talking about the
Group’s performance in
our illustrated review,
available online at
www.homeretailgroup.com/
reports/
Home Retail Group Annual Report 2010 9
REVIEW OF THE BUSINESS
Chief Executive’s statement continued
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.
Increasing our investment plans
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 signifi cant 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.
Share buy-back programme
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.
Our businesses continue to adaptwell to the consumer environment and are delivering share gains in theirmarkets. Given our strong fi nancialposition, we are investing ahead ofthe recovery in the wider economyand, more specifically, recovery inconsumer demand.
Competitive advantage and fi nancial strength
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 fi nancial benefi ts
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 fi nancial
position, we are investing ahead of the recovery
in the wider economy and, more specifi cally,
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.
Terry Duddy
Chief Executive
10 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
Our product markets —— Home Retail Group operates inthe home and general merchandise market, worth approximately£58bn in terms of UK retail sales.
We are the leader in this market, with an
approximate 10% share. The overall market
declined by around 3% in calendar year 2009.
The market can be analysed into various
product categories. A summary of these,
including where products are sold at Argos,
Homebase or both, the Group’s overall share
position, and the market size of each product
category, is as follows:
Housewares
The housewares market is relatively fragmented,
according to analysis by Verdict Research,
with the 10 largest retailers accounting for
over 40% of the market. Argos is market leader,
with Homebase adding further Group scale.
The competition base is very broad across the
department stores (John Lewis, Marks & Spencer,
House of Fraser, Debenhams and Bhs, as well as
fashion and home retailer Next), some national
specialists (IKEA, Dunelm), the supermarkets
(Tesco, Asda, Sainsbury) and some broader
generalists (Wilkinson, Matalan, TK Maxx).
Specialist independents are estimated to
account for around one-third of the market.
The housewares market in calendar year
2009 was estimated to have experienced a low
single-digit decrease in retail sales.
Furniture
The structure of the furniture market shows
fairly close resemblance to the housewares
market according to analysis by Verdict
Research, with the 10 largest retailers accounting
for approaching 40% of the market. Argos is
market leader, with Homebase again adding
further Group scale. The competition base has
a number of national specialists (DFS, IKEA,
Homestyle Group, Magnet, Furniture Village,
Dreams), with other significant players being
B&Q, M&S, John Lewis and Next.
The total furniture market in calendar year
2009 was estimated to have experienced a mid
single-digit decline in total retail sales, with
several major sub-categories declining by
double-digit rates.
Group Market
Argos Homebase position size (£bn)
Home enhancement
Housewares ✓ ✓ 1 9.0
Furniture ✓ ✓ 1 7.7
Home improvement (DIY/fi tted kitchens/bathrooms) ✓ ✓ 2 11.1
Horticulture, garden furniture and outdoor living ✓ ✓ 2 3.5
Sub total 31.3
General merchandise
Small domestic appliances ✓ ✓ 1 1.3
Consumer electronics ✓ ✓ 2 15.1
Large domestic appliances ✓ ✓ 3 3.6
Toys ✓ 1 2.3
Jewellery ✓ 1 3.6
Sports and leisure equipment ✓ 1 1.1
Sub total 27.0
Total 58.3
Note: All market positions are for calendar year 2009 and by retail sales except for jewellery, which is measured by volume. The market sizes and positions quoted above are taken from reports provided by Verdict, Mintel, NPD GfK and the EPOS tracked markets. These reports are subject to prior year restatements upon more current data becoming available.
PRODUCT MARKETS
Home improvement
The largest part of the home improvement
market is the DIY category (excluding furniture
and homewares). There are four national
specialists (B&Q, Homebase, Wickes and Focus)
accounting for 45% of the market according to
Verdict Research, with other national operators
selling products in this category being Argos,
Wilkinson, Robert Dyas, Wyevale, Topps and
Dobbies. Approximately 50% of the DIY market
is estimated to be accounted for by specialist
independents. The home improvement market
also includes the kitchens, bathrooms and
floorcoverings (excluding carpets) categories,
with additional national competitors in
these areas including Magnet, Howden,
IKEA and Homeform.
The home improvement market in
calendar year 2009 was estimated to have
experienced a low single-digit decline in total
retail sales.
Home Retail Group Annual Report 2010 11
REVIEW OF THE BUSINESS
Our product markets continued
Hear more about our business,
with video interviews and case
studies in our illustrated review,
available online from our
corporate website or at
www.homeretailgroup.com/
reports/
Horticulture, garden furniture and
outdoor living
This market according to Verdict Research,
is mainly dominated by the four national DIY
specialists, with Argos and the two garden centre
specialists Wyevale and Dobbies also being
significant retailers of products in this category.
Approximately one-third of this market is
estimated to be accounted for by specialist
independents.
The horticulture, garden furniture and
outdoor living market in calendar year 2009
was estimated to have experienced a low
double-digit increase in total retail sales,
benefiting from significantly better weather
conditions in Spring 2009.
Small domestic appliances
This market is relatively concentrated according
to GfK, with Argos being the clear market leader
with a substantial market share. Competition is
mainly in the form of the electrical specialists
(Currys and Comet), Boots in terms of personal
care appliances, the supermarkets, and the
department stores. A relatively small proportion
of the market would be accounted for by
specialist independents.
The small domestic appliances market
in calendar year 2009 was estimated to have
experienced a low single-digit decline in total
retail sales, according to Verdict Research.
Consumer electronics
This market is also relatively concentrated
according to GfK, with Currys being the market
leader, followed by Argos and then Comet. Other
competition is mainly in the form of John Lewis
and other department stores, the supermarkets,
and national specialists in certain sub-categories
such as Game in video gaming and Jessops in
photography. Around one-fifth of the consumer
electronics market would be accounted for by
specialist independents, while other online
retailers represent a small but growing share
of this market.
The consumer electronics market in calendar
year 2009 was estimated to have experienced
a mid single-digit decline in total retail sales,
according to Verdict Research. This was largely
driven by the video gaming category as well as
the office and telecoms categories, with a more
marginal decline in the other major areas of
consumer electronics.
Large domestic appliances
This market is again relatively concentrated
according to GfK, with the two major electrical
specialists being then followed by Argos.
Department stores such as John Lewis, DIY and
kitchen retailers (including Homebase), and to
a lesser extent the supermarkets and home
shopping businesses, represent other signifi cant
retailers in this category. Approximately
one-third of the large domestic appliances
market would be accounted for by specialist
independents.
The large domestic appliances market in
calendar year 2009 was estimated to have
experienced a low single-digit increase in total
retail sales, according to EPOS tracked markets.
Toys
The toy market is relatively concentrated
according to analysis by NPD, with the eight
largest retailers accounting for over 60% of
the market. Argos is the market leader, with
Toys ‘R’ Us as the other major national specialist,
following the demise of Woolworths. The Early
Learning Centre, Toymaster, The Entertainer and
the Disney Store are other signifi cant specialists,
with the supermarkets also being prominent
toy retailers.
The toy market in calendar year 2009 was
estimated to have experienced a mid single-digit
decline in total retail sales.
12 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
Jewellery
Market competitor analysis on the jewellery
market is based on volume sold rather than
total retail sales value. According to research
by Keynote, this is a highly concentrated market
with Argos being the market leader by volume,
followed by H. Samuel. Other major retailers
of jewellery volumes include fashion jewellery
shops, department stores, and specialist
jewellers selling a greater proportion of precious
metal jewellery such as Ernest Jones/Leslie Davis
and Goldsmiths.
The jewellery market in calendar year 2009
was estimated to have experienced a low
single-digit decline in total retail sales according
to Keynote.
Sports and leisure equipment
This market is relatively fragmented according
to analysis by Verdict Research, with Argos being
the market leader. Other sellers of equipment
include the predominantly sports clothing
retailers (Sports Direct, JJB Sports, JD Sports), the
department stores, and retailers such as Halfords
and Blacks in sub-categories such as cycles and
camping. The majority of the market is estimated
to be made up of specialist independents.
The sports and leisure equipment market
in calendar year 2009 was estimated to have
experienced a low single-digit decline in total
retail sales.
Expected future development
of the competitive landscape
We expect our product markets to remain
highly competitive in the future. Supermarkets
have been growing share in certain parts of the
non-food, non-clothing market, building on
their regular footfall and the increased space
given to these ranges. Online retailers, such as
amazon.co.uk, currently represent a small but
growing share of certain product categories.
However, in categories undergoing a
sharper slowdown in consumer spending, many
specialist retailers, often with some signifi cant
market shares, have experienced fi nancial
difficulties. In most categories, the independent
specialists have faced even greater pressures on
the ability to weather the challenging economic
environment.
Although retail conditions are likely to remain
tough in the near term, the longer-term outlook
for market growth remains positive. A return to
long-term growth in the general merchandise
and home enhancement markets would be
expected on account of population growth and
an increasing number of households, a reversion
back to the general trend of rising overall
household disposable income, technology
changes and other new product developments,
as well as the need to replace many existing
household items.
Home Retail Group’s key strengths mean
we are well equipped for the future. Our strong
retail brands, multi-channel offering, extensive
product choice and competitive pricing, together
with a strong financial position, mean we are
relatively well placed to trade through the
downturn and benefit from renewed consumer
confidence later in the cycle. While we have
leading positions in multiple product markets,
there remains substantial headroom for growth
in many categories. The more fragmented
markets provide growth opportunities, and
we expect to take market share from weaker
competitors and to benefit from any capacity
withdrawal that ensues.
Our businesses are well established but
continue to evolve to meet changing customer
preferences. Our product range is constantly
expanding. Our supply chain is highly effi cient
and cost effective. With all the key determinants
for success in place, we expect to emerge in the
long run as a stronger competitor in a more
consolidated market.
Our businesses are well established but continue to evolve to meet changingcustomer preferences. Our productrange is constantly expanding. Oursupply chain is highly effi cient and cost effective. With all the key determinantsfor success in place, we expect to emergein the long run as a stronger competitorin a more consolidated market.
Home Retail Group Annual Report 2010 13
REVIEW OF THE BUSINESS
Argos business review —— As the UK’s leading generalmerchandise retailer, Argos provides a highly successful andunique offer of choice, value and convenience.
White goods are amongst the
10,000 further lines available
online at www.argos.co.uk
The Argos Value range has
been further expanded to over
350 products.
Operational review
Expanding choice
At 19,300 lines, the latest edition of the Argos
catalogue has expanded by around 500 lines
or 3%. Most of the increase has been from
stocked-in lines, thereby improving the customer
choice for immediate availability.
Of the current catalogue’s 15,000 lines that
are available in stores, 3,700 are ‘Extra’ products
which are fully stocked-in at 339 stores or 45%
of the store portfolio, while a further 118 stores
carry part of this additional range. Future systems
developments will remove the distinction
between ‘Core’ and ‘Extra’ ranges, allowing any
of the 15,000 products to be stocked-in at any
store, based upon demand levels.
The internet is expanding choice beyond the
19,300 lines in the catalogue, with 10,000 further
lines currently on trial at www.argos.co.uk. Major
areas of range extension include: technology
categories such as video games, offi ce supplies,
photography and consumer electronics
accessories; white goods; beds; toys and nursery;
and sports and leisure equipment. There has
been particular success in white goods, where
a further 2,000 lines extend signifi cantly the
main Argos catalogue offer. Additional trials of
extended ranges will continue to establish the
full opportunity, and will also begin to explore
the development of an ordered-in capability for
the customer to benefit from the convenience
of store-based collection.
Improving ranges
The ‘Argos Value’ range has been further
extended to over 350 products, supporting
Argos’ strong value credentials. Following an
excellent response, the number of ‘WOW’
deals has also increased to over 500 and covers
a broader range of categories. Store displays of
both ‘Argos Value’ and ‘WOW’ products were
increased throughout the chain.
The acquisition of the Alba and Bush brands
in late 2008 has enabled Argos to successfully
reposition its own brand ranges in consumer
electronics – particularly TVs – as well as
expanding their use into areas such as white
goods. Developing our portfolio of own brands in
these areas, together with stronger relationships
with third-party brands, has helped to
significantly improve the range hierarchy.
The Chad Valley toy brand, acquired in early
2009, was applied to around 120 products in its
first catalogue for Christmas 2009. There was
a broadly even split between its use on lines
previously available at Woolworths, lines
previously unbranded at Argos, and lines that
were new to the market. Chad Valley has already
become Argos’ leading toy brand, and in the
latest catalogue it has been applied to 200
products and includes extending its use to a
broader range of toy categories.
The electricals and toys categories are
amongst those where Argos has continued to
gain market share, with the repositioning of
own brands a key driver of this. Range hierarchies
are being strengthened further across all other
categories. The acquired Hygena and Schreiber
brands are now being used on furniture ranges
in the latest catalogue. Argos will continue to
develop its other brands, which include
Beanstalk, Challenge, Cookworks and Pro
Fitness. Argos is also expanding its use of
licensing, exclusive product lines or celebrity
brand endorsements, with examples of these
expansion plans including Qualcast, Disney,
Regatta, Mamas & Papas and Davina McCall
fi tness.
Value commitment
Argos has maintained its commitment to being
highly price competitive. During the year, there
was retail price inflation in its product markets
as a result of product cost pressures driven
principally by adverse currency movements.
Argos remains a leading value retailer, supported
by the Group’s sourcing scale and infrastructure
advantages, together with the benefit of Argos’
low cost operating model.
An overall competitive position continues
to be maintained, measured using weekly
internet price comparisons against competitors
on approximately 10,000 products. A price
position better than the competition is
maintained on the approximate 1,000 lines that
drive the greatest sales volumes; these ‘key value
indicators’ (KVIs) include the Argos Value,
‘WOW’, lowest price point and best selling lines
such as popular branded consumer electronics
and domestic appliances. Argos’ success at
continuing to be advantaged on price versus
the market is reflected in further market share
growth; this includes significant share gains in
product categories that are amongst the most
easily price-compared by customers such as
televisions, computing and white goods.
14 Home Retail Group Annual Report 2010
Argos key performance indicators
SALES (£M)
Sales in the 52 weeks to 27 February
2010 increased by 1.5% in total. There 4,347
4,164 4,321 4,282 was further strong growth in televisions
and personal computers, offsetting
weakness in the video gaming market.
Toy sales grew strongly. Challenging
market conditions continued in
home-related areas such as furniture,
but the rate of decline moderated over
the year.
3,859
Definition: Income received from goods and services.
Source: 06 07 08 09 10 Audited financial statements.
New space SALES TRENDS (% CHANGE)
Like-for-like Like-for-like sales declined by 2.1%,
reflecting a trading environment+7.9
+6.1 that continued to be challenging.
The contribution to sales from net
new space was 3.6%.
+3.8 (0.9) +1.5+7.5 +5.5
+3.1 +3.9 +3.6
+0.7
(
+0.7
4.8)4.8
(1( .4)
+2.4
.4) (2.1)(2.
( )
1
+2.4
1)
Definition: Annual percentage change in sales. Like-for-like sales are calculated on stores that have been open for more than a year. Net new space contribution to sales changes reflects stores that have opened and closed.
Source: Audited financial statements/measured
06 07 08 09 10 internally.
8.7% BENCHMARK OPERATING PROFIT 7.7% 7.8% 7.1% (£M) AND MARGIN (%)
6.1% Benchmark operating profit for the 376 52 weeks to 27 February 2010 was
£266m, a 12% decline on last year’s 325 profits of £304m.
304297
266
Definition: Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.
Source: 06 07 08 09 10 Audited financial statements.
FOR ALL CHARTS, 06 AND 07 ARE ON A 52-WEEK PRO FORMA BASIS
REVIEW OF THE BUSINESS
Argos Extra NUMBER OF STORES
During the year, 20 stores were opened
730 745 and five were closed, increasing the Standard
707 store portfolio to 745. These stores680
655
189 238 278 314
429 416429466 442 416466 442
now stock-in for immediate collection
up to 15,000 product lines.
406
339
406 Definition: Total number of stores at year-end. Argos Extra fully-stocked in stores are those that carry the full range of Argos Extra product lines.
Source: 06 07 08 09 10 Measured internally.
NUMBER OF LINES IN THE19,300 18,900 CATALOGUE (SPRING/SUMMER)
18,500 The current Spring/Summer catalogue 17,100
has been expanded to a record 19,30016,700 lines. This is around 3% more lines
than last year. The catalogue, now in
its 73rd edition, remains central to the
Argos proposition.
Definition: Total number of lines in the Spring/Summer Argos catalogue.
Source: 06 07 08 09 10 Measured internally.
Home delivery (store) SALES ACROSS MORE THAN Home delivery (phone)
ONE CHANNEL (%)Check & Reserve (phone)
Multi-channel sales grew to £1.9bnHome delivery (internet)
or 43% of Argos’ sales. The internetCheck & Reserve (internet) 43 represented 32% of Argos’ sales; over
40 two-thirds of this or 22% of Argos’ 37 7.7 total sales were customers using
35 online Check & Reserve for store
32 1.6 collection, with this channel growing 2.2 9.5
by 36% for a second year in a row.
22.2
Definition: Percentage of sales across more than one channel. There are three ordering channels: the internet, phone or store and two fulfilment channels, store or home delivery.
Source: 06 07 08 09 10 Measured internally.
Home Retail Group Annual Report 2010 15
REVIEW OF THE BUSINESS
Argos business review continued
Driving further cost effi ciencies
At the end of the previous fi nancial year,
organisational changes were undertaken
to further improve operational effi ciency.
The number of head office roles reduced by
approximately 10%, and a restructuring of
certain levels of store management resulted in
a reduction of store-based full-time equivalent
roles. Other cost efficiencies have been made
across all parts of the business, including bringing
‘in-house’ the transport of stock from ports,
further savings in the catalogue production
process and reducing the level of distribution
annexation. Total operating and distribution
costs were reduced by around £15m, with cost
actions more than offsetting volume-related
growth and underlying infl ation.
Brand refresh and store
refurbishment programme
Since the brand was last updated around
10 years ago, Argos has become the leading
integrated multi-channel retailer, expanded
through Argos Extra and internet-only ranges,
and developed a series of more up-to-date
store formats. A programme to refresh the
brand began during the year. Initial stages have
been completed, which has seen the new brand
identity applied across the latest catalogue,
the website and all other marketing materials.
In the next financial year, approximately
130 stores will be refurbished to reflect the new
brand identity as well as the latest shopping
process improvements and product displays.
This will include new versions of catalogue
browsers, stock checker units, kiosks and call
forward technology, as well as updated jewellery
displays and other improvements to the
Multi-channel sales grew to £1.9bnor 43% of Argos’ sales. Th e internetrepresented 32% of Argos’ sales;over two-thirds of this or 22% of Argos’ total sales were customersusing online Check & Reserve forstore collection.
customer areas. Approximately 500 stores,
or two-thirds of the store estate, are expected
to be refurbished over the next three years.
Refurbishment costs are expected to average
approximately £100k per store, with the cost
in the first year being approximately £15m and
totalling £70m over the complete programme.
Multi-channel leadership
Multi-channel sales grew to £1.9bn or 43% of
Argos’ sales. The internet represented 32%
of Argos’ sales; over two-thirds of this or 22% of
Argos’ total sales were customers using online
Check & Reserve for store collection, with this
channel growing by 36% for a second year in
a row. After Amazon, Argos continues to be the
largest internet retailer in the UK, with over
300 million website visits driving £1.4bn of
sales in the last year.
Around 20% or over £800m of Argos’
sales continue to be home delivered, with over
40% of home delivery sales being orders placed
by customers while in store. Of the 10 million
products delivered last year, 4 million were larger
items delivered via Argos’ in-house and market-
leading ‘two-man’ home delivery service.
Argos has continued to develop its multi
channel leadership over the last year and has
strong plans in place to continue its position of
competitive advantage.
Enhanced tools to assist customer choice
The expansion of online customer ratings and
product reviews has been a key development
during the year. There are currently over 500,000
reviews and around 75% of products that carry
a customer rating.
In the next financial year, more product
comparison tools with enhanced data and
selection criteria will be launched. Richer content
will be available on key ranges including new
product image technology, videos and ‘How to’
guides. Further improved navigation tools will be
launched, and ‘Ask & Answer’ facilities will be
extended. An Apple iPhone application will be
launched soon.
16 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
More convenience for store-based collection
During the year, 20 stores were opened and fi ve
were closed, increasing the store portfolio to 745.
More products stocked into store for customers’
immediate collection have been facilitated by
better stocking policies and achieving further
benefits from the previously completed systems
developments which manage stock ordering
and replenishment.
Additional improvements to stockroom
processes are being driven through the ‘voice
put-away’ process. This technology helps to
automatically guide stockroom assistants to the
correct location, with key benefits being quicker
processing and further enhanced stock fi le
accuracy, thereby improving availability and
customer satisfaction. Having been extended to
130 stores during the year, ‘voice put-away’ will
now be rolled-out across the rest of the portfolio
over the next two years.
In the next financial year, there will be around
15 to 20 openings, while 5 to 10 older stores are
likely to be closed; there will also be a number of
stores that are relocated to better sites. While
the availability of suitable new out-of-town
property developments is constraining store
openings in the short term, Argos’ store chain
analysis over the long term continues to support
further years of growth.
For the rapidly growing number of customers
who reserve online for store-based collection,
there will be improved stock-finding tools which
automatically check more stores and provide
alternative channel options and products more
effectively. Improved online and kiosk payment
methods are also being developed.
Financial review
Sales in the 52 weeks to 27 February 2010
increased by 1.5% in total; the contribution
to sales from net new space was 3.6%, while
like-for-like sales declined by 2.1%. There was
further strong growth in televisions and personal
computers, offsetting weakness in the video
gaming market. Toy sales grew strongly.
Challenging market conditions continued in
home-related areas such as furniture, but the
rate of decline moderated over the year.
The gross margin rate was down by
approximately 175 basis points. Around
100 basis points represented the net impact
of product cost pressures mainly attributable
to adverse currency movements, which were
partially offset by supply chain gains, shipping
cost savings and a level of customer price
inflation. Around 50 basis points resulted
from the sales mix shift towards lower margin
consumer electronics categories and away from
higher margin home-related areas, although this
trend slightly reversed in the final quarter of the
year. The remaining 25 basis points refl ected
some increased promotional activity over the
peak Christmas trading period.
Total operating and distribution costs were
reduced by around £15m or 1%. Total sales
increased by 1.5%, equivalent to a potential cost
increase of around £20m, and underlying cost
inflation was around 2% or £25m. There was
therefore around 5% or £60m of cost
productivity as a result of continued excellent
cost management.
Benchmark operating profit for the 52 weeks
to 27 February 2010 was £266.2m, a £37.4m
or 12% decrease on the previous fi nancial
year’s £303.6m.
Hear more about Argos
in our illustrated review,
available online at
www.homeretailgroup.com/
reports/
52 WEEKS TO 27 FEBRUARY 2010 28 FEBRUARY 2009
Sales (£m) 4,346.8 4,281.9
Benchmark operating profi t (£m) 266.2 303.6
Benchmark operating margin 6.1% 7.1%
Like-for-like change in sales
New space contribution to sales change
Total sales change
Gross margin movement
Benchmark operating profi t change
Number of stores at year-end
Of which Argos Extra fully stocked-in
(2.1%)
3.6%
1.5%
Down c.175bps
(12%)
745
339
(4.8%)
3.9%
(0.9%)
Down c.100bps
(19%)
730
314
Home Retail Group Annual Report 2010 17
REVIEW OF THE BUSINESS
Homebase business review —— Homebase continues to be well positioned as a leading home enhancement retailer.
A new ‘Homebase Value’
range of over 300 products
has been launched.
Homebase had another year
of strong growth in ‘big ticket’
categories, particularly kitchens.
Operational review
Capitalising on a more favourable
trading environment
Market conditions during the year were
challenging in most areas of home and general
merchandise. However, Homebase has delivered
its strongest sales performance for fi ve years,
as it capitalised on a more favourable trading
environment in some of its product markets,
resulting in further market share gains.
In its peak trading period, the Spring 2009
weather conditions were signifi cantly more
favourable than the previous year. This, together
with excellent product ranging, maintaining high
operational standards and appropriately driving
additional demand through promotional and
clearance activity, led to a strong performance
in seasonal-related categories including
horticulture, garden maintenance, and other
outdoor living categories such as furniture
and barbecues.
Homebase had another year of strong
growth in ‘big ticket’ categories, particularly
kitchens. While the year benefited from the
withdrawal of some competitors, Homebase
continued to gain from its own initiatives
including the previous national rollout of kitchen
installations, new product ranges and refreshed
store displays.
Range and service development
Homebase continues to develop its point of
differentiation as a more style-led offer across
home enhancement. Strong performances in
the showroom and homewares areas provide
evidence of this successful positioning.
Homebase also continues to protect and
develop its core DIY and decorating offer with
sales in these areas broadly flat in the year,
an improvement on trends in previous years.
This performance has been supported in part by
a more competitive pricing position and better
customer perception of value. There have also
been improved ranges and product availability
to complete key DIY tasks, greater prominence
of advertising and promotions for these areas,
and a launch of related ‘How to’ guides.
Homebase is looking to replicate the success
of its kitchen installation service. Bathroom
installations, previously trialled in 60 stores,
were extended to a further 100 stores in time
for the New Year peak trading period, with
strong results being achieved to date. Similarly,
the fitted bedroom furniture trial has recently
been extended to 100 stores; this product range
also now benefits from the addition of the
Schreiber brand.
Among a number of initiatives to improve
sales and profit densities, new ranges and display
techniques for flooring and tiling will be rolled
out to around 160 stores. This expansion
typically takes space from underperforming
and low density wallpaper ranges. Trials will
also test flooring and tiling installation services.
Improvements to price and value
Homebase has achieved both an improved
competitive pricing position and customer
perception of value through a number of
initiatives. During the year, there was retail price
inflation in Homebase’s product markets as a
result of product cost pressures driven principally
by adverse currency movements. Homebase, like
Argos, targeted a level of customer price infl ation
that aimed to pass on the impact of cost of goods
inflation in absolute terms.
Homebase has specifically matched the
market price on over 1,000 ‘key value indicator’
and ‘entry price point’ lines. Over 400 ‘Bulk Buy’
deals have also been implemented, with these
multi-buy offers often representing market-
leading deals. A new ‘Homebase Value’ brand of
over 300 products has been launched, covering
everyday essentials across all categories, with
150 items priced under £5. Similar to Argos,
Homebase also now undertakes frequent
automated price comparisons on 6,000 lines
against main competitors. This data is supporting
more effective management of everyday
competitive pricing. Stronger promotional
campaigns, capitalising on consumer behaviour
in the current economic times, have also driven
improved customer satisfaction scores on
price and value measures improving by 30%,
as well as successfully driving incremental
cash profi t.
Multi-channel development
During the year, Homebase achieved its target
of over 30,000 product lines being browseable
via www.homebase.co.uk. Some 10,000 of these
are transactional, double the level a year earlier.
The ‘Stock Check’ service was rolled out to all UK
stores early in 2009 and customer use has been
growing strongly. Towards the end of the year,
the Stock Check & Reserve service was rolled
out to all stores. Customer response to these
developments and other improvements in web
content has resulted in signifi cant increases
in website customer satisfaction ratings.
18 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
Homebase key performance indicators
SALES (£M)
Sales in the 52 weeks to 27 February
1,559 1,594 1,569 1,572 2010 increased by 3.9% in total. 1,513 There was strong growth in
seasonally-related categories during
Homebase’s peak trading period,
given Spring 2009 benefited from
better year-on-year weather
conditions. The year saw further
good growth in big ticket categories,
particularly kitchens. Sales for the
remaining categories overall were
marginally up.
Definition: Income received for goods and services.
Source: 06 07 08 09 10 Audited financial statements.
Space SALES TRENDS (% CHANGE)
Like-for-like sales increased by 2.7%Like-for-like in the year. Homebase delivered its
(3.5) strongest sales performance for five
years, as it capitalised on a more
+6.7
+3.9 favourable trading environment in+2.20.0 some of its product markets. The
contribution to sales from net new
space was 1.2%.
(1.6)
+3.1 +2.5+3.6 +2.7
+1.2
(4.(3.1)(3. 1) (10.2)1) (1.4)
(4. (10.2)1) (1.4)
Definition: Annual percentage change in sales. Likefor-like sales are calculated on stores that have been open for more than a year; net new space contribution to sales change is calculated on stores that have opened and closed during the year.
Source: Audited financial statements/measured
06 07 08 09 10 internally.
BENCHMARK OPERATING PROFIT
(£M) AND MARGIN (%)
3.3% 3.4% Benchmark operating profit for the 2.9% 2.6% 52 weeks to 27 February 2010 was
1.0% £41m, a £26m or 177% increase on
last year’s £15m.53 51
45
41
Definition: 15 Benchmark operating profit is defined as
operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.
Source: 06 07 08 09 10 Audited financial statements.
FOR ALL CHARTS, 06 AND 07 ARE ON A 52-WEEK PRO FORMA BASIS
297
150153
144
145
165 181
150153 145
06
With mezzanine
Without mezzanine
331
310
345
09
349
10
112 109
102
06 07 08
9895
09 10
NUMBER OF STORES
A net four stores were opened during
the year; there were six openings and
two closures, taking the portfolio to
349 stores.
Definition: Total number of stores at year-end. Mezzanine stores contain a mezzanine-selling floor which is typically used to display kitchens, bathrooms and furniture.
Source: Measured internally.07 08
157 159
190188
157 159
SALES PER SQUARE FOOT (£)
Sales per square foot based on total
year-end selling space increased to
£98. The reduction in previous years
was driven by the combination of a
difficult DIY market and the impact
of expansion of store mezzanine and
garden centre space which is dilutive
to sales densities. The trend reversed
in the last year aided by the more
favourable trading environment.
Definition: Annual sales divided by year-end total selling space.
Source: Audited financial statements/measured internally.
Home Retail Group Annual Report 2010 19
REVIEW OF THE BUSINESS
Homebase business review continued
Hear more about Homebase
in our illustrated review,
available online at
www.homeretailgroup.com/
reports/
Homebase has been developing its email
and web-based promotions to drive further
traffic and sales through its website. The email
marketing database has been extended from
0.5 million relevant customers to over 7 million
by leveraging the combination of Homebase,
Argos and Nectar information. These
developments have boosted online traffi c and
helped drive strong growth in transactional
sales during the period.
In the next financial year, the number of
transactional Homebase products will continue
to be increased, as will the use of Argos and
internet-only products. Improved search criteria
and enhanced store location choices for reserved
goods will be introduced. A new ‘Get into
Gardening’ customer community site has been
launched, offering advice and tips through
videos, forums and blogs.
New loyalty scheme
Homebase has successfully transferred its
in-house Spend & Save loyalty card programme
over to the Nectar scheme. Customer feedback
indicated that Nectar was simpler to understand
and benefited from use across multiple retailers
and service providers, while the scheme was also
superior in customer reach with around 17 million
card holders making it the biggest loyalty card
programme in Britain. The Nectar scheme also
provides an enhanced level of customer insight.
Since launch, measures of card usage and
related spend have all exceeded expectations.
Six million of the Nectar card holders have
already shopped at Homebase.
In the next financial year, there will be
more Nectar-specific promotional events,
and increased use of Nectar to drive category
During the year, Homebaseachieved its target of over 30,000product lines being browseable viawww.homebase.co.uk. Some 10,000 of these are transactional, double the level a year earlier.
or specific product promotions. Longer term,
further use will be made of the Nectar
capabilities to develop customer segmentation
and more targeted marketing programmes.
Store portfolio development
A net four stores were opened during the year;
there were six openings and two closures, taking
the portfolio to 349 stores. No openings are
planned in the next financial year. In the
approximate 20% of the portfolio that has seen
little or no investment for many years, the low
cost refit trial was implemented in a further
10 stores during the year. Sales uplifts across
these refits have been achieving the targeted
15% level, and a further 10 stores are expected
to be refitted in the next financial year. Small
numbers of store closures, relocations or
downsizes will continue as part of our ongoing
management of the portfolio.
Cost base management
Significant cost actions were taken at Homebase
in the second half of the previous fi nancial year.
Despite better than expected demand in the year
just ended, distribution and operating costs were
held at the budgeted levels in absolute terms,
without detrimental impact on customer service
or operational standards. As a result, total
operating and distribution costs were reduced
by around £50m or 6% in the period, with cost
actions more than offsetting volume-related
growth and underlying infl ation.
Store payroll costs had been reduced from
the second half of the previous fi nancial year
through the realignment of shift patterns and
task allocations. At the end of that year, further
organisational changes were undertaken to
improve operational efficiency and cost
productivity. These included head offi ce function
roles being reduced by approximately 15% and
a restructuring of store supervisory positions
which reduced store-based full time equivalent
roles by approximately 5%. In addition to
lowering costs, these actions have given the
business a more efficient and effective structure,
while protecting customer service, availability
and essential processes. Homebase’s already
strong colleague engagement scores improved
slightly during the year.
20 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
Financial review
Sales in the 52 weeks to 27 February 2010
increased by 3.9% in total; the contribution
to sales from net new space was 1.2%, while
like-for-like sales increased by 2.7%. There was
strong growth in seasonally-related categories
during Homebase’s peak trading period, given
Spring 2009 benefited from better year-on-year
weather conditions. The year saw further good
growth in big ticket categories, particularly
kitchens. Sales for the remaining categories
overall were marginally up.
The gross margin rate was down by
approximately 350 basis points. Around 175
basis points represented the net impact of
product cost pressures mainly attributed to
adverse currency movements, which were
partially offset by supply chain gains, shipping
cost savings and a level of customer price
inflation. Around 150 basis points resulted from
increased promotional activity and clearance of
previously over-wintered seasonal stocks, which
drove successfully both sales and cash gross
margin, but which reduced the gross margin rate.
The remaining 25 basis point reduction refl ected
the sales mix impact given the strong sales of
seasonally-related categories as well as big
ticket products.
Total operating and distribution costs were
reduced by around £50m or 6%. Total sales
increased by 3.9%, equivalent to a potential
cost increase of around £30m, and underlying
cost inflation was around 1% or £10m.
Depreciation was around £10m lower as
a result of the impairment of store-related
assets in the previous financial year. There was
therefore around 10% or £80m of underlying
cost productivity as a result of successful cost
reduction and containment initiatives.
Benchmark operating profit for the 52 weeks
to 27 February 2010 was £41.2m, a £26.3m
or 177% increase on the previous fi nancial
year’s £14.9m.
Homebase has successfully transferredits in-house Spend & Save loyaltycard programme over to the Nectarscheme. Customer feedback indicated that Nectar was simpler to understandand benefited from use across multipleretailers and service providers.
52 WEEKS TO 27 FEBRUARY 2010 28 FEBRUARY 2009
Sales (£m) 1,571.9 1,513.2
Benchmark operating profi t (£m) 41.2 14.9
Benchmark operating margin 2.6% 1.0%
Like-for-like change in sales 2.7% (10.2%)
New space contribution to sales change 1.2% 6.7%
Total sales change 3.9% (3.5%)
Gross margin movement Down c.350bps Up c.25bps
Benchmark operating profi t change 177% (67%)
Number of stores at year-end 349 345
Of which contain a mezzanine fl oor 190 188
Store selling space at year-end (million sq ft) 16.1 15.9
Of which – garden centre area 3.7 3.6
– mezzanine fl oor area 1.9 1.9
Home Retail Group Annual Report 2010 21
REVIEW OF THE BUSINESS
Financial Services business review —— Financial Services works in conjunction with Argos and Homebase to provide theircustomers with the most appropriate credit offers to driveproduct sales, and to maximise the total profit from thetransaction for Home Retail Group.
Operational review
The in-house store card operations drove
£579m of Group retail credit sales, up 1% on the
previous year. The proportion of promotional
credit sales continued to represent 77% of all
sales placed on the store cards; the offer of ‘buy
now, pay later’ products remains a key enabler
of sales in ‘big ticket’ categories. In addition to
credit sales placed on the Group’s own store
cards, credit offers for purchases at Homebase
of typically over £3,000 are provided through
product loans from Barclays Partner Finance.
Including these product loans, total sales
penetration was 9.6%.
At the start of the year being reported,
the account management system was migrated
to a new platform. This has helped to lower
processing costs, while further initiatives to
lower costs and improve customer convenience
included increased contact centre automation
and a trial for automated applications in-store,
facilitated through the previously rolled-out
new Argos till systems. A new online account
management tool for customers has also
recently been launched.
52 WEEKS TO
Sales (£m)
Benchmark operating profit before fi nancing costs
Financing costs
Financial review
Total gross receivables grew by £6m year-on
year, with a £9m increase in the store card and
a £3m reduction from the final run-off of the
personal loan receivables.
Delinquency rates continued to rise in line
with our expectations. However, the year-on
year increase peaked around the half-year, with
the differential subsequently easing. As a result,
the bad debt charge increased by £9m in the
first half and by £13m for the full year. Financing
costs reduced by £10m in the period refl ecting
a substantially lower funding cost rate being
applied, since this non-cash internal recharge
is based upon UK base rates. A corresponding
impact is recognised in Group net interest
income. All other costs were tightly controlled
and were marginally down year-on-year.
The benchmark operating result of £5.7m
for the year reflects the financial return on the
revolving (i.e. interest-bearing) element of
receivables, as promotional credit products
are recharged to Argos and Homebase at cost.
The cost advantage of this internal arrangement
versus third-party promotional credit provision
is therefore a benefit within the Argos and
Homebase benchmark operating profi ts.
27 FEBRUARY 2010 28 FEBRUARY 2009
104.0 102.3
9.2 19.7
(3.5) (13.6)
Benchmark operating profi t (£m) 5.7 6.1
AS AT 27 FEBRUARY 2010 28 FEBRUARY 2009
Store card gross receivables
Personal loan gross receivables
497
–
488
3
Total gross receivables
Provision
497
(68)
491
(67)
The in-house store card
operations drove £579m
of Group retail credit sales
Net receivables at year-end (£m) 429 424
Provision % of gross receivables 13.6% 13.6%
Store card credit sales 579 573
22 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
Financial Services key performance indicators
NUMBER OF ACTIVE STORE
CARD HOLDERS (’000s)
1,200 The total number of active accounts 1,1681,125 grew to 1.2 million. The cards offer
1,044 1,068 a revolving credit facility together
with a range of 3, 6, 9 and 12 month
‘buy now pay later’ plans. The offer
is also fully multi-channel, with the
availability of credit online being
a feature on both www.argos.co.uk
and www.homebase.co.uk.
Defi nition: Total number of store card accounts that have had monetary activity, either making a sale transaction, a payment or having an outstanding balance in the last six months.
Source: 06 07 08 09 10 Measured internally.
GROUP RETAIL CREDIT SALES (£M) GROUP CREDIT PENETRATION (%)
579 9.6%573 9.5%566
522 8.6%
8.0%
441 7.1%
06 07 08 09 10 06 07 08 09 10
FOR ALL CHARTS, 06 AND 07 ARE ON A 52-WEEK PRO FORMA BASIS
GROSS STORE CARD
RECEIVABLES (£M)
497 There was a £9m increase in gross 488482 store card receivables in the year
448 driven by the continued success in
the range of credit products offered. 378
Defi nition: Total balances outstanding on customer store card accounts.
Source: 06 07 08 09 10 Measured internally.
The in-house store card operations drove £579m of Group retail sales,
up 1% on the previous year. In addition to credit sales placed on the Group’s
own store cards, credit offers for purchases at Homebase of typically over
£3,000 are provided through product loans from Barclays Partner Finance.
Including these product loans, total sales penetration was marginally higher
at 9.6%.
Defi nition: Group retail credit sales refl ect transactions placed on the Argos and Homebase store cards.
Group credit penetration is Group retail credit sales together with product loans from Barclays Partner Finance, divided by total UK retail sales.
All calculations are inclusive of VAT.
Home Retail Group Annual Report 2010 23
REVIEW OF THE BUSINESS
Responsible retailing —— Taking a responsible approachto the environment and the communities in which we operate iscentral to building a sustainable and profitable business. We knowthis as ‘the basis of good business’.
Hear more about our
corporate responsibility
activities in our illustrated
review, available online at
www.homeretailgroup.com/
reports/ or, for a full report
go to www.thebasisofgood
business.com
We have again been awarded
gold status for our overall
corporate responsibility
performance
This year we have been
upgraded from silver to
gold making us retail sector
sustainability leaders
It plays a key part in making sure our business is a place where our colleagues
enjoy working and our customers enjoy shopping.
The way we do it
Five principles embed our approach into the way we do business every day.
Keeping clean and green: reducing the impact our operations have on
the environment
Shopping for tomorrow: helping our customers live more sustainable lives
Sourcing with care: sourcing the best products whilst minimising our social
and environmental impact
Building a great place to work: making this a business our colleagues are
proud to work for
Being a good neighbour: supporting the communities where we live and work
Performance highlights
� 78% of waste from the business recycled
� 1,340 tonnes reduction in product packaging
� 55% of customers buying large appliances sent back their packaging for recycling
� 53% fewer carrier bags given to customers (vs 2005)
� 4% reduction in carbon footprint
� 99% of direct-source and direct-import factories completed ethical audits
� 90% of timber-based products sourced from certified or known and legal sources
� All print publications printed on paper from certified sources or recycled paper
� 75% of colleagues responded as engaged in colleague opinion survey (2008/09: 70%)
� Up to two days’ paid leave for every colleague to volunteer in their communities
� £1.9m raised by colleagues and customers for charitable causes
COMMUNITY INVESTMENT £’000
Cash donations 408
Volunteering 123
Gifts in kind 198
Management resource 156
Company donations 885
Monies raised by colleagues/partners
Payroll giving 402
In-store fundraising 1,445
Tick to give 66
Donations from others 1,913
Total 2,798
24 Home Retail Group Annual Report 2010
86.7
06
REVIEW OF THE BUSINESS
Responsible retailing key performance indicators
26%
74%
26%
BUILDING ENERGY USE PER SQ FT
(kWh/SQ FT)
Total energy used per square foot
has remained flat, a satisfactory51 performance given the very cold winter.
45
42
38 38
06 07 08 09 10
100%
Waste sent to landfill
Waste recycled
84.3
40%
60%
40%
75.4 70.5
53%
47%
53% 72%
28%
72%
07 08 09
Recycled sources
FSC or PEFC sources
Other paper used
129 128
12%12% 13%13%
87%
13%13%
38%
49%49%
74%
14%14%
07 08 09
61.5
22%
78%78%
10
122
84%
16%
84%
16%
10
WASTE MANAGEMENT (K TONNES)
Total Group waste fell 18% from
70,000 to 61,000 tonnes, and our
recycling rate climbed from 72% to
78%. As a result, only 13,000 tonnes
went to landfill, a 32% reduction
on last year.
CATALOGUES AND PUBLICATIONS:
TOTAL PAPER USED AND
PERCENTAGE SUSTAINABLY
SOURCED (K TONNES)
We have reduced our paper use by 5%.
All print publications are now printed
on paper from certified sources or on
recycled paper.
PACKAGING PER £1,000 SALES (KG)
Packaging per £1,000 sales has
reduced by 9% thanks to our17.717.4 packaging reduction programme.
16.2 16.1
14.6
06 07 08 09 10
CARBON FOOTPRINT (K TONNES)Company car fleet CO2
Increases in electricity purchased Commercial fleet CO2 from combined heat and power Building CO2 plants and a reduction in fuel used by
our commercial fleet has led to a 4% 330 326 reduction in the carbon footprint of
293 283 our operations.
313
72% 67% 67% 67%
26% 30%26% 30% 30%30%30% 30%
2% 3% 3%
3% 2%
06 07 08 09 10
922
856
310
165 132
06 07 08 09 10
ETHICAL SOURCING (NUMBER OF
FACTORIES AUDITED IN THE YEAR)
Ninety-nine per cent of direct-source
and direct-import factories (1,632
factories) have completed ethical
audits against our own standard or
other accredited standard*.
Nine hundred and twenty-two have
completed their audit this year**.
*ICTI, WRAP, BSCi, SMETA or SA8000
**New factories complete an audit when they commence supply and all factories participate in revalidation audits within agreed timescales.
Home Retail Group Annual Report 2010 25
68%
30%30%
111 118
06
REVIEW OF THE BUSINESS
Financial summary
Sales up £125m or 2% to £6,023m, refl ecting
growth of 1.5% at Argos and 3.9% at Homebase.
Like-for-like sales were down 2.1% at Argos and
up 2.7% at Homebase, while the net new space
contribution was 3.6% at Argos and 1.2% at
Homebase.
Cash gross margin down £74m or 3%
to £2,276m, representing a 200 basis point
decline in the Group gross margin rate. Argos’
gross margin rate declined by approximately
175 basis points, driven principally by the net
impact of adverse currency movements and
the sales mix. Homebase’s gross margin rate
declined by approximately 350 basis points,
driven principally by the net impact of adverse
currency movements and increased promotional
and clearance activity.
Operating and distribution costs reduced by
£64m or 3% to £1,986m, with costs reduced
by £15m at Argos and by £50m at Homebase.
This resulted in exceptionally strong cost
productivity of around 5% at Argos and 10%
at Homebase.
Benchmark operating profit down £11m
or 4% to £290m, comprising a £37m or 12%
decline at Argos, and a £26m or 177% increase
at Homebase.
Benchmark PBT down £35m or 11% to
£293m, which includes £25m lower net interest
income as further strong cash generation was
more than offset by the effective interest rate
falling substantially to approximately 1% versus
5% in the prior year.
An effective tax rate of 31.0% based on
benchmark PBT, reduced from 31.4% for
the previous financial year reflecting a lower
proportion of disallowable expenditure.
Basic benchmark EPS down 10% to 23.4p.
Total dividend for the year maintained
at 14.7p, with a final dividend of 10.0p
recommended by the Board.
Net cash of £414m at 27 February 2010,
with the cash generation of £130m in the year
benefiting from further good working capital
management and a reduced level of capital
expenditure.
Share buy-back announced, with up to £150m
to be returned over the next 12 months.
Financial defi nitions
1. Benchmark operating profit is defi ned
as operating profit before amortisation of
acquisition intangibles, store impairment and
onerous lease charges or releases, exceptional
items and costs related to demerger incentive
schemes.
2. Benchmark profit before tax (benchmark
PBT) is defined as profit before amortisation of
acquisition intangibles, store impairment and
onerous lease charges or releases, exceptional
items, costs related to demerger incentive
schemes, financing fair value remeasurements,
financing impact on retirement benefi t
obligations, the discount unwind on non-
benchmark items and taxation.
3. Basic benchmark earnings per share
(benchmark EPS) is defined as benchmark PBT
less taxation attributable to benchmark PBT,
divided by the weighted average number of
shares in issue (excluding shares held in Home
Retail Group’s share trusts net of vested but
unexercised options and share awards).
26 Home Retail Group Annual Report 2010
102.3
REVIEW OF THE BUSINESS
Financial summary
52 WEEKS TO 27 FEBRUARY 2010 28 FEBRUARY 2009
£m
Argos 4,346.8 4,281.9
Homebase 1,571.9 1,513.2
Financial Services 104.0
Sales 6,022.7 5,897.4
Cost of goods (3,746.9) (3,547.4)
Gross margin 2,275.8 2,350.0
Operating and distribution costs (1,986.1) (2,049.6)
Argos 266.2 303.6
Homebase 41.2 14.9
Financial Services 5.7 6.1
Central Activities (23.4) (24.2)
Benchmark operating profi t 289.7 300.4
Net interest income (see below) 5.2 29.7
Share of post-tax results of joint ventures and associates (2.0) (2.4)
Benchmark PBT 292.9 327.7
Exceptional items included in operating profi t – (694.0)
Costs related to demerger incentive schemes (7.7) (8.4)
Financing fair value remeasurements 2.7 (28.9)
Financing impact on retirement benefi t obligations (0.7) 11.2
Discount unwind on non-benchmark items (6.7) (1.8)
Onerous lease provision releases 12.5 –
Profit/(loss) before tax 293.0 (394.2)
Taxation (83.2) (18.9)
of which: taxation attributable to benchmark PBT (91.4) (103.5)
Profit/(loss) for the year 209.8 (413.1)
Basic benchmark EPS 23.4p 25.9p
Basic EPS 24.3p (47.7p)
Number of shares for basic EPS 862.9m 866.6m
Net interest reconciliation:
Third-party net interest income 4.4 18.6
Financing costs charged to Financial Services 3.5 13.6
Discount unwind on benchmark items (2.7) (2.5)
Net interest income 5.2 29.7
Financing fair value remeasurements 2.7 (28.9)
Financing impact on retirement benefi t obligations (0.7) 11.2
Discount unwind on non-benchmark items (6.7) (1.8)
Income statement net fi nancing income 0.5 10.2
The above table has been prepared in accordance with note 2 to the consolidated financial statements on page [60].
Home Retail Group Annual Report 2010 27
REVIEW OF THE BUSINESS
Group fi nancial review
Sales and benchmark operating profi t
Group sales were 2% higher at £6,022.7m (2009:
£5,897.4m) while Group benchmark operating
profit declined 4% to £289.7m (2009: £300.4m).
Within this, the drivers of the Argos, Homebase
and Financial Services performance are analysed
as part of the preceding business reviews.
Central Activities represents the cost of
central corporate functions and the investment
costs of new development opportunities.
Costs for the year were 3% lower at £23.4m
(2009: £24.2m), which included savings from
organisational changes made at the end of the
previous financial year to streamline head offi ce
functions. The HomeStore&More trial expanded
with a fourth store and the testing of an adjacent
bedroom furniture format at one of the earlier
stores. The trial stores will continue to assess
the potential opportunity for this new format
development.
Net interest income
Net interest income was £5.2m (2009: £29.7m).
Within this, third-party interest income for the
period reduced to £4.4m (2009: £18.6m). While
the Group’s net cash position increased, the
effective interest rate earned reduced to
approximately 1% from 5%.
Financing costs charged within Financial
Services’ benchmark operating profit saw the
corresponding credit within net interest income
reduce to £3.5m (2009: £13.6m). This non-cash
internal recharge is based upon UK base rates,
and therefore reduced substantially.
The charge within net interest income in
relation to the discount unwind on benchmark
items was £2.7m (2009: £2.5m). This arises from
the accounting treatment whereby provisions
for expected future liabilities are required to be
discounted back to current value. As settlement
of the liability moves closer to the present day,
additional non-cash charges to unwind the
discount are incurred; this will result in the
absolute level of provision eventually matching
the liability in the accounting period that it
becomes due.
Share of post-tax results of joint
ventures and associates
These amounted to a loss of £2.0m (2009:
£2.4m). The loss is due principally to costs
incurred by the joint venture with Barclays
Bank PLC in regard to the Argos credit card.
Benchmark profit before tax
Benchmark profit before tax for the year
declined 11% to £292.9m (2009: £327.7m).
Costs related to demerger
incentive schemes
These amounted to £7.7m (2009: £8.4m),
with the final charge being unchanged from
that reported in the first half of the year. It was
originally announced that these costs could
amount to a maximum of £45m, to be charged
to the income statement over the three-year
period from the October 2006 demerger, and
are excluded from benchmark profit before tax.
The actual cumulative cost has totalled £34m.
Financing fair value remeasurements
Certain foreign exchange movements as well
as changes in the fair value of certain fi nancial
instruments are recognised in the income
statement within net financing income. These
amounted to a net gain of £2.7m (2009: loss
of £28.9m), which arises principally as a result
of translation differences on subsidiary cash
balances. The gain reflects the strengthening
of sterling against other currencies during the
year. Equal and opposite adjustments to these
translation differences are recognised as part
of the movements in reserves. As required by
accounting standards, the net nil exchange
adjustment is therefore split between the
income statement and the statement of
comprehensive income.
Financing impact on retirement
benefi t obligations
The charge through net financing income in
respect of the expected return on retirement
benefit assets net of the interest expense on
retirement benefit liabilities was £0.7m (2009:
credit £11.2m). The current service cost, which
the Group considers a fairer reflection of the
cost of providing retirement benefits, is already
reflected in benchmark operating profi t.
Discount unwind on non-benchmark items
An expense of £6.7m (2009: £1.8m) within net
financing income relates to the discount unwind
on onerous lease provisions. As these provisions
were items previously excluded from benchmark
profit before tax, the discount unwind has also
been excluded from benchmark profit before tax.
As set out within the net interest income review
on the left, these non-cash charges arise from
the accounting treatment whereby provisions
for expected future liabilities are discounted back
to current value.
Onerous lease provision releases
A credit of £12.5m (2009: nil) was recorded in
the year, relating to onerous lease provisions no
longer required. As the provision charges were
items previously excluded from benchmark
profit before tax, the provision releases will also
be excluded from benchmark profit before tax.
Profit before tax
The reported profit before tax for the year was
£293.0m (2009: loss of £394.2m).
Taxation
Taxation attributable to benchmark profi t before
tax was £91.4m (2009: £103.5m), representing
an effective tax rate (excluding joint ventures
and associates) of 31.0% (2009: 31.4%). The
reduction in the effective rate largely refl ects
a lower amount of disallowable expenditure.
Taxation attributable to non-benchmark
items amounted to a credit of £8.2m (2009:
£84.6m). This includes a credit of £7.6m (2009:
£23.5m) being prior year non-benchmark items.
The total tax expense for the year was therefore
£83.2m (2009: £18.9m).
Number of shares and earnings per share
The number of shares for the purpose of
calculating basic earnings per share (EPS) is
862.9m (2009: 866.6m), representing the
weighted average number of issued ordinary
shares of 877.4m, less an adjustment of 14.5m
(2009: 10.8m) representing shares held in
Group share trusts net of vested but unexercised
options and share awards.
The calculation of diluted EPS refl ects
the potential dilutive effect of employee share
incentive schemes. This increases the number
of shares for diluted EPS purposes by 9.3m
(2009: 10.4m) to 872.2m (2009: 877.0m).
Basic benchmark EPS is 23.4p (2009: 25.9p),
with diluted benchmark EPS of 23.1p (2009:
25.6p). Reported basic EPS is 24.3p (2009: loss
of 47.7p), with reported diluted EPS being 24.1p
(2009: loss of 47.7p).
28 Home Retail Group Annual Report 2010
300.4
REVIEW OF THE BUSINESS
Dividends
Home Retail Group’s dividend policy remains
to target dividend cover over the medium term
of around two times, based on full-year basic
benchmark EPS.
While earnings have reduced by 10%, the
Group’s cash generation has continued to be
strong. A final dividend maintained at 10.0p is
therefore being recommended by the Board,
holding the dividend for the year at 14.7p. Based
on basic benchmark EPS of 23.4p (2009: 25.9p),
dividend cover is 1.59 times (2009: 1.76 times).
The final dividend, subject to approval by
shareholders at the AGM, will be paid on 21 July
2010 to shareholders on the register at the close
of business on 21 May 2010.
Cash flow and net cash position
Cash flows from operating activities were
£461.0m (2009: £468.4m). Strong working
capital management resulted in an infl ow of
£69.6m (2009: outflow of £10.2m); this infl ow
included the benefit of some timing differences
which are expected to unwind in the new fi nancial
year. The working capital inflow more than offset
the lower benchmark operating result.
Net capital expenditure was £87.4m (2009:
£132.4m), reflecting the lower number of stores
opened year-on-year. Tax paid was £107.3m
(2009: £74.7m), with the prior year benefi ting
from a tax authorities repayment in respect of
the settlement of historic tax issues. Dividends
paid to shareholders amounted to £126.3m
(2009: £127.2m), and £9.4m (2009: £21.6m)
was used to purchase shares for the Home Retail
Employee Share Trust.
The Group’s financing net cash position at
27 February 2010 was £414.0m, an increase of
£129.6m over the year. The financing net cash
position included a £50.0m term deposit which
was purchased in November 2009 and matures
in May 2010.
CASH FLOW AND NET CASH POSITION
52 WEEKS TO 27 FEBRUARY 2010 28 FEBRUARY 2009
£m
Benchmark operating profi t 289.7
Exceptional items within operating profi t – (694.0)
Onerous lease provision releases 12.5 –
Costs related to demerger incentive schemes (7.7) (8.4)
Statutory operating profit after exceptional items
Depreciation and amortisation
Movement in working capital
Financing costs charged to Financial Services
Non-cash Homebase exceptional charges
Cash flow impact of prior year restructuring charge
Other operating items
Cash flows from operating activities
Net interest
Taxation
Net capital expenditure
Brand acquisitions
Purchase of term deposit
Sale of term deposit
Other investments
294.5 (402.0)
130.1 159.4
69.6 (10.2)
3.5 13.6
– 651.2
(17.4) (3.1)
(19.3) 59.5
461.0 468.4
7.2 16.6
(107.3) (74.7)
(87.4) (132.4)
(1.9) (20.6)
(50.0) (75.0)
75.0 –
(6.7) (2.2)
Cash inflow before fi nancing activities 289.9 180.1
Dividends paid (126.3) (127.2)
Purchase of shares for Employee Share Trust (9.4) (21.6)
Other fi nancing activities 0.3 0.1
Net increase in cash and cash equivalents 154.5
Opening cash and cash equivalents 209.4 174.0
Net cash infl ow 154.5 31.4
Effect of foreign exchange rate changes 0.1 4.0
Closing cash and cash equivalents 364.0 209.4
Term deposit 50.0 75.0
Closing financing net cash 414.0
Home Retail Group Annual Report 2010 29
31.4
284.4
REVIEW OF THE BUSINESS
Group financial review continued
BALANCE SHEET
AS AT 27 FEBRUARY 2010 28 FEBRUARY 2009
£m
Goodwill 1,541.0 1,541.0
Other intangible assets 92.7 103.6
Property, plant and equipment 525.1 559.3
Inventories 935.4 930.3
Instalment receivables 429.4 424.5
Other assets 178.1 190.2
3,701.7 3,748.9
Trade and other payables (1,104.9) (1,063.2)
Other liabilities (219.1) (250.2)
(1,324.0) (1,313.4)
Invested capital 2,377.7 2,435.5
Retirement benefi t obligations (24.9) (46.4)
Net tax assets 52.1 32.7
Derivative fi nancial instruments 47.7 52.2
Financing net cash 414.0 284.4
Reported net assets 2,866.6 2,758.4
Pre-tax return on invested capital 12.1% 12.2%
Balance sheet
Reported net assets as at 27 February 2010
were £2,866.6m, equivalent to 332p per share
excluding shares held in the Employee Share
Trust. The year-on-year increase in net assets
was £108.2m. Within this, invested capital
reduced by £57.8m, driven by the working capital
reduction and lower capital expenditure. These
movements also contributed to the £129.6m
increase in financing net cash.
Benchmark pre-tax return on invested
capital (ROIC) is a key performance measure
for the Group. Benchmark operating profi t plus
share of post-tax results of joint ventures and
associates was £287.7m, down £10.3m or 3%,
while year-end invested capital reduced by
2%. This resulted in a pre-tax ROIC of 12.1%
(2009: 12.2%).
Liquidity and funding
The Group maintains liquidity by arranging
funding ahead of requirements and through
access to committed facilities. At 27 February
2010, the Group had £700m of undrawn
committed borrowing facilities, £685m of
which does not expire until 2013. These facilities
are in place to enable the Group to fi nance its
working capital requirements and for general
corporate purposes. The Group’s net cash
position is however expected to continue to
be sufficient to meet its financing needs in the
foreseeable future.
Group fi nancing arrangements
The Group finances its operations through a
combination of retained profits, property leases
and borrowing facilities where necessary. The
Group’s net cash balances averaged approximately
£500m over the year; the Group did not draw
upon its committed borrowing facilities at any
point during the year.
The Group has significant liabilities through
its obligations to pay rents under operating leases;
the operating lease rental expense for the year
amounted to £379.1m. The capitalised value of
these liabilities is £3,033m based upon an eight
times multiple of the year’s operating lease
charge, or £3,148m based upon discounted cash
flows of the expected future operating lease
charges. In common with credit rating agencies
and lenders, the Group treats its lease liabilities
as debt when evaluating fi nancial risk.
Capital structure management and share
buy-back programme
The Group has continued its strong track record
of cash generation. In the four years since
demerger, over £600m of net cash has been
generated. This cumulative net cash generation
has been after approximately £500m of
dividends to shareholders and approximately
£700m of capital expenditure and other
investments that have continued to position
the businesses strongly for growth. The
Group’s adjusted net debt/EBITDAR ratio,
which capitalises the lease rental expense on
an eight times multiple, was 3.4x at demerger,
strengthened to 2.9x after two years, and moved
back to 3.3x for the financial year just ended.
The Board has conducted its regular review
of the Group’s capital structure as part of the
year-end process. In doing so it has taken account
of the Group’s current cash position, its signifi cant
lease obligations, maintaining a capital structure
equivalent to a potential investment grade
rating, continuing to invest appropriately in the
business and maintaining flexibility to enable the
Group to withstand unforeseen fl uctuations in
the trading environment.
30 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
FINANCIAL YEAR 05/06 06/07 07/08 08/09 09/10
£m
Benchmark PBT 337.1 376.7 432.9 327.7 292.9
Add: depreciation and amortisation 134.9 147.5 151.6 159.4 130.1
Add: lease rental expense 299.2 328.2 344.8 372.8 379.1
Deduct: interest income (9.5) (16.6) (33.3) (29.7) (5.2)
EBITDAR 761.7 835.8 896.0 830.2 796.9
Financing net (debt)/cash (200) 60 174 284 414
Capitalised lease rental expense (2,394) (2,626) (2,758) (2,982) (3,033)
Adjusted net debt (2,594) (2,566) (2,584) (2,698) (2,619)
Adjusted net debt/EBITDAR ratio 3.4x 3.1x 2.9x 3.2x 3.3x
As a result of the review, it is anticipated that
over the next 12 months up to £150m of capital
will be returned to shareholders through a share
buy-back programme. The programme will be
funded out of the Group’s existing cash resources.
At a share price of 300p, it would represent
approximately 6% of the Company’s 877.4m
issued ordinary shares. The Company currently
has authority to purchase up to 10% of its issued
ordinary shares, and renewal of this authority will
be sought at the Company’s AGM on 30 June 2010.
Retirement benefi t obligations
Pension arrangements are operated principally
through the Home Retail Group Pension Scheme,
a defi ned benefit scheme, together with the
Home Retail Group Stakeholder Pension
Scheme, a defined contribution scheme.
The IAS 19 valuation as at 27 February 2010
for the defi ned benefit pension plans was a net
deficit of £24.9m (28 February 2009: £46.4m).
Plan assets increased to £667.7m (28 February
2009: £504.4m), driven principally by higher
market values. The present value of plan liabilities
increased to £692.6m (28 February 2009:
£550.8m), driven principally by a reduction in
the assumed discount rate to 6.0% (28 February
2009: 6.5%).
A full actuarial valuation of the defi ned
benefit scheme is carried out every three years
by independent, qualified actuaries. The latest
full review, as at 31 March 2009, resulted in a
deficit of £102m. Increases to funding have been
agreed with the pension trustee. The cash fl ow
impact of the additional payments are £17m in
the year to 27 February 2010 (with the Group’s
net cash position at 27 February 2010 of £414m
being after this payment), reducing to £16m and
£14m in the two subsequent fi nancial years.
Counterparty credit risk management
The Group’s exposure to credit risk with regard to
treasury transactions is managed by dealing only
with major banks and financial institutions with
appropriate credit ratings and within limits set
for each organisation. Dealing activity is closely
controlled and counterparty positions are
monitored on a regular basis.
Interest rate risk management
The Group’s principal objective is to manage
the trade-off between the effective rate of
interest and the credit risk associated with
the counterparty bank or fi nancial institution.
The annual effective rate of interest earned
on the Group’s net cash balances reduced
substantially in the financial year being reported.
This reflects a period when UK base rates have
been at their lowest.
Currency risk management
The Group’s key objective is to minimise the
effect of exchange rate volatility. Transactional
currency exposures that could signifi cantly
impact the income statement are hedged using
forward purchase contracts.
Approximately 30% of the Group’s product
costs are paid for directly in US dollars. Sterling
weakened substantially against the US dollar
between August 2008 and April 2009. This had
a significant impact on the Group’s hedged rates,
and therefore the cost of goods sold.
US dollar hedged rates 08/09 09/10 change
First half 2.00 1.75 (0.25)
Second half 2.00 1.50 (0.50)
Full year 2.00 1.60 (0.40)
Share price and total shareholder return
The Group’s share price ranged from a low of
189.0p to a high of 329.7p during the fi nancial
year. On 26 February 2010, the closing mid
market price was 255.0p, giving a market
capitalisation of £2.2bn at the year-end.
Total shareholder return (the change in the
value of a share including reinvested dividends)
has been an increase of 26.9% over the year.
This compares to an increase of 47.8% for the
FTSE 350 General Retail sector and an increase
of 45.5% for the wider FTSE 100.
Accounting standards and use
of non-GAAP measures
The Group has prepared its consolidated fi nancial
statements under International Financial
Reporting Standards for the 52 weeks ended
27 February 2010. The basis of preparation is
outlined in note 2 to the consolidated fi nancial
statement on page [60].
The Group has identified certain measures
that it believes provide additional useful
information on the underlying performance
of the Group. These measures are applied
consistently but as they are not defi ned under
GAAP they may not be directly comparable
with other companies’ adjusted measures.
The non-GAAP measures are outlined in note 3
to the consolidated financial statement on page
[67].
Home Retail Group Annual Report 2010 31
REVIEW OF THE BUSINESS
Principal risks and uncertainties —— We discuss below the principal risks and uncertainties that could impact theGroup’s performance, and our mitigating activities. For furtherinformation on how we manage risk, see the business reviewand also page 41, within the corporate governance statement.
AREA OF PRINCIPAL RISK AND UNCERTAINTY DESCRIPTION AND EXAMPLES OF MITIGATING ACTIVITY
Economic and market risks
Impact on sales, costs, profit and cash of:
� Economic conditions
� Cost of raw material products/services/utilities
� Consumer preferences
� Competitor activity
� Seasonality/weather
� UK-centric store network
� Expansion/development of store network
� Changing demographics
The economic outlook for 2010 remains uncertain. Key issues specific to the UK and Republic of Ireland
centre around the political landscape and plans to address the fi scal deficit (eg public spending cuts, tax
changes) with their resultant impact on the consumer. This economic environment, including the response
of other retailers to it, has the potential to impact on the success of the Group in terms of its performance
in respect of sales, costs, profit and cash generation.
Significant cost savings have been made over the last three years in terms of operational effectiveness
and supply chain benefits from the combined leverage of Argos and Homebase. The ongoing effi ciency
programmes will enable the Group to continue its investment in competitive pricing and the development
of the infrastructure. The Group’s operational and financial strength will continue to sustain our commercial
advantage in the market place.
The Group is committed to supporting cost-conscious customers and those looking for value across all
spectrums of the range architecture. Continued investment will further extend choice within the Argos and
Homebase Value ranges and maintain our leadership in long-term growth markets.
Other mitigating activities include:
� Empowering customer choice by strengthening range architecture
� Store format, multi-channel and customer service developments
� Price tracking and dynamic pricing to ensure competitiveness
Currency The volatility of the global economy continues to create a risk of exposure to fluctuations in currency rates
� Purchase of products whose cost base of related to overseas product purchasing.
manufacture is in currencies other than sterling,
principally the US dollar and the euro We attempt to mitigate these risks through:
� Sale of products in currencies other than sterling, � Appropriate hedging policies
principally the euro in the Republic of Ireland � Adjustments to customer pricing
� Seeking opportunities for further sourcing effi ciencies
Operations
Failure to ensure appropriate processes are in place
to manage the complexity of retail operations,
including sourcing of products and customer service
The sourcing of products from outside the UK introduces complex supply chain risks that the Group
mitigates through effective management processes to ensure that stock is in the right place at the right
time to meet customer needs. Our distribution infrastructure is continuously reviewed to drive further
stock effi ciency.
Enhancement of our award-winning multi-channel capability will ensure that customers are
empowered to choose convenience; from shopping online for home delivery to using Check & Reserve
to benefit from immediate collection from store. The use of technology to get closer to our customers
through social networking and online reviews enables customer issues to be identified and resolved quickly.
The new partnership between Homebase and Nectar, the UK’s leading coalition loyalty programme,
provides a platform for leveraging customer data to maximise sales and customer satisfaction.
Other mitigating activities include:
� Continuously improving the efficiency of catalogue production processes
� Enhancement of the Homebase website, with 10,000 product lines now transactional
� Improving the accuracy of stock forecasts
� Extending installation services for kitchens, bathrooms and bedroom furniture
� Dedicated working parties to manage operational change
32 Home Retail Group Annual Report 2010
REVIEW OF THE BUSINESS
AREA OF PRINCIPAL RISK AND UNCERTAINTY DESCRIPTION AND EXAMPLES OF MITIGATING ACTIVITY
Regulatory environment
� Changes in UK and overseas legislation
and regulation, eg consumer protection,
environmental regulation
� Changes in UK fi scal/employment policy,
eg minimum wage
Good governance practices remain important to the Group. In addition to ensuring compliance with existing
requirements, we are active in monitoring potential future developments. We also lobby, often with other
retailers, to support and develop the industry and the interests of consumers. Key developments impacting
the Group are the Carbon Reduction Commitment, Payment Card Industry Data Security Standards and
potential government changes to how customers can apply for store cards.
Other mitigating activities include:
� Membership of industry representative groups
� Direct engagement with government and regulators
� Dedicated working parties to manage operational change
Infrastructure development/projects
Delay or failure to manage and implement major
business and infrastructure projects effectively
The Group is committed to investing for growth, extending multi-channel leadership and maintaining
a robust infrastructure. Strategic projects to replace or enhance key systems and infrastructure carry
a degree of risk; however, we have dedicated project teams in place with strong governance frameworks
to manage them.
Other mitigating activities include:
� Detailed approval and planning process prior to project commencement
� Board review of status/progress of major change programmes
� Post project implementation reviews
� Management expertise in significant infrastructure/change programmes
Product safety
Failure to manage supplier relationships and/or
ensure appropriate quality checks are in place
The safety and quality of our products is of critical importance to the Group. Suppliers are required to sign
up to the Group’s Supply Chain Principles and to specific policies regarding products and their environmental
impact. Wherever possible, Argos and Homebase teams work in conjunction with suppliers to ensure
improvement opportunities are explored.
Other mitigating activities include:
� Rigorous quality/safety assessment programme for new products
� Ongoing monitoring of quality/safety of goods on sale
� Supplier relationship protocols
� Ongoing rotation of supplier audits
� Standardisation of terms and conditions for all suppliers
Pe
� �
ople
Reliance on key personnel
Pension obligations
The Group values its colleagues and their contribution to the success of the organisation. Internal training
schemes and the graduate recruitment programme maintain the succession pool and actively encourage
promotion from within. The Group has rolled out a new leadership model to support the development of
current and future leaders. We are committed to open communications with colleagues at all times and
monitor employee satisfaction through an annual Group-wide staff survey.
Other mitigating activities include:
� Competitive remuneration packages
� Succession planning
� Management development and training programmes
� Regular review of pension trustee activities and plans to mitigate the fund defi cit
Business interruption
� Acts of terrorism
� Failure or unavailability of operational and/or
IT infrastructure
� Delay or interruption in service provided by
third-party suppliers
A major incident could impact the ability of the Group to continue trading. We maintain and routinely
test our business continuity plans in order to reduce the potential impact of such events. Security measures
are in place where appropriate to protect colleagues, customers and assets. We remain vigilant to the
vulnerability of suppliers and continue to work towards a sustainable outcome for all parties. The ongoing
transfer of our data systems to a purpose-built unit to enhance our continuity arrangements represents
a major risk during the year which is reduced by the robust change management controls in place.
Other mitigating activities include:
� Business continuity and recovery planning
� IT recovery plans
� Third-party supplier management
Home Retail Group Annual Report 2010 33
GOVERNANCE
Board of Directors and Operating Board
Oliver Stocken Terry Duddy Richard Ashton Penny Hughes
Chairman Chief Executive Finance Director Non-Executive Director
Greg Ball David Guise Peter Connor John Coombe
Managing Director, Human Resources Director Information Systems Director Non-Executive Director Customer and Financial Services
Maria Thompson Gordon Bentley Sara Weller Paul Loft
Commercial Director Company Secretary Managing Director, Argos Managing Director, Homebase
34 Home Retail Group Annual Report 2010
GOVERNANCE
Board of Directors
Oliver Stocken
Chairman Oliver was a director of NM Rothschild & Sons
and held several roles within Barclays Group
culminating in his appointment as group fi nance
director of Barclays PLC. In 2000, he was
appointed to the GUS board where he chaired
the audit committee and subsequently the
remuneration committee. In October 2006,
he became chairman of Home Retail Group.
He is a non-executive director of Standard
Chartered plc and chairman of Stanhope plc
and Oval Limited. Oliver is also chairman of
the Trustees of the Natural History Museum.
Terry Duddy
Chief Executive Terry began his career at Letraset working in
personnel management and then in product
management. In 1984, he joined the Dixons
Stores Group where he held a variety of
commercial positions, including sales director of
Currys, product marketing director of the Dixons
Stores Group and, latterly, managing director of
PC World. Terry joined GUS in August 1998 as
chief executive of the newly acquired Argos,
becoming a GUS Director later that year. In 2000
he was appointed chief executive of Argos Retail
Group. In October 2006, he became chief
executive of Home Retail Group. He is a
non-executive director of Hammerson plc.
Richard Ashton
Finance Director Richard started his career at
PricewaterhouseCoopers where he trained
as a chartered accountant. In 1994, he joined
GE where he spent eight years and held a variety
of positions. These included chief fi nancial
officer of GE Capital’s pan-European equipment
financing business, headquartered in the
Netherlands, assistant to GE Capital’s chief
fi nancial officer in the US and various fi nance
roles in the UK. Richard joined Argos Retail
Group as finance director in November 2001.
In October 2006, he became fi nance director
of Home Retail Group.
Penny Hughes
Non-Executive Director Penny spent 10 years with Coca-Cola, initially
as marketing director and ultimately as president
of Coca-Cola GB & Ireland. She has held a
number of non-executive roles on the boards
of international businesses such as Vodafone,
Trinity Mirror, Body Shop, Reuters and GAP.
Currently she serves on the board of The Royal
Bank of Scotland Group plc, Wm Morrison
Supermarkets plc and Cable & Wireless
Worldwide PLC. She is President of the
Advertising Association and a Trustee of the
British Museum. Penny joined the Board of
Home Retail Group in December 2006 and
chairs the remuneration committee.
John Coombe
Non-Executive Director John held a number of senior fi nancial roles
within Charterhouse Group plc and Charter
Consolidated plc before joining Glaxo
Holdings in 1986. Appointed to the board in
1992, he was ultimately chief fi nancial offi cer
of GlaxoSmithKline for five years before retiring
in 2005. He joined the GUS Board in April 2005.
He became a non-executive director of Home
Retail Group in October 2006. He is the senior
independent director and chairs the audit
committee of Home Retail Group. He is a
non-executive director of HSBC Holdings,
chairman of Hogg Robinson Group and a former
member of the Code Committee of the Panel
on Takeovers and Mergers. Until 2003, he was a
member of the UK Accounting Standards Board.
He is also a trustee of the Royal Academy of Arts
Trust, where he chairs the audit committee.
BOARD COMMITTEES Nomination Committee: Audit Committee:
Oliver Stocken (Chairman), John Coombe, John Coombe (Chairman), Penny Hughes
Terry Duddy, Penny Hughes
Note: Mike Darcey was appointed to the Board of
Remuneration Committee: Directors as a non-executive director on 20 April
Penny Hughes (Chairman), John Coombe, 2010 and became a member of each of the above
Oliver Stocken committees from that date.
Home Retail Group Annual Report 2010 35
GOVERNANCE
Directors’ report
The directors present their report and the audited financial statements for
the 52 weeks ended 27 February 2010 (‘the period’).
Principal activities and business review
The Group’s principal activities comprise home and general merchandise
retailing. The chairman’s statement, review of the business and fi nancial
statements report on performance of the business during the period, the
position at the period end, likely future developments, the principal risks
and uncertainties facing the Group, financial key performance indicators
and charitable donations and are incorporated by reference into this
directors’ report as is the Group’s statement on corporate governance.
There were no material acquisitions or disposals during the period.
Profit and dividends
The Group’s consolidated income statement on page 54 shows a profi t
for the period of £209.8m. The directors recommend the payment of a
final dividend of 10.0p per ordinary share, to be paid on 21 July 2010 to
shareholders on the register at the close of business on 21 May 2010.
An interim dividend of 4.7p per ordinary share was paid on 20 January 2010‚
giving a total dividend for the year of 14.7p per ordinary share.
Directors
The names and biographical details of the directors as at the end of the
period are shown in the Board of Directors and Operating Board section
on pages 34 and 35. On 1 July 2009, Andy Hornby resigned from the
Board. On 20 April 2010, Mike Darcey was appointed to the Board as a
non-executive director. Particulars of directors’ remuneration are shown
in the directors’ remuneration report on pages 43 to 51. Details of the
service contracts of the directors, and how a change of control will affect
the service contracts of the executive directors, are summarised within
the directors’ remuneration report. Neither contract for the executive
directors provides for extended notice periods or compensation in the
event of termination or a change of control.
The directors retiring at the 2010 Annual General Meeting are Penny
Hughes who, being eligible, offers herself for re-election, and Mike Darcey,
who will seek election to the Board.
During the period, the Group maintained liability insurance and
third-party indemnification provisions for its directors, under which the
Company has agreed to indemnify the directors to the extent permitted by
law in respect of all liabilities to third parties arising out of, or in connection
with, the execution of their powers, duties and responsibilities as directors
of the Company and any of its associated companies. These indemnities
are Qualifying Third-party Indemnity Provisions as defined in Section 234
of the Companies Act 2006 and copies are available for inspection at the
registered office of the Company during business hours on any weekday
except public holidays.
Directors’ interests
The beneficial interests of the directors, together with non-benefi cial
interests in Home Retail Group plc shares, are shown below:
Terry Duddy
Number of ordinary shares at 27 February 2010
2,183,932
Number of ordinary shares at 28 April 2010
2,236,158
Richard Ashton 571,387 598,152
Oliver Stocken 126,936 140,353
John Coombe 55,844 61,969
Penny Hughes 15,250 21,375
Mike Darcey, on his appointment on 20 April 2010 and as at 28 April 2010,
had no beneficial or non-beneficial interests in Home Retail Group plc shares.
Substantial shareholdings
As at 28 April 2010, the Company had been notified under Rule 5 of
the Financial Services Authority’s Disclosure and Transparency Rules
of the following holdings of voting rights in the issued share capital of
the Company:
Total number of Percentage of voting rights total voting
(ordinary shares) rights (%)
Schroders plc 87,463,013 9.99
BlackRock Investment Management
(UK) Limited 63,137,923 7.20
Taube Hodson Stonex Partners LLP 43,983,617 5.01
Legal and General Group plc 34,590,018 3.94
Share capital and control
As at 28 April 2010, the Company’s issued share capital comprised a single
class of shares, referred to as ordinary shares. Details of the ordinary share
capital can be found in note 27 to the consolidated fi nancial statements
on page 91.
The rights and obligations attaching to the shares are more fully set out
in the Articles of Association of the Company. There are no restrictions on
the transfer of ordinary shares in the Company other than the following:
� certain restrictions may from time to time be imposed by laws and
regulations (such as insider trading laws); and
� pursuant to the Listing Rules of the Financial Services Authority,
the Company requires certain employees to seek the Company’s
permission to deal in the Company’s ordinary shares.
The Company is not aware of any agreements between shareholders which
may result in restrictions on the transfer of securities and/or voting rights.
There are no shareholdings which carry special rights relating to control of
the Company. A change of control of the Company following a takeover bid
may cause a number of agreements to which the Company or its trading
subsidiaries is party to take effect, alter or terminate. In the context of the
Company as a whole, these agreements are not considered to be signifi cant.
Purchase of own shares
At the Annual General Meeting of the Company held on 1 July 2009,
authority was given for the Company to purchase, in the market, up to
87,000,000 ordinary shares of 10p each. The Company did not use this
36 Home Retail Group Annual Report 2010
GOVERNANCE
authority to make any purchases of its own shares during the period. At the
Annual General Meeting to be held on 30 June 2010, shareholders will be
asked to give a similar authority, details of which are contained in the
Notice of Meeting. As stated in the business review, over the next 12 months
up to £150m of capital will be returned to shareholders through a share
buy-back programme.
Details of the Company’s interests in its own shares are set out in
note 28 to the consolidated financial statements on page 92.
Employee share plans
Some of the Company’s employee share plans include restrictions on the
transfer of shares while the shares are subject to the plan. As described in
the directors’ remuneration report, non-executive directors received part
of their fees in shares, which may not normally be transferred during a
director’s period of offi ce.
Where, under an employee share plan operated by the Company,
participants are the beneficial owners of the shares but not the registered
owners, the voting rights are normally exercised by the registered owner,
at the direction of the participant.
All of the Company’s share plans contain provisions relating to a change
of control. Outstanding awards and options would normally vest and
become exercisable on a change of control, subject to the satisfaction of
any performance conditions at that time.
Political donations
The Group has made no political donations and incurred no items of
political expenditure during the period.
Employees
The Group has in place measures to provide its employees with information
on matters of concern to them as employees, including consulting
employees or their representatives on a regular basis so that the views of
employees can be taken into account in making decisions which are likely
to affect their interests. Various communication routes are made available
to employees to give them awareness of the financial and economic
factors affecting the performance of the Company and employees are
also encouraged to be involved in the Company’s performance through
a Save as You Earn share scheme.
The Group has a policy in place for giving full and fair consideration to
applications for employment by the Company made by disabled persons,
having regard to their particular aptitudes and abilities, and for continuing
the employment of, and for arranging appropriate training for, employees
of the Company who have become disabled persons during the period
when they were employed by the Company. The policy also covers the
training, career development and promotion of disabled persons employed
by the Company.
Creditor payment
For all trade creditors, it is, and will continue to be for the next fi nancial
year, Group policy to:
� agree and confirm the terms of payment at the commencement
of business with that supplier;
� pay suppliers in accordance with applicable terms; and
� continually review the payment procedures and liaise with suppliers
as a means of eliminating difficulties and maintaining a good working
relationship.
Trade creditor days of the Group at 27 February 2010 were 51 (2009: 51),
based on the ratio of Group trade creditors at the end of the year to the
amounts invoiced during the year by trade suppliers. The Company has
no trade creditors.
Articles of Association
The Articles of Association set out the internal regulation of the Company
and cover such matters as the rights of shareholders, the appointment or
removal of directors and the conduct of the Board and general meetings.
Copies are available upon request and are displayed on the Company’s
website at www.homeretailgroup.com. In accordance with the Articles
of Association, directors can be appointed or removed by the Board or
shareholders in general meeting. Amendments to the Articles of
Association must be approved by at least 75% of those voting in person
or by proxy at a general meeting of the Company. Subject to company law
and the Articles of Association, the directors may exercise all the powers of
the Company and may delegate authorities to committees. Details of the
main Board committees can be found in the corporate governance report
on pages 38 to 42.
At the 2010 Annual General Meeting a special resolution, as set out in
the Notice of Meeting, will be put to shareholders proposing the adoption
of new Articles of Association, which will incorporate amendments to the
current Articles of Association to reflect the implementation in the UK in
2009 of the Shareholder Rights Directive and the remaining provisions of
the Companies Act 2006.
Annual General Meeting
The Annual General Meeting of the Company will be held at the Jurys Inn
Hotel, Midsummer Boulevard, Milton Keynes MK9 2HP, commencing at
11.00 am on Wednesday 30 June 2010. The Notice of Meeting is included
in a separate circular to shareholders which accompanies this annual report.
It is also available on the Company’s website at www.homeretailgroup.com.
Financial risk management
The financial risk management objectives and policies of the Group and the
exposure of the Group to price, credit, liquidity and cash flow are set out in
note 4 to the consolidated financial statements on pages 68 to 71.
Relevant audit information
As at 28 April 2010, so far as each director is aware, there is no relevant
audit information of which the auditors are unaware and each director has
taken all steps that he or she ought to have taken as a director in order to
make himself or herself aware of any relevant audit information and to
ensure that the auditors are aware of that information.
Auditors
The auditors, PricewaterhouseCoopers LLP, have indicated their willingness
to continue in office and a resolution that they be reappointed will be
proposed at the Annual General Meeting.
By order of the Board Gordon Bentley Registered Offi ce:
Secretary Avebury
28 April 2010 489-499 Avebury
Boulevard
Milton Keynes
MK9 2NW
Home Retail Group Annual Report 2010 37
GOVERNANCE
Corporate governance report
Chairman’s introduction
The events of the past two years have highlighted the purpose and value
of effective corporate governance. However, they have also highlighted
that effective corporate governance relies much more upon behaviours
and applied principles of good governance than organisational structures
and checklists. This should be reflected in the revised version of the UK
Corporate Governance Code to be published this year.
The Board is responsible for the Group’s system of corporate
governance and is committed to maintaining high standards of behaviour
and principles. In his draft preface to the Revised Code, Sir Christopher
Hogg, Chairman of the Financial Reporting Council, states: “to follow the
spirit of the Code to good effect, boards must think deeply, thoroughly
and on a continuing basis, about their overall tasks and the implications of
these for the roles of their individual members”. I support that statement
and am grateful to the members of the Board for the continuing
commitment and diligence they show to their responsibilities.
This corporate governance report provides an overview of how the
Board has applied the principles of good governance during the period
under review both directly and through its principal committees, the
work and activities undertaken and how it has evaluated its performance.
Oliver Stocken
Chairman
The Board
The work of the Board is structured around a framework of scheduled
meetings and telephone conferences each year. Several of these meetings
are linked to events in the corporate calendar such as the full year and half
year results and the annual general meeting. Other meetings focus on
strategy, the annual budget and planning. In advance of each meeting the
Board receives a comprehensive financial management report that covers
the trading and operational performance of each of the Group’s businesses,
the Group’s financial performance, current market expectations of
performance and any significant developments. Each month the Board
also receives a management information pack that provides detailed
information on the Group’s businesses. The Board meets informally on
the evening before most Board meetings. This provides an opportunity
to discuss current trading and operations and recent developments. The
members of the Operating Board are invited to join these discussions on
a regular basis and to update the Board on their areas of responsibility.
Each non-executive director serves on each of the three main Board
committees: audit, remuneration and nomination. We believe this
facilitates better communication with Board members and the provision
of information to the Board. It also enables Board members to take full
account of the relationships between the work of these committees,
including consideration of financial reporting, internal controls and risk
management, external and internal audit, remuneration policy and
management succession plans.
However, the time commitment expected of non-executive directors is
not restricted to meetings of the Board and Board committees. It is important
that the non-executive directors understand the operations of the Group’s
businesses and they take time to visit stores, distribution centres and offi ces,
attend management conferences and meet members of management
below Operating Board level, including high potential colleagues. In
addition, during the year the non-executive directors attended a meeting
with members of the Operating Board and senior management for Argos
and Homebase to discuss progress on business initiatives.
The Board consists of the chairman, Oliver Stocken; chief executive,
Terry Duddy; finance director, Richard Ashton; and three non-executive
directors: John Coombe (the senior independent director), Penny Hughes
and Mike Darcey (appointed 20 April 2010). The biographical details of the
directors in office at the end of the period under review are shown in the
Board of Directors and Operating Board section on page 35. On 1 July 2009,
Andy Hornby stepped down as a non-executive director, following his
appointment as Chief Executive of Alliance Boots. The Board is very grateful
to Andy Hornby for his significant contribution to Home Retail Group.
In the first two full years as an independently listed plc the formal
evaluation of the performance of the Board was conducted internally.
This year, an externally facilitated effectiveness review of the Board and
its committees was undertaken. The external facilitator attended a Board
meeting and held face-to-face meetings with each member of the Board
and the company secretary, human resources director and the managing
directors of the main businesses. The agenda for the face-to-face meetings
included Board and committee functioning, performance and composition,
governance and independence, training and induction and the role of
the chairman. The external facilitator’s report was reviewed by the
Board and recommendations for improvement were agreed and have
been implemented.
For the period under review, Home Retail Group plc has complied
fully with the main and supporting principles set out in Section 1 of the
Combined Code on Corporate Governance published by the Financial
Reporting Council in June 2008 (‘the Code’) excepting that following
Andy Hornby’s resignation, the audit and remuneration committees
comprised two independent non-executive directors from 1 July, for
the remainder of the period under review. This statement, together with
the directors’ report and the directors’ remuneration report, provides
a summary of the Group’s procedures for applying the principles of the
Code and the extent to which such principles have been applied.
The Company has also complied fully with the remainder of the Code
during the period under review by applying its principles as follows.
The three non-executive directors are determined by the Board to be
independent and there are no relationships or circumstances which could
affect, or appear to affect, a non-executive director’s judgement. The
Company has in place formal procedures regarding conflicts of interest,
which are reviewed on an annual basis. The non-executive directors are
appointed for three-year renewable terms. The Board is satisfied that the
chairman’s other Board appointments and commitments do not place
constraints on his ability to fulfil properly his role as chairman of Home
Retail Group plc.
The Board has at least six scheduled meetings each year and
meets more frequently, as required. During the year, in addition to the
scheduled meetings, four additional meetings were held. The chairman
has also met with the non-executive directors without the executive
directors present.
38 Home Retail Group Annual Report 2010
GOVERNANCE
There is a formal schedule of matters specifically reserved to the Board.
The Board has responsibility for:
� the overall management of the Group, approval of the Group’s
long-term objectives and commercial strategy, and the review of
performance, ensuring that any necessary corrective action is taken;
� the approval of announcements of half-yearly and final results, including
dividends, and the annual report and accounts, including the corporate
governance statement, remuneration report and statement on internal
controls;
� the approval of documentation to be put forward to shareholders at
general meetings and all circulars and prospectuses other than routine
documents;
� the approval of all appointments to the Board and of the company
secretary, following recommendations by the nomination committee,
ensuring adequate succession planning for the Board and senior
management, and approving the terms of reference of the Board
committees; and
� determining the responsibilities of the chairman and of the chief
executive.
The chairman is responsible for the leadership of the Board and ensuring
its effectiveness, for effective communication with shareholders and for
facilitating the effective contribution of the non-executive directors and
their constructive relationship with the executive directors.
The chief executive is responsible for the day-to-day business of the
Group, and is supported by the Operating Board, which includes the
finance director and the managing directors of the main businesses and
shared services functions. Members of the Operating Board meet
informally with the chairman and non-executive directors and regularly
attend and present at Board meetings when relevant agenda items are
under consideration.
There is in place a procedure under which the directors, in furtherance
of their duties, are able to take independent professional advice, if
necessary, at the Company’s expense. The company secretary, who has
been appointed by the Board, is responsible for advising the Board on all
corporate governance matters and for ensuring that Board procedures
are followed, and all directors have access to this professional advice.
The company secretary ensures that the Board receives regular briefi ngs
on corporate governance matters and company legislation.
Individual appraisals of directors have been undertaken by the
chairman. Under the leadership of the senior independent director, the
non-executive directors met without the chairman present to appraise
the chairman’s performance, taking account of any views expressed by
the executive directors.
All directors are subject to election by shareholders at the fi rst
opportunity after their appointment and, thereafter, in accordance
with the Company’s Articles of Association. All directors will be required
to submit themselves for re-election at least once every three years.
Both Penny Hughes and Mike Darcey will retire at the Annual General
Meeting to be held on 30 June 2010. At the Annual General Meeting,
Mike Darcey will be eligible for election and Penny Hughes will be eligible
for re-election.
The letters of appointment for non-executive directors, including the
chairman, are available for inspection by any person at the Company’s
registered office during normal business hours and at the Annual General
Meeting (for 15 minutes prior to the meeting and during the meeting).
Board committees
The Board has appointed the following principal committees:
remuneration committee, nomination committee and audit committee.
The terms of reference of each of these committees are available on the
Company’s website at www.homeretailgroup.com. In order to facilitate
better communication with Board members and the provision of
information to the Board, the independent non-executive directors
serve on each of the Board committees.
The attendance of directors at scheduled meetings of the Board and the
Board committees was as follows:
Board member
Terry Duddy1
Board meetings
(10)5,6
10
Audit Remuneration committee committee
(4)5 (7)5
4 7
Nomination committee
(4)5
4
Richard Ashton2 10 4 – 1
Oliver Stocken3 10 4 7 4
John Coombe 10 4 7 4
Andy Hornby4 2 1 1 –
Penny Hughes 10 4 7 4
Notes: 1. Terry Duddy is not a member of the audit committee or the remuneration committee 2 Richard Ashton is not a member of the audit committee, the remuneration committee
or the nomination committee 3. Oliver Stocken is not a member of the audit committee 4. Andy Hornby resigned as a director on 1 July 2009 5. Includes the final meetings of the period under review which took place in early
March 2010 6. In addition to the six scheduled meetings of the Board, four additional meetings were
held in which all Board members participated
Remuneration committee
Penny Hughes was appointed as chairman of the remuneration committee
on 1 July 2009, following the resignation of Andy Hornby. The other
members of the committee are John Coombe, Oliver Stocken and,
from 20 April 2010, Mike Darcey. Terry Duddy attends meetings of the
committee at the request of the committee chairman. In accordance with
the Code, the committee meets not less than three times a year. During the
period under review the committee met seven times. The remuneration
committee is responsible for making recommendations to the Board on
the Group’s policy on the remuneration of the Operating Board, as well as
the specific remuneration packages for each of the executive directors and
other members of the Operating Board. Details of how the committee has
fulfilled its responsibilities and of compliance with Section B of the Code
regarding remuneration are set out in the directors’ remuneration report
on pages 43 to 51.
Home Retail Group Annual Report 2010 39
GOVERNANCE
Corporate governance report continued
Nomination committee
The nomination committee is chaired by Oliver Stocken and its other
members are John Coombe, Terry Duddy, Penny Hughes and, from
20 April 2010, Mike Darcey. The nomination committee meets not less
than twice a year and has responsibility for making recommendations
to the Board on the composition of the Board and its committees, on
retirements, appointments of additional and replacement directors and
on succession planning. During the year, the nomination committee has
considered the composition of the Board and its committees and
succession planning and also reviewed and discussed management
succession plans. Following the resignation of Andy Hornby, the
committee led the process to appoint a further non-executive director.
As part of this process, the committee evaluated the balance of skills,
knowledge and experience on the board and, in the light of this evaluation,
prepared a specification of the capabilities required for the appointment,
including an assessment of the time commitment expected. An external
search consultancy was appointed to facilitate the search for suitable
candidates. Following this process, Mike Darcey was recommended to
the Board for appointment.
Audit committee
The audit committee is chaired by John Coombe and its other members
are Penny Hughes and, from 20 April 2010, Mike Darcey. John Coombe was
formerly chief fi nancial officer of GlaxoSmithKline plc. The Board considers
that he has the recent and relevant financial experience required to chair
the audit committee. Penny Hughes and Mike Darcey have a wide range of
experience from positions at the highest level of business. Oliver Stocken,
Terry Duddy, Richard Ashton, the Group head of internal audit and the
external auditors attend meetings of the committee at the request of
the committee chairman. Further details of the members of the audit
committee are set out in the Board of Directors and Operating Board
section on page 35.
The audit committee normally meets no fewer than four times
a year and its principal responsibilities cover internal control and risk
management, internal audit, external audit (including auditor
independence) and financial reporting. The committee met with the
external auditors and the head of internal audit at least once during
the year without the presence of executive directors or management.
The committee has a structured programme linked to the Group’s
financial calendar. During the period under review, the committee
undertook the following activities:
� reviewed the full-year announcement, annual report and fi nancial
statements and the half-yearly announcement and considered reports
from the external auditors identifying any accounting or judgemental
issues requiring its attention;
� reviewed the statement in the annual report on the system of
internal control;
� reviewed and approved audit plans for the external and internal auditors;
� considered quarterly reports from the head of internal audit on the
results of internal audit reviews, signifi cant fi ndings, management
action plans and timeliness of resolution;
� reviewed reports on the Group’s risk management process and risk profi le;
� reviewed presentations on risk and its identifi cation, management
and control with senior management;
� reviewed, at each scheduled meeting, a report on any material litigation
involving Group companies;
� reviewed management of fraud risk and incidences of fraud; and
� reviewed arrangements by which Group employees may, in confi dence,
raise concerns about possible improprieties in fi nancial reporting,
dishonesty, corruption, breaches of business principles and other matters.
One of the primary responsibilities of the audit committee is to make
recommendations to the Board in relation to the appointment,
re-appointment and removal of the external auditors. During the period
under review, the committee reviewed and discussed the Public Report on
the 2008/9 Inspection of PricewaterhouseCoopers LLP issued by the Audit
Inspection Unit of the UK’s Public Oversight Board, part of the Financial
Reporting Council. A number of factors were taken into account by the
committee in assessing whether to recommend the external auditors for
re-appointment. These included:
� the quality of reports provided to the audit committee and the Board
and the quality of advice given;
� the level of understanding demonstrated of the Group’s businesses
and the retail sector; and
� the objectivity of the external auditors’ views on the controls around
the Group.
The committee recognises that auditor independence is an essential part
of the audit framework and the assurance it provides. Audit fees paid to the
Company’s auditors, PricewaterhouseCoopers LLP‚ in respect of the period
under review‚ exceeded non-audit fees. The committee has established
control procedures to safeguard the objectivity and independence of the
external auditors and to ensure that the independence of the audit work
undertaken by the external auditors is not compromised.
The committee has established a policy covering the type of non-audit
work that can be assigned to the external auditors. The auditors may only
provide such services provided that these do not conflict with their
statutory responsibilities and ethical guidance. These services are:
� further assurance services – where the external auditors’ knowledge
of the Group’s affairs means that they may be best placed to carry out
such work. This may include‚ but is not restricted to‚ shareholder and
other circulars‚ regulatory reports and work in connection with
acquisitions and divestments;
� services relating to taxation – where the external auditors’ knowledge
of the Group’s affairs may provide significant advantages to the Group’s
tax position and‚ where this is not the case, the work is put out to tender;
and
� general – in other circumstances, the external auditors may provide
services‚ provided that proposed assignments which exceed fi nancial
limits set out in the policy are put out to tender and decisions to award
work are taken on the basis of demonstrable competence and cost
effectiveness.
40 Home Retail Group Annual Report 2010
GOVERNANCE
However, certain areas of work are specifically prohibited‚ including work
related to accounting records and financial statements that will ultimately
be subject to external audit and management of‚ or signifi cant involvement
in‚ internal audit services.
The committee chairman’s pre-approval is required before the
Company uses non-audit services that exceed financial limits set out in
the policy. The committee receives half-yearly reports providing details
of assignments and related fees carried out by the external auditors in
addition to their normal work. Fees in respect of such assignments carried
out in the period under review were:
£m
Services relating to taxation 0.1
All other services 0.1
Accountability and audit
The Board acknowledges that it is responsible for the Group’s system
of internal control and for reviewing its effectiveness. Such a system is
designed to manage rather than eliminate the risk of failure to achieve
business objectives and can provide reasonable, but not absolute,
assurance against material misstatement or loss. The Board has reviewed
the effectiveness of the key procedures which have been established to
provide internal control.
The Board confirms that the Company has in place an ongoing
process for identifying, evaluating and managing the signifi cant risks
faced by the Group, including risks relating to environmental, social and
governance matters. This process was in place throughout the period
under review and up to the date of approval of this annual report and
meets the requirements of the guidance issued in October 2005 entitled
‘Internal Control: Guidance for Directors on the Combined Code’ (the
Turnbull Report).
This process is overseen by a risk committee chaired by the fi nance
director and comprised of all divisional finance directors, the director of
Group treasury and taxation, the company secretary and the risk assurance
manager. The head of internal audit also attends its meetings. The risk
committee met six times in the period under review.
The audit committee has kept under review the effectiveness of this
system of internal control and has reported regularly to the Board. As part
of the process that the Company has in place to review the effectiveness
of the internal control system there are procedures designed to capture
and evaluate failings and weaknesses, and to ensure that necessary
action is taken to remedy any failings that may be categorised by the
Board as signifi cant.
The key procedures which were operational in the period under review
were as follows:
Risk assessment
� risks were identified and reviewed by management followed by the
review of the risk committee. This takes place on a bi-annual basis,
facilitated by the risk assurance manager;
� the risks identified through this process were then reported to the
Operating Board and audit committee with particular focus on those
risks classified as high-level risks by the risk committee. The schedule
of high-level risks was used as the basis for a programme of internal
audit and assurance;
� the audit committee has delegated responsibility from the Board for
considering operational, financial and compliance risks on a regular
basis and received its annual report on the controls over these risks. This
included risks arising from environmental, social and governance matters.
Control environment and control activities
� the Group has established procedures for delegating authority, which
ensures that decisions that are significant, either because of the value or
the impact on other parts of the Group, are taken at an appropriate level;
� the Group has implemented appropriate strategies to deal with each
significant risk that has been identified. These strategies include internal
controls, insurance and specialised treasury instruments;
� the Group sets out principles, policies and standards to be adhered to.
These include risk identification, management and reporting standards,
ethical principles and practice and accounting policies.
Information and communication
� the Group has a comprehensive system of budgetary control, including
monthly performance reviews by the Operating Board. The Operating
Board also reviews a range of financial and non-fi nancial performance
indicators. These indicators were regularly reviewed to ensure that they
remain relevant and reliable;
� the Group has whistleblowing procedures in place for employees to
report any suspected improprieties.
Monitoring
� a range of procedures was used to monitor the effective application of
internal control in the Group, including management assurance through
confirmation of compliance with standards, and independent assurance
through internal audit reviews and review by specialist third parties;
� the internal audit department’s responsibilities include reporting to
the audit committee on the effectiveness of internal control systems,
with a particular focus on those areas identified as being the greatest
risk to the Group;
� follow-up processes were used to ensure there was an appropriate
response to changes and developments in risks and the control
environment.
Home Retail Group Annual Report 2010 41
GOVERNANCE
Corporate governance report continued
Going concern
The business and financial reviews on pages 14 to 31 contain information
on the performance of the Group, its cash flow and net cash position,
capital structure and liquidity and funding. Further information relating to
the Group’s financial risk management is set out in note 4 to the fi nancial
statements and the principal risks and uncertainties that could impact
the Group’s performance are set out on pages 32 and 33.
After making enquiries, the directors are satisfied that the Company
has sufficient resources to continue in operation for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing
the fi nancial statements.
Relations with shareholders
The Board recognises the importance of communicating with its
shareholders and does so through a variety of channels, including
the annual report, the Annual General Meeting and the processes
described below.
Although the majority of shareholder contact is with the chief
executive and the finance director (supported by management specialising
in investor relations), it is the responsibility of the Board as a whole, led by
the chairman, to ensure that a satisfactory dialogue with shareholders
takes place. During the period under review, the chairman of the
remuneration committee also held meetings with a number of
shareholders.
Meetings with shareholders have been held following the full and
half-yearly results announcements. A monthly summary of all important
or relevant issues raised by shareholders during the course of meetings
and discussions is circulated to the Board and reviewed as appropriate
at scheduled Board meetings.
Additionally during the year, the Board (and, in particular, the
non-executive directors) has obtained an independent insight into the
views of major shareholders by commissioning research from a third-party
adviser across a balanced sample of the Company’s investors. These
shareholders controlled some 20% to 25% of the Company’s issued share
capital. The findings of the research were presented to the Board by the
third-party adviser.
Through these processes the Board is kept abreast of key issues.
Shareholders also have a direct line of communication to the chairman,
particularly if there are areas for concern, whether it be about performance,
strategy or governance. The senior independent director is also available
should shareholders have concerns which contact through the normal
channels of the chairman, chief executive and the finance director has
failed to resolve, or for which such contact is inappropriate.
All directors, including the chairmen of the audit, nomination and
remuneration committees, intend to be present at the Annual General
Meeting and be available to answer shareholders’ questions. Voting at the
Annual General Meeting will be by way of a poll by members present at
the meeting and, following each vote, the level of proxies lodged on each
resolution, the balance for and against the resolution and the number
of votes withheld, will be displayed. The results of voting at the Annual
General Meeting will also be available on the Company’s website at
www.homeretailgroup.com as soon as possible after the meeting.
42 Home Retail Group Annual Report 2010
GOVERNANCE
Directors’ remuneration report
This report has been prepared by the remuneration committee on behalf of
the Board. In writing it, the committee has adopted the governance principles
relating to directors’ remuneration as set out in the Combined Code.
This report complies with the Companies Act 2006, schedule 8 of the
Large and medium-sized Companies and Groups (Accounts and Reports)
regulations 2008 and the Listing Rules of the Financial Services Authority.
Chairman’s statement
I am pleased to present my first report on directors’ remuneration.
We made a number of changes to our remuneration policy last year,
and said that we would continue to monitor the effectiveness of the policy.
Having done this, and following continued consultation with shareholders,
we are proposing further changes which we believe result in greater
alignment between performance and reward.
Our performance this year has exceeded initial expectations. The
executive team responded quickly to the challenges that emerged in
2008/09, with the cost base being tightly managed during the year and
with further actions resulting in a reduction of over £50m in the absolute
level of costs in 2009/10. At the end of 2009/10 we have achieved profi t
significantly higher than originally anticipated and also had strong cash
generation. This has therefore resulted in annual bonus targets being
exceeded and a maximum bonus being paid.
Our proposals for the future, outlined below, take into account our
aspirations for the business, the economic environment and feedback
from shareholders.
Background information
In considering our remuneration plans in 2010/11 we took into account
a range of factors including:
� The economic conditions and specifically how we needed to respond
to them
� The most appropriate range of performance measures for our
incentive schemes
� The appropriate balance of our remuneration package
At the beginning of 2009/10, performance expectations from analysts
were well below the previous year with analyst consensus of c. £190m in
respect of benchmark profit before tax (PBT). By the end of the year we had
significantly exceeded expectations with a reported benchmark PBT fi gure
of over £100m above the original analyst consensus figure. 2009/10 saw
growth in market share for both Argos and Homebase and continued
leadership in multi-channel retailing, which resulted in better than
expected sales. We have also dealt successfully with the potential impact
of the weakened value of sterling, offsetting the increase on our cost of
goods through good supply chain management and retail pricing. In
addition, excellent management of costs has helped support the profi t
performance, whilst good management of working capital has contributed
to excellent cash generation. Our dividend policy has been maintained,
which compares favourably against many of our competitors.
Last year we committed to continue to review our remuneration
arrangements and monitor their effectiveness. We believe that the
arrangements put into place for 2009/10 were appropriate, given the
environment and context at that point in time, which made longer-term
target setting very difficult. As a result, the remuneration committee felt
that setting robust three-year internal targets was not possible. We are now
in a better position to set three-year targets, and are therefore proposing to
change remuneration arrangements as detailed in the following section.
Proposed changes to remuneration policy
During the year we have continued to consider our remuneration
arrangements and propose to introduce the policy outlined below in
relation to executive directors and members of the Operating Board for
the financial year 2010/11:
� Continue with the annual bonus plan, which will pay a bonus
for achieving:
i) a benchmark PBT target; and
ii) a Group net cash generation target
For very substantially exceeding these targets there is a maximum
bonus opportunity equating to 150% of salary.
� Discontinue the deferred bonus plan. This plan was in operation for
the financial year 2009/10 only, and was up to 150% of salary.
� Replace the deferred bonus plan with a long-term incentive award of
150% of salary based on a performance measure of basic benchmark
earnings per share (EPS), measured over three years. Subject to
shareholder approval, this award will be made under the conditions
of the existing performance share plan (PSP) and will vest, subject to
continued employment, 25% on achievement of 8% compound annual
growth rate (CAGR) of basic benchmark EPS, rising to a maximum award
at 16% CAGR. The EPS calculation will be adjusted to exclude the
impact of the recently announced share buy-back programme.
� Continue with a long-term incentive PSP award of 150% of salary based
on a performance measure of relative total shareholder return (TSR)
measured over a three-year period. The award will vest, subject to
continued employment and satisfactory Group fi nancial performance,
25% on the achievement of TSR at the median of our peer group, rising
to 100% of the award at the 90th percentile.
� Introduce shareholding guidelines, to be achieved over both three- and
five-year periods. Within three years of the guidelines being introduced,
all members of the Operating Board, including the chief executive and
the Group finance director to hold 50% of annual salary in shares.
Within five years of the guidelines being introduced, the chief executive
to hold 150% of annual salary in shares and the Group fi nance director
and all other members of the Operating Board to hold 100% of annual
salary in shares. After the introduction of the guidelines, for any new
appointments to the Operating Board, the guidelines are to be reached
three and five years after the first share based award is made.
� No annual pay review in April 2010, which means there has been no
change in salaries since April 2008. This policy has been applied across
the entire executive and senior management population. Exceptions
may be made during the year where pay has been identified as being
below market benchmarks.
These changes maintain the overall maximum of incentive awards at 450%
of salary, and substantially shift the balance into long-term incentive plans,
with two thirds based on long-term and one third on short-term performance.
Performance-related pay % of salary
Annual incentive plan bonus (profit and cash measures) 150%
Long-term incentive with EPS measure 150%
Long-term incentive with relative TSR measure 150%
Total 450%
Home Retail Group Annual Report 2010 43
GOVERNANCE
Directors’ remuneration report continued
Remuneration policy applied in the year under review
Home Retail Group’s corporate objective is to perform consistently in the
upper quartile of the general retail sector and our incentive structure is
designed to support this goal.
The policy is based on our remuneration principles:
� The remuneration strategy should help to support corporate objectives
� Remuneration arrangements should support the alignment of interests
of shareholders and employees
� Remuneration packages should be competitive and contain
performance-related elements which increase with seniority
� All employees should be encouraged to participate in Home Retail Group
as shareholders via our share plans
The incentive structure for the executive directors and members of
the Operating Board in the year under review comprised:
� Median level salary
� Annual bonus, subject to achievement of fi nancial targets
� Opportunity to participate in a deferred bonus, subject to the
achievement of fi nancial targets
� Annual participation in the PSP
Executive remuneration
The elements of remuneration in the year under review for executive
directors are detailed below. More than 80% of total potential
remuneration (excluding pensions and benefits) is performance-related.
There is no payment of bonus or long-term incentives if performance
targets are not achieved.
Element Purpose Performance measure
Pay Reflect competitive
market level, the economic
environment and
individual performance
Performance against
agreed objectives for
annual pay award
Annual bonus Achievement of annual
financial targets
Benchmark PBT and Group
net cash generation over
a one-year period
Deferred
bonus
Encourage longer-term
investment in shares and
alignment with interests
of shareholders
Benchmark PBT and Group
net cash generation over
a one-year period with
shares being released
subject to confi rmation of
satisfactory Group fi nancial
performance for the year
in which performance was
originally measured
Performance
share plan
Reward outperformance
relative to peer group
and alignment with
interests of shareholders
Relative TSR and
satisfactory Group
fi nancial performance
over a three-year period
Salary and benefi ts
We normally review salaries annually in April and make adjustments to
reflect movements in the employment market, the general economic
environment and individual performance. In line with competitive practice,
executive directors receive additional benefits that include a car or cash
alternative, private health cover, pension and life insurance. Only their
salary is pensionable.
Salaries have remained unchanged since April 2008 and were not
increased in April 2010. This policy has been applied across the entire
executive and senior management population. Exceptions will be made
during the year where pay has been identified as being below market
benchmarks.
Annual bonus
The remuneration committee sets targets by reference to Board-approved
budgets and reflect performance that is considered stretching. In the period
under review, 2009/10, the benchmark PBT and Group net cash generation
targets for the annual bonus were set at the beginning of the year and
reflected both the internal and external view of challenging market
conditions. Both targets were substantially exceeded. As a result a
maximum bonus payment of 150% of salary will be awarded, of which
one half is being deferred voluntarily in shares by the executive directors.
Performance share plan
The PSP gives executive directors the right to receive shares in the
Company subject to the satisfaction of certain conditions, satisfactory
Group financial performance and their continued employment. This plan
underpins our longer-term incentive structure by providing a share-based
reward which vests only when we outperform our peer group.
For the 2009 award the measure of TSR has been used to assess our
performance against the following peer group of companies over a
three-year period. The peer group is weighted to attach greater importance
to companies that are closer comparators to Home Retail Group.
Peer group for PSP awards made in May 2009:
Carphone Warehouse J Sainsbury Next
Debenhams Kesa Electricals Signet Group
DSG International Kingfi sher Travis Perkins
Dunelm Marks & Spencer Group Tesco
Game Group Morrisons Topps Tiles
Halfords Group Mothercare WH Smith
No awards vest if TSR is below the median return for the peer group. Once
median performance is achieved, 25% of the award will vest, with 100%
of the award vesting for performance at the 90th percentile. Any level of
vesting is also subject to satisfactory Group financial performance, which
is reviewed by the remuneration committee and takes into account a range
of factors including earnings, cash generation and dividend payments to
shareholders.
The award is converted to shares at the price prevailing at the time the
awards are made. Awards equivalent to 150% of salary were made in 2009.
In exceptional circumstances, the remuneration committee may choose
to grant a higher amount, up to 200% of salary.
The awards vest to the extent that the performance test is achieved
over a three-year period. TSR calculations are made by external advisers,
using the average share price over the three-month period up to both the
start and the end of the performance period.
44 Home Retail Group Annual Report 2010
GOVERNANCE
For future awards, subject to shareholder approval, we propose to
make an additional award of 150% of salary based on a basic benchmark
EPS measure to replace the discontinued deferred bonus plan.
Deferred bonus plan
For the financial year 2009/10 executive directors participated in a deferred
bonus plan, which deferred up to 150% of salary in shares, the amount of
which is determined by performance against benchmark PBT and Group
net cash generation targets. Shares are released, subject to continued
employment and satisfactory Group financial performance for the year
in which performance is measured, 1/6th on the first anniversary, 2/6th
on the second anniversary and 3/6th on the third anniversary. If fi nancial
performance is not satisfactory, the committee may reduce or withhold
the award. The targets were both substantially exceeded, and will result
in a maximum award of 150% of salary, deferred in shares.
All-employee share plans
We encourage employees to become shareholders through the operation
of all-employee share plans. In 2009 we invited all eligible employees to
participate in a Save As You Earn (SAYE) plan approved by HM Revenue &
Customs (HMRC). This gave our employees the opportunity to apply for
options to acquire shares in the future. The option price was 80% of the
market value of a Home Retail Group share, calculated as the average price
over the three business days before the date of invitation, this being 200p.
The number of shares over which the option was granted was determined
by the amount committed by the employee under their savings contract.
Employees could elect for their savings contract to run over a period
of three or five years, with a maximum saving of £250 per month. Options
will be exercisable during the six months following the end of the contract.
We intend to run a further invitation for employees in 2010.
Funding of awards
Share awards granted by Home Retail Group may be satisfied with newly
issued shares, treasury shares or shares purchased in the market. Currently,
share awards are satisfied with shares held in the Employee Share Trust.
In the year under review, the Employee Share Trust purchased shares in
the market. We will keep our policy for funding share awards under review.
Pensions
Terry Duddy Prior to 1 April 2006, Terry Duddy was a member of the pension scheme
which will provide him on retirement at age 60 with a pension in line with
pre-6 April 2006 HMRC limits, with pensionable salary limited to the
pension earnings cap. Since April 2006, Terry Duddy has been a member
of the Home Retail Group secured unfunded retirement benefi ts scheme
and will receive on retirement at age 60 a pension of one-thirtieth of full
pensionable salary for each year of service from 1 April 2006.
Richard Ashton Richard Ashton is a member of the pension scheme which will provide
him on retirement at age 60 with a pension of up to two-thirds of the
pension earnings cap subject to HMRC limits. Since April 2006, for
benefits in excess of the pensions earnings cap, he has been a member
of the Home Retail Group secured unfunded retirement benefi t scheme.
Service contracts
Both Terry Duddy and Richard Ashton were appointed as executive
directors on 5 July 2006. Neither contract provides for extended notice
periods or compensation in the event of early termination or a change
of control.
Notice periods for executive directors provide for six months’ notice
from the director and 12 months from the Company. Service contracts do
not provide for additional payments in the event of termination or change
of control.
Terry Duddy Terry Duddy has a service contract dated 27 July 1999, under which the
Group is required to provide 12 months’ notice and he is required to provide
six months’ notice. Under the terms of the contract, the Group reserves
the option to terminate Terry Duddy’s employment by paying him in lieu
of notice. The contract ends when he reaches the normal retirement age
of 60.
Richard Ashton Richard Ashton has a service contract dated 1 March 2005, under which
the Group is required to provide 12 months’ notice and he is required to
provide six months’ notice. The contract ends when Richard Ashton
reaches the normal retirement age of 60.
Chairman and non-executive directors
The agreements for the non-executive directors can be terminated without
compensation and with one month’s notice, other than the chairman, who
has a notice period of three months. Non-executive directors are appointed
for a fixed term of three years and appointments are reviewed at the end
of the term.
Outside appointments
Executive directors may be invited to become non-executive directors of
other companies. These appointments provide an opportunity to gain
broader experience to Home Retail Group. Providing that appointments
are not likely to lead to a conflict of interest, executive directors may accept
non-executive appointments and retain the fees received. During the year,
on 3 December 2009, Terry Duddy became a non-executive director of
Hammerson plc for which he receives an annual fee of £55,000 from
1 April 2010.
Non-executive directors
Our policy on non-executive director remuneration is as follows:
� Remuneration should be in line with recognised best practice and
sufficient to attract and retain high-calibre non-executives
� Remuneration should be set by reference to the responsibilities
undertaken by the non-executive, taking into account that each
non-executive director is expected to be a member of the audit,
remuneration and nomination committees
� Remuneration should be a combination of cash fees paid monthly
and shares, bought twice each year
� Non-executive directors are obliged to retain shares purchased until
their retirement from the Board of Directors. Any tax liability connected
to these arrangements is the responsibility of the individual director
� Non-executive directors should not participate in share plans operated
by the Group
� Non-executive directors should not receive any benefits in kind
Home Retail Group Annual Report 2010 45
GOVERNANCE
Directors’ remuneration report continued
Fees are reviewed in the light of market practice of FTSE 100 companies,
the anticipated number of days worked and individual responsibilities.
With effect from 1 April 2010 fees are:
Fees £000
Fees to be used to
purchase shares1
£000
Chairman 200 50
Non-executive base fee 40 27
Senior independent director 10 –
Chair of audit/remuneration committee 30 –
1. The net amount will be used to purchase shares.
Remuneration committee
Role and membership
In the past year, the committee further reviewed the remuneration plans,
with a specific focus on long-term incentives, the overall balance of the
package and performance measures.
The committee met seven times during the period under review.
Attendance at these meetings is set out in the corporate governance
statement on page 39.
The remuneration committee is a committee of the Board and its
membership comprises:
Penny Hughes (chairman from 1 July 2009)
John Coombe
Oliver Stocken
Andy Hornby (resigned 1 July 2009)
Mike Darcey (appointed 20 April 2010)
The remuneration committee is responsible for making recommendations
to the Board on the Group’s policy on the remuneration of the Operating
Board as well as the specific remuneration packages for each of the
executive directors and other members of the Operating Board, including
pension rights and any compensation payments. The remuneration of the
non-executive directors and the chairman is reserved for consideration by
the Board of Directors as a whole. No director is involved in any discussions
about his or her own remuneration.
Advisers
At the invitation of the chairman of the committee, the chief executive
attended meetings to give background information on remuneration matters.
During the period under review, Hewitt New Bridge Street were
appointed as advisers to the remuneration committee and provided advice
from 1 December 2009 onwards. Prior to that time Towers Perrin advised
the committee. Both advised on matters relating to performance
conditions for long-term incentive plans and executive remuneration
issues and provided the committee with salary survey data. They did not
provide the Company with any other services. Linklaters LLP provided legal
advice on share scheme rules.
The committee was also advised by David Guise, Group HR Director
and Paula Hayes, Director of Policy & Reward. The secretary to the
committee was Gordon Bentley, Company Secretary.
The terms of reference of the committee can be found on the
Company’s website at www.homeretailgroup.com.
Performance graph
The graph below compares the TSR for Home Retail Group against the
FTSE 350 index of general retailers for the period from demerger to the end
of the period under review. The directors feel that the FTSE 350 index of
general retailers is the most appropriate choice of index as it is a relevant
comparator group for a retail business. The graph has been prepared in
accordance with the assumptions contained in the relevant legislation.
£110 £103.44
£100 £99.65
£90
£80 £73.16
£70 £65.78
£57.65£63.75£60 £68.52
£50
£46.35£40
11 October 3 March 1 March 28 February 27 February 2006 2007 2008 2009 2010
Value of £100 invested on demerger
Home Retail Group FTSE 350 index of general retailers
46 Home Retail Group Annual Report 2010
GOVERNANCE
The following sections are audited
Directors’ emoluments
The value of the salary, annual bonus and benefits (excluding awards of options and restricted shares) of each director is set out in the following table.
For the non-executive directors, this includes fees and shares as part payment for fees. At the end of the period under review the salary for Terry Duddy
was £820,000 pa and for Richard Ashton was £420,000 pa.
Period ended 27 February 2010 Period ended 28 February
Base salary/ Annual cash Taxable 2009 £000 fees bonus1 benefits Total Total
Terry Duddy 820 615 402 1,475 858
Richard Ashton 4203 315 144 749 432
Oliver Stocken 242 – – 242 221
John Coombe 91 – – 91 81
Andy Hornby5 27 – – 27 71
Penny Hughes6 73 – – 73 52
The following table provides details of shares purchased for non-executive directors on 22 October 2009 and 22 March 2010. The values reported below
are included within the remuneration reported in the directors’ emoluments table.
Number of Number of shares shares purchased on Value purchased on Value
22 October 2009 £000 22 March 2010 £000
Oliver Stocken 11,500 35 11,500 32
John Coombe 5,250 16 5,250 15
Andy Hornby5 3,500 11 – –
Penny Hughes6 3,750 11 5,250 15
Notes: 1. In addition, Terry Duddy and Richard Ashton have voluntarily deferred in shares receipt of a further £615,000 and £315,000 respectively to March 2011. 2. This includes benefits in kind of car, fuel, chauffeur, and private medical insurance. 3. The annual salary this year was reduced by £16,000 to reflect a period of unpaid leave. 4. This includes benefits in kind of car and private medical insurance. 5. Andy Hornby resigned from the Board on 1 July 2009. 6. Penny Hughes was appointed chairman of the Remuneration Committee with effect from 1 July 2009, to replace Andy Hornby. The additional fee for chairing the Remuneration
Committee is therefore included from this date.
Home Retail Group Annual Report 2010 47
GOVERNANCE
Directors’ remuneration report continued
Current share plans
Long-term incentive plans
Home Retail Group performance share plan A conditional award of shares was granted to executive directors in 2009 under the Home Retail Group PSP. These awards, along with vested, unvested
and rolled-over awards granted under the GUS plc PSP are included in the table below. During the period under review, the performance conditions for
the rolled-over 2006 award were measured. The TSR performance condition was met. The remuneration committee also reviewed the Group fi nancial
performance for the performance period, taking into account earnings, cash generation and dividend payments to shareholders and concluded that this
performance condition had also been met. The award therefore vested at 80% during the period. The 2007 award has met both the TSR and Group
financial performance conditions and vested at 52%.
Plan shares Plan shares Total plan Share Value of Plan shares awarded released shares held at Share price price on shares on at 1 March during the during the 27 February on date Vesting date of date of
Original grant date 20091 period period2 2010 of award date3 release5 release
Terry Duddy
02/06/06 193,201 – 154,560 – – 12/06/09 272.0p £420,417
16/10/06 57,483 – 57,483 – – 16/10/09 299.6p £172,219
09/05/07 170,648 – – 170,648 – 15/03/104 – –
09/05/08 306,164 – – 306,164 – 09/05/11 – –
08/05/09 – 487,128 – 487,128 252.5p 08/05/12 – –
Richard Ashton
02/06/06 90,159 – 72,127 – – 12/06/09 272.0p £196,192
16/10/06 27,998 – 27,998 – – 16/10/09 299.6p £83,882
09/05/07 87,457 – – 87,457 – 15/03/104 – –
09/05/08 156,815 – – 156,815 – 09/05/11 – –
08/05/09 – 249,504 – 249,504 252.5p 08/02/12 – –
Notes: 1. The shares awarded under the GUS plc 2006 PSP were subject to compulsory rollover at the time of demerger and vested in accordance with the plan’s rules. 2. The performance condition for the rolled-over awards was based on the TSR of Home Retail Group against its comparator group from the date of demerger to the normal vesting date.
The rolled-over GUS plc 2006 PSP was measured against the TSR and Group financial performance conditions and vested at 80%, with shares released to participants. As a result the remaining shares from the original award were forfeited. A dividend equivalent payment was made in relation to the 2006 GUS PSP, and the demerger restricted stock award. Terry Duddy received a total dividend equivalent payment of £104,096 and Richard Ashton £49,075.
3. All awards granted from 2007 onwards are subject to the performance conditions outlined on page 44. 4. The performance period for the 2007 award ended on 26 February 2010 and shares were released to participants earlier than the original vesting date on 15 March 2010. 5. Share price has been rounded to one decimal place.
Deferred bonus plan
This plan operated for the financial year 2009/10 only. For this year, executive directors were entitled to participate in a deferred bonus plan. Subject to
continued employment and satisfactory Group financial performance for the year in which performance is measured, shares will be released 1/6th on
the first anniversary of the award, 2/6th on the second anniversary of the award and 3/6th on the third anniversary of the award. The award is based
on 2009/10 performance against a benchmark PBT and a Group net cash generation target and will be made at the maximum, 150% of salary which
is £1,230,000 for Terry Duddy and £630,000 for Richard Ashton. The shares will be purchased in May 2010, with the number of shares in the plan to be
disclosed in future reports, once they have been awarded.
48 Home Retail Group Annual Report 2010
GOVERNANCE
Home Retail Group SAYE scheme
Terry Duddy and Richard Ashton joined the Home Retail Group SAYE scheme in 2008.
Number of Options Options Options Total number options at granted exercised lapsed of options at Date
1 March during the during the during the 27 February Exercise from which Original grant date 2009 period period period 2010 price exercisable Expiry date
Terry Duddy
01/07/08 8,565 – – – 8,565 190.0p 01/09/13 01/03/14
Richard Ashton
01/07/08 4,947 – – – 4,947 190.0p 01/09/11 01/03/12
Terry Duddy and Richard Ashton were awarded 49 free shares at the time of the demerger under an HMRC approved Share Incentive Plan. They became
fully entitled to these shares on 11 November 2009.
Home Retail Group share price
Details of the closing market price of Home Retail Group shares from 1 March 2009 to 27 February 2010 are shown in the table below:
At 27 February 2010 255.0p
Highest price during the period 329.7p
Lowest price during the period 189.0p
Legacy arrangements
As Home Retail Group demerged from GUS plc in October 2006, some legacy rollover arrangements are still in place in relation to GUS plc share plans.
Where this is the case, reference is made to the previous GUS plc plan in the sections below. The majority of these plans have now vested, with the fi nal
elements of the re-investment plan due to vest in 2010 and 2011.
Share options
The Company granted the following rolled-over options over its shares following demerger. The options are governed by the rules of the GUS plc
executive share option scheme. No new options have been granted during the period under review and no options have been exercised.
Number of Options Options Options Total number options at granted exercised lapsed of options at Date
1 March during the during the during the 27 February Exercise from which Original grant date 2009 period period period1 2010 price exercisable2 Expiry date
Terry Duddy
31/05/05 197,277 – – – 197,277 359.9p 31/05/08 30/05/15
02/06/06 193,201 – – 193,201 – 388.2p 02/06/09 02/06/16
Richard Ashton
31/05/05 80,576 – – – 80,576 359.9p 31/05/08 30/05/15
02/06/06 90,159 – – 90,159 – 388.2p 02/06/09 02/06/16
Notes: 1. The 2006 award did not meet the performance condition and therefore lapsed. 2. There is a performance test based on basic benchmark EPS growth. This requires compound annual growth to exceed compound annual retail price inflation by 4% per annum over
a continuous three-year period.
Home Retail Group Annual Report 2010 49
GOVERNANCE
Directors’ remuneration report continued
Co-investment plan
Awards made in 2006 and 2007 were made under the GUS plc co-investment plan in accordance with the plan rules.
Invested Matching Invested Matching Total Value of Plan shares shares shares shares plan shares matching
shares at granted granted returned released held at Share price Share price shares 1 March during during during during 27 February on date on date on date
Original grant date 2009 period period period period4 2010 of award Vesting date of exercise5 of exercise
Terry Duddy
12/06/061 90,123 – – 19,513 70,610 – – 12/06/09 272.0p £192,066
27/06/072 426,476 – – – 135,362 291,114 – 27/06/10 – –
09/05/083 871,918 – – – – 871,918 – 09/05/11 – –
Richard Ashton
27/06/072 207,907 – – – 65,989 141,918 – 27/06/10 – –
09/05/083 446,858 – – – – 446,858 – 09/05/11 – –
Notes: 1. Matching share options granted in 2006 were subject to compulsory rollover at the time of the demerger. The rolled-over awards were governed by the rules of the GUS plc plan. 2. This award was converted to restricted shares on 25 February 2010 and the plan shares at the end of the period represent the balance remaining after the sale of shares to meet tax
and National Insurance liabilities. The remaining shares will be released to participants on the original vesting date of 27 June 2010. 3. Matching awards made in 2008 are subject to performance against a basic benchmark EPS target and a return on invested capital target. If total basic benchmark EPS growth of 10%
or above over the three-year period is achieved, matching shares vest as to one half of the 50% of the award that is subject to basic benchmark EPS, which increases to full vesting of that 50% when benchmark EPS growth reaches 25% or more over the performance period.
4. Dividend equivalent payments were made on matching shares released. Terry Duddy received £148,720 and Richard Ashton £54,746. 5. Share price has been rounded to one decimal place.
Re-investment plan
At the time of the demerger, executive directors were offered the opportunity to re-invest shares acquired in 2004 and 2005 under the terms of the
GUS plc co-investment plan into a one-off re-investment plan.
This one-off plan granted a matching award of Home Retail Group shares if participants agreed to re-invest the invested shares and/or matching
awards from the 2004 and 2005 operation of the GUS plc co-investment plan. The receipt of the matching award is subject to satisfaction of performance
conditions, the retention of re-invested awards and continued employment. The matching award is calculated on the basis of two Home Retail Group
shares for each Home Retail Group share re-invested by the participant. The matching award is made in two equal portions. The first 50% of the award
was time-based and vested on the third anniversary of the grant. The remaining 50% of the award will vest subject to the satisfaction of performance
conditions, in two equal tranches on the fourth and fifth anniversaries of the grant.
Re-invested Matching Total Value of shares shares plan shares matching
Plan released released held at Share price shares shares as at during during the 27 February Vesting on date of on date of
1 March 2009 period1 period 2010 date exercise exercise
Terry Duddy
1,598,850 799,425 799,426 – 17/10/09 302.3p £2,416,870
399,713 – – 399,713 17/10/10 – –
399,712 – – 399,712 17/10/11 – –
Richard Ashton
511,228 255,614 255,614 – 17/10/09 302.3p £772,787
127,807 – – 127,807 17/10/10 – –
127,807 – – 127,807 17/10/11 – –
1. Dividend equivalent payments were made on matching and re-invested shares released. Terry Duddy received £645,329 and Richard Ashton £206,343.
50 Home Retail Group Annual Report 2010
GOVERNANCE
Pensions
The table set out below provides the disclosure of directors’ pension entitlements.
Additional pension
Accrued Accrued Changes earned to Transfer pension at pension at Transfer Transfer in transfer 27 February value of
27 February 1 March value at value at values 2010 the increase 2010 2009 27 February 1 March (less director’s (net of infl ation (less director’s
per annum per annum 2010 2009 contributions) per annum) contributions) £000 £000 £000 £000 £000 £000 £000
Terry Duddy
122 94 2,412 1,633 779 28 553
Richard Ashton
57 46 721 471 240 12 138
By order of the Board
Penny Hughes
Chairman – remuneration committee
Home Retail Group Annual Report 2010 51
GOVERNANCE
Statement of directors’ responsibilities
The directors are responsible for preparing the annual report, the directors’
remuneration report and the financial statements in accordance with
applicable law and regulations.
Company law requires the directors to prepare financial statements for
each financial year. Under that law the directors have prepared the Group
and Parent Company financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union.
Under company law the directors must not approve the fi nancial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and the Company and of the profi t or
loss of the Group for that period. In preparing these fi nancial statements,
the directors are required to:
� select suitable accounting policies and then apply them consistently;
� make judgements and accounting estimates that are reasonable and
prudent;
� state whether applicable IFRSs as adopted by the European Union
have been followed, subject to any material departures disclosed and
explained in the financial statements; and
� prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of
the Company and the Group and enable them to ensure that the fi nancial
statements and the Directors’ remuneration report comply with the
Companies Act 2006 and, as regards the Group fi nancial statements,
Article 4 of the IAS Regulation. They are also responsible for safeguarding
the assets of the Company and the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of
the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Each of the directors, whose names and functions are listed on page 34,
confirm that to the best of their knowledge:
� the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and fair view
of the assets, liabilities, financial position and profit of the Group; and
� the directors’ report includes a fair review of the development and
performance of the business and the position of the Group, together
with a description of the principal risks and uncertainties that it faces.
52 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Independent auditors’ report to the members of Home Retail Group plc – Group
We have audited the Group consolidated financial statements of Home Retail Group plc for the 52 weeks ended 27 February 2010, which comprise
the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated
statement of changes in equity, the consolidated statement of cash flows, and the related notes. The financial reporting framework that has been
applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Respective responsibilities of directors and auditors
As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the Group consolidated
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Group consolidated fi nancial
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part
16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Scope of the audit of the fi nancial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the
financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting
policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signifi cant
accounting estimates made by the directors; and the overall presentation of the fi nancial statements.
Opinion on fi nancial statements
In our opinion the Group consolidated fi nancial statements:
� give a true and fair view of the state of the Group’s affairs as at 27 February 2010 and of its profit and cash flows for the 52 weeks then ended;
� have been properly prepared in accordance with IFRSs as adopted by the European Union; and
� have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
� the information given in the directors’ report for the financial year for which the Group consolidated financial statements are prepared is consistent
with the Group consolidated fi nancial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
� certain disclosures of directors’ remuneration specified by law are not made; or
� we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
� the directors’ statement in relation to going concern; and
� the part of the corporate governance statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code
specified for our review.
Other matter
We have reported separately on the Parent Company financial statements of Home Retail Group plc for the 52 weeks ended 27 February 2010 and
on the information in the directors’ remuneration report that is described as having been audited.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 28 April 2010
Home Retail Group Annual Report 2010 53
FINANCIAL STATEMENTS
Consolidated income statement For the 52 weeks ended 27 February 2010
Notes
52 weeks ended 27 February 2010
Total £m
52 weeks ended 28 February 2009
Before exceptional Exceptional items items Total
£m £m £m
Revenue
Cost of sales
5,6 6,022.7
(4,055.6)
5,897.4
(3,873.8)
––
5,897.4
(3,873.8)
Gross profi t
Net operating expenses 7,9
1,967.1
(1,672.6)
2,023.6
(1,731.6)
–(694.0)
2,023.6
(2,425.6)
Operating profi t/(loss)
– Finance income
– Finance expense
Net fi nancing income
Share of post-tax loss of joint ventures and associates
10
17
294.5
46.1
(45.6)
0.5
(2.0)
292.0
63.7
(53.5)
10.2
(2.4)
(694.0)
––
––
(402.0)
63.7
(53.5)
10.2
(2.4)
Profit/(loss) before tax
Taxation 9,11
293.0
(83.2)
299.8
(101.2)
(694.0)
82.3
(394.2)
(18.9)
Profit/(loss) for the year attributable to equity holders
of the Company 209.8 198.6 (611.7) (413.1)
Earnings per share pence pence
– Basic
– Diluted
13
13
24.3
24.1
(47.7)
(47.7)
Non-GAAP measures Notes
52 weeks ended
27 February 2010
£m
52 weeks ended
28 February 2009
£m
Reconciliation of profit before tax (‘PBT’) to benchmark PBT
Profit /(loss) before tax 293.0 (394.2) Adjusted for: Exceptional items 9 – 694.0 Demerger incentive schemes 29 7.7 8.4 Financing fair value remeasurements 10 (2.7) 28.9 Financing impact on retirement benefi t obligations 10 0.7 (11.2) Discount unwind on non-benchmark items 10 6.7 1.8 Onerous lease provision releases (12.5) –
Benchmark PBT 292.9 327.7
Benchmark earnings per share pence pence
– Basic 13 23.4 25.9 – Diluted 13 23.1 25.6
54 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Consolidated statement of comprehensive income For the 52 weeks ended 27 February 2010
Profit/(loss) for the year attributable to equity holders of the Company
Other comprehensive income
Net change in fair value of cash fl ow hedges
– Foreign currency forward exchange contracts
Net change in fair value of cash flow hedges transferred to inventory
– Foreign currency forward exchange contracts
Actuarial gains/(losses) in respect of defi ned benefit pension schemes
Fair value movements on available-for-sale fi nancial assets
Currency translation differences
Tax (charge)/credit in respect of items taken directly to equity
Other comprehensive income for the year, net of tax
Notes
24
11
52 weeksended
27 February 2010
£m
209.8
(26.5)
43.0
6.6
3.0
(3.6)
(5.9)
16.6
52 weeks ended
28 February 2009
£m
(413.1)
153.3
(130.1)
(135.4)
(2.3)
35.9
32.5
(46.1)
Total comprehensive income for the year attributable to equity holders of the Company 226.4 (459.2)
Home Retail Group Annual Report 2010 55
FINANCIAL STATEMENTS
Consolidated balance sheet At 27 February 2010
27 February 28 February 2010 2009
Notes £m £m
ASSETS
Non-current assets
Goodwill 14 1,541.0 1,541.0
Other intangible assets 15 92.7 103.6
Property, plant and equipment 16 525.1 559.3
Investment in joint ventures and associates 17 8.2 8.4
Deferred tax assets 26 61.6 87.4
Trade and other receivables 19 4.0 3.4
Other fi nancial assets 25 13.2 9.2
Total non-current assets 2,245.8 2,312.3
Current assets
Inventories 18 935.4 930.3
Trade and other receivables 19 582.1 593.7
Current tax assets 50.5 15.1
Other fi nancial assets 25 49.5 53.7
Current asset investments 20 50.0 75.0
Cash and cash equivalents 21 364.0 209.4
Total current assets 2,031.5 1,877.2
Total assets 4,277.3 4,189.5
LIABILITIES
Non-current liabilities
Trade and other payables 22 (62.5) (64.0)
Provisions 23 (198.3) (198.6)
Deferred tax liabilities 26 (37.8) (26.3)
Retirement benefi t obligations 24 (24.9) (46.4)
Total non-current liabilities (323.5) (335.3)
Current liabilities
Trade and other payables 22 (1,042.4) (999.2)
Provisions 23 (20.8) (51.6)
Other fi nancial liabilities 25 (1.8) (1.5)
Current tax liabilities (22.2) (43.5)
Total current liabilities (1,087.2) (1,095.8)
Total liabilities (1,410.7) (1,431.1)
Net assets 2,866.6 2,758.4
EQUITY
Share capital 27 87.7 87.7
Merger reserve 28 (348.4) (348.4)
Other reserves 28 46.6 35.4
Retained earnings 3,080.7 2,983.7
Total equity 2,866.6 2,758.4
The financial statements were approved by the Board of Directors on 28 April 2010 and were signed on its behalf by:
Terry Duddy, Richard Ashton,
Chief Executive Finance Director
56 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Consolidated statement of changes in equity For the 52 weeks ended 27 February 2010
Attributable to equity holders of the Company
Share Merger Other Retained capital reserve reserves earnings Total
£m £m £m £m £m
Balance at 1 March 2009 87.7 (348.4) 35.4 2,983.7 2,758.4
Profit for the year – – – 209.8 209.8
Other comprehensive income – – 8.3 8.3 16.6
Total comprehensive income for the year ended 27 February 2010 – – 8.3 218.1 226.4
Transactions with owners:
Movement in share-based compensation reserve – – – 20.4 20.4
Net movement in own shares – – 2.9 (12.0) (9.1)
Equity dividends paid during the year – – – (126.3) (126.3)
Other distributions – – – (3.2) (3.2)
Total transactions with owners – – 2.9 (121.1) (118.2)
Balance at 27 February 2010 87.7 (348.4) 46.6 3,080.7 2,866.6
Attributable to equity holders of the Company
Share Merger Other Retained capital reserve reserves earnings Total
£m £m £m £m £m
Balance at 2 March 2008 87.7 (348.4) 3.9 3,602.0 3,345.2
Loss for the year – – – (413.1) (413.1)
Other comprehensive income – – 52.6 (98.7) (46.1)
Total comprehensive income for the year ended 28 February 2009 – – 52.6 (511.8) (459.2)
Transactions with owners:
Movement in share-based compensation reserve – – – 21.3 21.3
Net movement in own shares – – (21.1) (0.4) (21.5)
Equity dividends paid during the year – – – (127.2) (127.2)
Other distributions – – – (0.2) (0.2)
Total transactions with owners – – (21.1) (106.5) (127.6)
Balance at 28 February 2009 87.7 (348.4) 35.4 2,983.7 2,758.4
Home Retail Group Annual Report 2010 57
FINANCIAL STATEMENTS
Consolidated statement of cash fl ows For the 52 weeks ended 27 February 2010
Cash flows from operating activities
Cash generated from operations
Tax paid
Net cash inflow from operating activities
Notes
33
52 weeksended
27 February 2010
£m
461.0
(107.3)
353.7
52 weeks ended
28 February 2009
£m
468.4
(74.7)
393.7
Cash flows from investing activities
Purchase of property, plant and equipment (73.7) (110.9)
Proceeds from the disposal of property, plant and equipment 1.9 2.6
Purchase of intangible assets (17.5) (44.7)
Loan to joint venture (5.1) (2.0)
Purchase of investments (51.6) (75.2)
Disposal of investment 75.0 –
Interest received 7.2 16.6
Net cash used in investing activities (63.8) (213.6)
Cash flows from fi nancing activities
Purchase of shares for Employee Share Trust
Proceeds from sale of own shares
Dividends paid 12
(9.4)
0.3
(126.3)
(21.6)
0.1
(127.2)
Net cash used in fi nancing activities (135.4) (148.7)
Net increase in cash and cash equivalents 154.5 31.4
Movement in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
Net increase in cash and cash equivalents
21 209.4
0.1
154.5
174.0
4.0
31.4
Cash and cash equivalents at the end of the year 21 364.0 209.4
58 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Analysis of net cash/(debt) At 27 February 2010
27 February 28 February 2010 2009
Non-GAAP measures Notes £m £m
Financing net cash:
Cash and cash equivalents 21 364.0 209.4 Current asset investments 20 50.0 75.0
Total financing net cash 414.0 284.4
Operating net debt:
Off balance sheet operating leases (3,148.1) (3,304.3)
Total operating net debt (3,148.1) (3,304.3)
Total net debt (2,734.1) (3,019.9)
Adjusted for: Off balance sheet operating leases 3,148.1 3,304.3 Current asset investments 20 (50.0) (75.0)
Total cash and cash equivalents reflected in balance sheet 364.0 209.4
The Group uses the term total net debt which highlights the Group’s aggregate net indebtedness to banks and other financial institutions together with
debt-like liabilities, notably operating leases. The capitalised value of these leases is £3,148.1m (2009: £3,304.3m), based upon discounting the current
rentals at the estimated current long-term cost of borrowing of 4.1% (2009: 4.1%).
The current asset investment comprises a term cash deposit invested for a period of six months (2009: nine months) which matures after the balance
sheet date on 10 May 2010 (2009: 15 April 2009). The analysis of net cash/(debt) forms part of the notes to the fi nancial statements.
Home Retail Group Annual Report 2010 59
FINANCIAL STATEMENTS
Notes to the fi nancial statements For the 52 weeks ended 27 February 2010
1. GENERAL INFORMATION
Home Retail Group plc (‘the Company’), which is the ultimate parent company of Home Retail Group (‘the Group’), is a public limited company
incorporated and domiciled in the United Kingdom under the Companies Act 2006 and listed on the London Stock Exchange. The Group is a home
and general merchandise retailer. These consolidated financial statements were authorised for issue by the Board of Directors on 28 April 2010.
Statement of compliance
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’)
and International Financial Reporting Interpretations Committee interpretations (‘IFRICs’) as adopted by the European Union. They also comply with
those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.
2. BASIS OF PREPARATION
The Group consolidated financial statements are presented in sterling, rounded to the nearest hundred thousand. They are prepared under the historic
cost basis modified for the revaluation of certain financial instruments, share-based payments and post-employment benefits. The principal accounting
policies applied in the preparation of these consolidated financial statements are set out in note 3. Unless otherwise stated, these policies have been
consistently applied to all the periods presented.
Basis of consolidation
The Group financial statements consist of the financial statements of the ultimate parent company (Home Retail Group plc), entities controlled by the
Company (its subsidiaries) and the Group’s share of its interests in joint ventures and associates. The accounting policies of subsidiaries are consistent
with the policies adopted by the Group for the purposes of the Group’s consolidation.
Subsidiaries A subsidiary is an entity whose operating and financing policies are controlled by the Group. Subsidiaries are consolidated from the date on which
control was transferred to the Group. Subsidiaries cease to be consolidated from the date that the Group no longer has control. Intercompany
transactions, balances and unrealised gains on transactions between Home Retail Group companies have been eliminated on consolidation.
Joint ventures and associates Joint ventures are entities in which the Group holds an interest on a long-term basis and which are jointly controlled by the Group and one or more
other interested parties under a contractual agreement. Associates are entities over which the Group has signifi cant influence but not control.
The equity method is used to account for investments in joint ventures and associates and investments are initially recognised at cost.
The Group’s share of net assets of its joint ventures and associates are included on the Group balance sheet. The Group’s share of its joint ventures and
associates’ post-acquisition profits or losses are recognised in its income statement. The cumulative post-acquisition movements are adjusted against
the carrying value of the investment. The carrying amount of an investment in a joint venture or associate is tested for impairment by comparing its
recoverable amount to its carrying amount whenever there is an indication that the investment may be impaired.
Business combinations
Under the requirements of IFRS 3, all business combinations are accounted for using the purchase method. The cost of business acquisitions is the
aggregate of fair values, at the date of exchange, of assets given, liabilities incurred or assumed, equity instruments issued by the acquirer and any
costs directly attributable to the business combination. The cost of a business combination is allocated at the acquisition date by recognising the
acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at that date. The acquisition
date is the date on which the acquirer effectively obtains control of the acquiree. Intangible assets are recognised if they meet the definition of an
intangible asset contained in IAS 38 and its fair value can be measured reliably. The excess of the cost of acquisition over the fair value of the Group’s
share of the identifiable net assets acquired is recognised as goodwill.
Changes in accounting standards
The Group has adopted applicable new standards and amendments to existing standards which are effective for the first time in the current
year as follows:
� IFRS 8 ‘Operating Segments’ replaces IAS 14 ‘Segment Reporting’ and requires segmental information reported to be based on that which the
Group Board and Operating Board use internally for the purposes of evaluating the performance of the Group’s businesses and making decisions
about resource allocation between operating segments. The Group adopted IFRS 8 with effect from 1 March 2009. The adoption of IFRS 8 has not
resulted in a change to the Group’s reportable segments.
60 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
� IAS 1 (revised) ‘Presentation of Financial Statements’ prohibits the presentation of items of income and expense in the statement of changes in
equity, requiring ‘non-owner changes in equity’ to be presented separately from ‘owner changes in equity’. Entities can choose whether to present
a single performance statement (being a statement of comprehensive income) or two statements (being an income statement and a statement of
comprehensive income). The Group has elected to present two statements: an income statement and a statement of comprehensive income.
� The amendment to IFRS 7 ‘Reclassification of Financial Instruments’ has enhanced the disclosure requirements about fair value measurements and
reinforced existing principles for disclosure about the liquidity risk associated with financial instruments. The Group adopted the amendments to
IFRS 7 with effect from 1 March 2009.
The vesting conditions and cancellations amendment to IFRS 2 ‘Share-Based Payment’ would normally have been effective for the first time for
the current year, however it was early-adopted by the Group during the 52 weeks to 28 February 2009.
The Group has also adopted IFRIC 13 ‘Customer Loyalty Programmes’ with effect from 1 March 2009, but this has had no material impact on the
results or financial position of the Group.
Other new standards, amendments and interpretations are also effective for the first time for the current year, but have had no material impact
on the results or financial position of the Group.
At the balance sheet date a number of amendments to existing standards were in issue but not yet effective:
� Amendment to IAS 27 –‘Consolidated and Separate Financial Statements’;
� Amendment to IAS 39 – ‘Eligible Hedged Items’;
� Amendment to IFRS 2 – ‘Group Cash-settled Share-Based Payment’; and
� IFRS 3 (revised) – ‘Business Combinations’.
The Group has not early-adopted any of these amendments to existing standards. Their impact will be fully considered in due course. There are no
other new standards or IFRICs not yet effective which are expected to have a material impact.
Critical accounting estimates and assumptions
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of revenues,
expenses, assets and liabilities and the disclosure of contingent liabilities. The resulting accounting estimates, which are based on management’s
best judgement at the date of the financial statements, will, by definition, seldom equal the related actual results. The estimates and underlying
assumptions are reviewed on an ongoing basis, with revisions recognised in the period in which the estimates are revised and future periods where
appropriate. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below:
Taxes The Group is subject to taxes in a number of jurisdictions. Significant judgement is required in determining the provision for income taxes as there are
many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises
liabilities based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that
were initially recorded, such differences will impact the results for the year and the respective income tax and deferred tax provisions in the year in
which such determination is made.
Pension benefi ts The present value of the defi ned benefit obligations depends on a number of factors that are determined on an actuarial basis using a number of
assumptions. The assumptions used in determining the defi ned benefit obligations and net pension costs include the expected long-term rate of return
on the relevant scheme assets and the discount rate. Any changes in these assumptions may impact the amounts disclosed in the Group’s balance
sheet and income statement.
The expected return on scheme assets is calculated by reference to the scheme investments at the year-end and is a weighted average of the expected
returns on each main asset type (based on market yields available on these asset types at the year-end).
The Group determines the appropriate discount rate at the end of each year. This is the interest rate used to determine the present value of estimated
future cash outflows expected to be required to settle the defi ned benefit obligations. In determining the appropriate discount rate, the Group
considers the market yields of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have
terms to maturity consistent with the estimated average term of the related pension liability. Other key assumptions for defi ned benefi t obligations
and pension costs are based in part on market conditions at the relevant year-ends and additional information is disclosed in note 24.
Home Retail Group Annual Report 2010 61
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
2. BASIS OF PREPARATION CONTINUED Goodwill Goodwill is allocated to cash-generating units (CGUs) at the level of each business segment. The Group is required to assess whether goodwill
has suffered any impairment loss on an annual basis, based on the recoverable amount, being the higher of the CGU’s fair value less costs to sell and
its value-in-use. The value-in-use calculations require the use of estimates in relation to future cash flows and suitable discount rates as disclosed in
note 14. Actual outcomes could vary from these estimates.
Impairment of assets Assets are subject to impairment reviews whenever changes in events or circumstances indicate that an impairment may have occurred. Assets are
written down to the higher of fair value less costs to sell and value-in-use. Value-in-use is calculated by discounting the expected cash flows from the
asset at an appropriate discount rate for the risks associated with that asset. This includes estimates of both the expected cash flows and an appropriate
discount rate which use management’s assumptions and estimates of the future performance of the asset. Differences between expectations and the
actual cash flows will result in differences in the level of impairment required.
A previously recognised impairment loss is reversed if there has been a significant change in the underlying assumptions used to determine the
recoverable amount, however not to an amount higher than the carrying amount that would have been determined, net of amortisation or
depreciation, if no impairment loss had been recognised in prior years.
Provisions Provisions have been estimated for onerous leases, self insurance and other liabilities. These provisions represent the best estimate of the liability at the
balance sheet date, the actual liability being dependent on future events such as trading conditions at a particular store or the incidence of insurance
claims against the Group. Expectations will be revised each period until the actual liability arises, with any difference accounted for in the period in
which the revision is made.
Inventory provisions Inventory is carried at the lower of cost and net realisable value which requires the estimation of the eventual sales price of goods to customers in the
future. Any difference between the expected and the actual sales price achieved will be accounted for in the period in which the sale is made.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services to external customers, net of value
added tax, rebates, discounts and returns. Revenue is recognised as follows:
Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be
measured reliably. Revenue on goods to be delivered is recognised when the customer receives delivery of the goods. The Group operates a variety of
sales promotion schemes that give rise to goods being sold at a discount to the standard retail price. Revenue is adjusted to show sales net of all related
discounts. Commissions receivable on the sale of services for which the Group acts as agent are included within revenue. A provision for estimated
returns is made, representing the profit on goods sold during the year which will be returned and refunded after the year-end.
Interest income Interest income on customer store card accounts and loans is recognised as revenue using the effective interest method.
Foreign currency translation
Functional and presentation currency The consolidated financial information is presented in sterling, which is the Company’s functional and the Group’s presentation currency. Items
included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which
the entity operates (the functional currency).
Transactions and balances Transactions in foreign currencies are recorded at the exchange rate prevailing on the date of the transaction. At each balance sheet date, monetary
assets and liabilities denominated in foreign currencies are retranslated at the exchange rate prevailing at the balance sheet date. Translation differences
on monetary items are taken to the income statement with the exception of differences on transactions that are subject to effective cash fl ow hedges.
Translation differences on non-monetary items are reported as part of the fair value gain or loss and are included in either equity or the income
statement as appropriate.
62 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
Group companies The results and financial position of overseas Home Retail Group entities are translated into sterling as follows:
� assets and liabilities are translated at the closing rate at the date of that balance sheet;
� income and expenses are translated at the average exchange rate for the period; and
� all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to equity. Tax charges and
credits attributable to those exchange differences are taken directly to equity. Goodwill and fair value adjustments arising on the acquisition of
a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing rate.
Goodwill
Goodwill is the excess of the fair value of the consideration payable for an acquisition over the fair value of the Group’s share of identifi able net
assets of a subsidiary, associate or joint venture acquired at the date of acquisition. Fair values are attributed to the identifiable assets, liabilities and
contingent liabilities that existed at the date of acquisition, reflecting their condition at that date. Adjustments are made where necessary to bring the
accounting policies of acquired businesses into alignment with those of the Group. Goodwill on acquisitions of associates and joint ventures is included
in the carrying amount of the investment. Goodwill is stated at cost less any provision for impairment. Goodwill is not amortised and is tested at least
annually for impairment. An impairment charge is recognised where the carrying value of goodwill exceeds its recoverable amount, being the higher
of its fair value less costs to sell and its value-in-use. Value-in-use calculations are performed using cash flow projections discounted at a rate taking
account of the specific risks inherent within the Group’s retail businesses. Gains and losses on the disposal of an entity include the carrying amount
of goodwill relating to the entity sold, allocated where necessary on the basis of relative fair value.
Other intangible assets
Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill, if those assets are separable and their fair
value can be measured reliably. Intangible assets acquired separately from the acquisition of a business are capitalised at cost. Certain costs incurred
in the developmental phase of an internal project are capitalised as intangible assets provided that a number of criteria are satisfied. These include the
technical feasibility of completing the asset so that it is available for use or sale, the availability of adequate resources to complete the development
and how the asset will generate probable future economic benefi t.
The cost of other intangible assets with finite useful economic lives is amortised over that period. The carrying values of intangible assets are reviewed
for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. If impaired, they are written down
to the higher of fair value less costs to sell and value-in-use.
Brands Acquired brands have a finite useful life and are initially recognised at fair value at the date of acquisition and subsequently held at cost less
accumulated amortisation. Amortisation is calculated to spread the cost of the brands over their estimated useful lives of 10 years on a straight-line
basis. This amortisation method reflects the pattern in which the asset’s future economic benefits are expected to be consumed.
Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Computer
software licences are held at cost and are amortised on a straight-line basis over three to five years. Costs that are directly associated with the
production of identifiable and unique software products controlled by the Group, and that will generate economic benefits beyond one year, are
recognised as intangible assets. Computer software development costs recognised as assets are amortised on a straight-line basis over 3 to 10 years.
Costs associated with maintaining computer software programs are recognised as an expense as incurred.
The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each balance sheet date.
Home Retail Group Annual Report 2010 63
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES CONTINUED Property, plant and equipment
Property, plant and equipment are held at cost being the purchase price and other costs directly attributable to bringing the asset into use less
accumulated depreciation and any impairment in value. An impairment charge is recognised where the carrying value of the asset exceeds its
recoverable amount, being the higher of the asset’s fair value less costs to sell and its value-in-use. Value-in-use calculations are performed using
cash flow projections discounted at a rate taking account of the specific risks inherent within the Group’s businesses.
Depreciation is charged on a straight-line basis as follows:
� freehold properties are depreciated over 50 years;
� leasehold premises are depreciated over the period of the lease;
� plant, vehicles and equipment are depreciated over 2 to 10 years according to the estimated life of the asset;
� land is not depreciated; and
� assets under the course of construction are not depreciated.
The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each balance sheet date.
Receivables
Trade Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. A provision for
impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according
to the original terms of receivables. The amount of the provision is recognised in the balance sheet, with the cost of unrecoverable trade receivables
recognised in the income statement immediately.
Financial services The gross margin from the sale of a retail product on extended credit terms is recognised at the time of the sale of the retail product. Income under
instalment agreements is credited to the income statement using the effective interest method. When a receivable is impaired, the Group reduces
the carrying amount to its recoverable amount.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is generally determined on a first in, first out basis. The cost bases in use within
the Group are general retail goods valued on a standard cost or weighted average basis which approximates to actual cost. Net realisable value is the
estimated selling price in the ordinary course of business, less applicable variable selling expenses. Costs of inventory include the transfer from equity
of any gains or losses on qualifying cash flow hedges relating to their purchase.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities
of three months or less and bank overdrafts.
Current asset investments
Current asset investments includes cash on deposit held with banks, with original maturities of greater than three months.
Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. They are classifi ed
as current liabilities if payment is due within 12 months of the balance sheet date. They are recognised initially at fair value and subsequently
remeasured at amortised cost.
Borrowings and borrowing costs
All loans and borrowings are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowing.
Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value
and other borrowing costs is recognised in the income statement over the period of the borrowings using the effective interest method.
Current and non-current tax
Current tax and non-current tax are based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable
or deductible.
64 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
Deferred tax
Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. However,
if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax assets and liabilities are calculated at the tax
rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the tax rates and laws that have been
enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable
profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on
investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is
probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to taxes levied by
the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Provisions
Provisions are recognised when:
� the Group has a present legal or constructive obligation as a result of past events;
� it is more likely than not that an outflow of resources will be required to settle the obligation; and
� the amount has been reliably estimated.
Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be
required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outfl ow
with respect to any one item included in the same class of obligations may be small. If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and,
where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised
as an interest expense. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset when the
reimbursement is certain.
Provisions are made for onerous lease contracts for stores that have closed or where a decision to close has been announced, and for those stores
where the projected future trading revenue is insufficient to cover the lower of exit cost or value-in-use.
Provisions are also made for legal claims, restructuring costs and estimated cost of claims incurred by the Group’s captive insurance company but not
settled at the balance sheet date.
Operating leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made
under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Incentives from lessors are recognised
as a systematic reduction of the charge over the life of the lease.
Post-employment benefi ts
The liability recognised in the balance sheet in respect of defi ned benefit pension plans is the present value of the defi ned benefit obligation at the
balance sheet date less the fair value of plan assets, together with adjustments for unrecognised past service costs. The defi ned benefit obligation is
calculated annually by independent actuaries using the projected-unit credit method. The present value of the defi ned benefit obligation is determined
by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which
the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the consolidated statement
of comprehensive income. Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the
employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line
basis over the vesting period.
For defined contribution pension plans the Group and employees pay contributions into an independently administered fund. The cost of providing
these benefits, recognised in the income statement, comprises the amount of contributions payable to the schemes in respect of the year.
Home Retail Group Annual Report 2010 65
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES CONTINUED Catalogue costs
Costs incurred during the production of the Group’s catalogues are deferred on the balance sheet net of any associated advertising revenue and
marketing support until the catalogue is made available to the Group, at which point the net deferred cost is charged to the income statement.
Dividends
Dividends proposed by the Board of Directors and unpaid at the year-end are not recognised in the financial statements until they have been approved
by the shareholders at the Annual General Meeting. Interim dividends are recognised in the financial statements when they are paid. Final dividends
are recognised in the financial statements when they are approved by the shareholders.
Insurance
Certain of the Group’s insurance policies are maintained by the Group’s captive insurance company, Global Guernsey Limited, which accounts for
all insurance business on an annual basis and the net consolidated result is dealt with as part of the operating costs in these fi nancial statements.
Insurance premiums in respect of insurance placed with third parties and re-insurance premiums in respect of risks not retained by the Group’s
captive insurance company are charged to the income statement in the period to which they relate.
Financial instruments
The Group classifies its financial instruments in the following categories: financial assets and liabilities at fair value through profit or loss, loans and
receivables and available-for-sale financial assets. The classification depends on the purpose for which the financial instruments were acquired.
Management determines the classification of its financial instruments at initial recognition.
Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value are so designated by management on initial recognition. Derivatives are generally designated as hedges.
Financial assets and liabilities at fair value through profit or loss are initially recorded at fair value with gains or losses arising from changes in their fair
value presented in the income statement. Items in this category are classified as current assets or current liabilities if they are either held for trading
or are expected to be realised within 12 months of the balance sheet date.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise
when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans and receivables are
recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. They are included in current assets,
except for those with maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans and receivables
comprise trade and other receivables, cash and cash equivalents and current asset investments in the balance sheet.
Available-for-sale fi nancial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories.
Available-for-sale financial assets are measured at fair value or, where fair value cannot be reliably measured, at cost less impairment. They are
included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.
Accounting for derivative financial instruments and hedging activities
Derivatives are recognised at fair value on the date a contract is entered into and are subsequently remeasured at their fair value. The method of
recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being
hedged. The Group designates derivatives as either cash flow hedges or fair value hedges.
The Group documents the relationship between hedging instruments and hedged items at the hedge inception, as well as its risk management
objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an
ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.
Movements on the hedging reserve in equity are shown in the Group statement of comprehensive income.
Cash fl ow hedges The cash flow hedges are intended to hedge the foreign currency exposures of the future purchases of inventory. The effective portion of changes in
the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. Any gain or loss relating to the ineffective
portion would be recognised immediately in the income statement. The hedged cash flow is expected to occur up to 14 months into the future and
will be transferred to the consolidated income statement via inventory carrying value as applicable.
66 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of
forward currency exchange contracts hedging the Group’s exposure to foreign currency liabilities is recognised in the income statement within cost
of sales.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest
method is used is amortised to the income statement over the period to maturity.
Fair value estimation
The fair value of financial instruments traded in organised active financial markets is based on quoted market prices at the close of business on the
balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for
financial liabilities is the current offer price. The fair value of financial instruments for which there is no quoted market price is determined by a variety
of methods incorporating assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes
for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for
the remaining fi nancial instruments.
The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. The nominal
value less estimated credit adjustments of trade receivables and payables are assumed to approximate to their fair values. The fair value of fi nancial
liabilities is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar
fi nancial instruments.
Share-based payments
The Group operates a number of equity-settled, share-based compensation plans. The fair value of the shares granted is recognised as an expense after
taking into account the best estimate of the number of awards expected to vest. The Group revisits the vesting estimate at each balance sheet date.
Non-market performance conditions are included in the vesting estimate. Expenses are incurred over the vesting period. Fair value is measured at the
date of grant using whichever of the Black-Scholes or Monte Carlo models, or closing market price is most appropriate to the award. Market-based
performance conditions are included in the fair value measurement on grant date and are not revisited for actual performance.
Non-GAAP fi nancial information
Exceptional items Items which are both material and non-recurring are presented as exceptional items within their relevant income statement line. The separate
reporting of exceptional items helps provide a better indication of underlying performance of the Group. Examples of items which may be recorded
as exceptional items are impairment charges, restructuring costs and the profits/losses on the disposal of businesses.
Benchmark operating profit and benchmark profit before tax (‘benchmark PBT’) The Group use the terms benchmark operating profit and benchmark PBT as measures which are not formally recognised under IFRS. Benchmark
operating profit is defined as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases,
exceptional items and costs related to demerger incentive schemes. Benchmark PBT is defined as profit before amortisation of acquisition intangibles,
store impairment and onerous lease charges or releases, exceptional items, costs related to demerger incentive schemes, financing fair value
remeasurements, financing impact on retirement benefit obligations, the discount unwind on non-benchmark items and taxation. These measures
are considered useful in that they provide investors with an alternative means to evaluate the underlying performance of the Group’s operations.
Total net debt The Group uses the term total net debt which is considered useful in that it provides the Group’s aggregate net indebtedness to banks and other
financial institutions together with debt-like liabilities, notably operating leases.
Home Retail Group Annual Report 2010 67
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
4. FINANCIAL RISK MANAGEMENT
Financial risk factors
There are a number of financial risks and uncertainties which could impact the performance of the Group: market risk (foreign exchange and interest
rate risk), credit risk and liquidity risk. The Group operates a structured risk management process which identifies, evaluates and prioritises risks
and uncertainties.
The Group’s treasury function seeks to reduce exposures to foreign exchange, interest rate and other financial risks, and to ensure suffi cient liquidity
is available to meet foreseeable needs and to invest cash assets safely and profitably. Policies and procedures are subject to review and approval by
the Board of Directors as well as subject to internal audit review.
Market risk – foreign exchange risk The Group is subject to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the euro. Foreign
exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations.
To manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, entities in the Group use
forward contracts, transacted with external banks. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities
are denominated in a currency that is not the entity’s functional currency.
Group Treasury is responsible for managing the net position in each foreign currency by using external forward currency contracts. The key objective
of the Group’s foreign exchange transaction exposure management is to minimise potential volatility in profits which could arise as a result of exchange
rate fluctuations whilst maintaining an appropriate competitive stance.
To achieve the above objectives, the Group will initially seek to hedge up to 90% of any foreign exchange transaction risks expected to arise as a result
of uncertain, but probable, foreign currency cash flows up to 14 months forward. This subsequently increases to 100% as cash flows become certain.
For segment reporting purposes, each subsidiary designates contracts as fair value hedges or cash flow hedges, as appropriate. External foreign
exchange contracts are designated as hedges of foreign exchange risk on specific assets, liabilities or future transactions on a gross basis.
The cash flow hedges are intended to hedge the foreign currency exposure of future purchases of inventory. Weekly reports are made to management
to demonstrate that this objective is being achieved. The hedged cash flows are expected to occur up to 14 months into the future and will be
transferred to the consolidated income statement or inventory carrying value as applicable. The Group has foreign operations whose net assets are
exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group’s foreign operations is not hedged.
If on 27 February 2010, the last day of the financial year, sterling had been 5 cents, or approximately 3.3% (2009: approximately 3.5%), weaker/
stronger against the US dollar, with all other variables held constant, post-tax profit would have been £5.9m lower/higher (2009: £6.7m lower/higher)
mainly as a result of foreign exchange losses/gains arising on retranslation of US dollar denominated balances in subsidiary companies with a sterling
functional currency. Equity would have been £13.6m higher/lower (2009: £11.7m higher/lower), arising mainly from the revaluation of US dollar
forward currency contracts.
If on 27 February 2010, the last day of the financial year, sterling had been 5 cents, or approximately 4.5% (2009: approximately 4.4%), weaker/
stronger against the euro, with all other variables held constant, post-tax profit would have been £3.6m lower/higher (2009: £5.0m lower/higher),
mainly as a result of foreign exchange losses/gains on retranslation of sterling denominated cash balances in subsidiary companies with a euro
functional currency. Equity would have been £2.0m higher/lower (2009: £0.4m lower/higher), arising mainly from foreign exchange gains or losses
on retranslation of euro-denominated net assets held by subsidiary companies with a euro functional currency.
Market risk – cash flow and fair value interest rate risk Whilst the Group’s Financial Services business has gross instalment receivable balances on fixed interest rates and floating rates, the Group’s income
and operating cash flows are still considered to be substantially independent of changes in market interest rates.
The Group currently holds a net cash position and has undrawn borrowing facilities.
The Group’s interest rate risk arises from the variance in market rate when deposits are made. This risk is managed by combining overnight deposits
with term deposits. Interest rate risk also arises from any future long-term borrowings that it may incur. Borrowings issued at fixed rates expose the
Group to fair value interest rate risk. The principal objective of the Group’s interest rate risk management is to manage the trade-off between obtaining
the most beneficial effective rates of interest whilst minimising the impact of interest rate volatility on profits before tax. The aim will normally be to
manage interest rate risks by achieving a ratio of between 30% and 70% of net debt fi xed rate.
68 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
The Group had no borrowings at any point during the year.
Credit risk The Group has no significant concentrations of credit risk. It has policies in place to ensure that sales of financial services products are made to
customers with an appropriate credit history. Customers are credit scored using an external credit agency. Sales to retail customers are made
in cash, via major debit and credit cards or via in-house or third-party operated fi nancial products.
The Group’s exposure to credit risk with regard to treasury transactions is managed by dealing only with major banks and fi nancial institutions.
Dealing activity is closely controlled and counterparty positions are monitored on a regular basis.
Foreign exchange counterparty limits are set for each organisation on a scale based on credit rating and maturity period.
Group policy is that cash is only deposited with major banks and financial institutions that satisfy the Group’s credit requirements. These credit
requirements are assessed by reference to published credit ratings and the extent of UK Government investment, and are applied in combination to
determine both the maximum amount and the maximum duration of cash deposits. A minimum credit rating of at least AA- (Standard & Poor’s) or
Aa3 (Moody’s) is required, unless the UK Government has a significant investment, in which case a minimum credit rating of at least A+ (Standard
& Poor’s) or A1 (Moody’s) is required.
The above policy reflects revisions which have been made during the year, to take account of developments impacting the economic climate of
banks and financial institutions. Each deposit made by the Group during the year was compliant with the policy which was effective at the date
of the deposit. Where a term deposit has been made and the counterparty ratings have subsequently reduced, each relevant position has been
reviewed and any decision to maintain a position until the normal maturity date has been approved by the Board.
The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings as follows:
Cash and term deposits and current asset investment
Cash and Current Bank and institution Bank and institution short-term asset rating at rating at cash deposits investment (a) transaction date 27 February 2010 Maturity date £m £m
AAA AAA n/a
AA AA 10 May 2010
AA AA 28 April 2010
A+ A+ 3 March 2010
A+ A 22 March 2010
A+ A+ 26 April 2010
164.0 –
– 50.0
50.0 –
50.0 –
50.0 –
50.0 –
364.0 50.0
(a) The current asset investment comprises a term cash deposit invested for a period of six months.
Bank and institution Bank and institution rating at rating at transaction date 28 February 2009 Maturity date
AAA AAA n/a
AA AA 7 April 2009
AA A+ 15 April 2009
A+ A 7 April 2009
Cash and Current short-term asset
cash deposits investment (b) £m £m
134.4 –
25.0 –
– 75.0
50.0 –
209.4 75.0
(b) The current asset investment comprised a term cash deposit invested for a period of nine months.
Home Retail Group Annual Report 2010 69
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
4. FINANCIAL RISK MANAGEMENT CONTINUED Marked to market forward foreign exchange contracts
2010 2009 Bank and institution rating at year end £m £m
AA 12.5 6.7
AA- 8.3 14.1
A+ 20.5 22.9
A 2.4 8.4
A- 4.0 –
47.7 52.1
Of the £47.7m (2009: £52.1m) marked to market forward foreign exchange contracts held at the year-end, 39% (2009: 84%) will have matured within
three months of the balance sheet date.
Liquidity risk Home Retail Group manages its cash and committed borrowing facilities to maintain liquidity and funding flexibility. Liquidity is achieved through
arranging funding ahead of requirements and maintaining sufficient undrawn committed facilities to meet short-term needs. At 27 February 2010,
the Group had an undrawn committed borrowing facility available of £700m, £685m of which does not expire until 2013. This facility includes a
covenant related to adjusted benchmark earnings before interest, tax, depreciation, amortisation and rent. It is in place to enable the Group to fi nance
its working capital requirements and for general corporate purposes, should the need arise. The Group has not drawn down on the facility and has
been in compliance with the requirements of the covenant throughout the year.
The table below analyses the Group’s financial liabilities and derivative financial liabilities into relevant maturity groupings based on the remaining
period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash fl ows. Balances
due within 12 months equal their carrying balances, as the impact of discounting is not signifi cant.
At 27 February 2010
Less than 3 3-6 6-9 9-12
months months months months Total £m £m £m £m £m
Trade and other payables (599.2) – – – (599.2)
At 28 February 2009
Less than 3
months £m
3-6 months
£m
6-9 months
£m
9-12 months
£m Total
£m
Trade and other payables (574.1) – – – (574.1)
When a forward foreign exchange contract matures, this requires an outflow of the currency being sold and an inflow of the currency being bought.
The table below analyses the Group’s outflow and inflow from derivative financial instruments into relevant maturity groupings based on the
remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted
cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not signifi cant.
At 27 February 2010
Less than 3 3-6 6-9 9-12
months months months months Total £m £m £m £m £m
Forward foreign exchange contracts
– outfl ow (318.0) (256.0) (196.0) (99.6) (869.6)
– infl ow 336.6 271.9 204.9 103.9 917.3
70 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
Less than 3
months £m
3-6 months
£m
At 28 February 2009
6-9 months
£m
9-12 months
£m Total
£m
Forward foreign exchange contracts
– outfl ow
– inflow
(324.4)
368.2
(232.1)
239.7
(92.6)
93.0
(22.8)
23.1
(671.9)
724.0
Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal and efficient capital structure. In order to maintain or adjust the capital
structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares. The Group fi nances
its operations through a combination of retained profits, property leases and borrowing facilities where necessary. The Group has signifi cant liabilities
through its obligations to pay rents under property leases. The Group, in common with the credit rating agencies, treats its lease liabilities as debt
when evaluating financial risk and investment returns. The Group’s net debt varies significantly throughout the year due to trading seasonality, and
the position as at 27 February 2010 is set out in the analysis of net cash/(debt) on page 59.
Foreign currency
The principal exchange rates used were as follows: Average Closing
52 weeks 52 weeks ended ended
27 February 28 February 27 February 28 February 2010 2009 2010 2009
US dollar 1.59 1.77 1.52 1.43
Euro 1.13 1.22 1.12 1.13
Fair value estimation
Effective 1 March 2009, the Group adopted amendments to IFRS 7 for financial instruments that are measured in the balance sheet at fair value.
This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices)
or indirectly (that is, derived from prices); and
Level 3 – inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
The fair value of financial instruments traded in active markets is based on quoted market prices at the close of business on the balance sheet date.
A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service,
or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market
price used for financial assets held by the Group is the current bid price. These instruments are included in level 1 and comprise investments in quoted
managed indexed funds. As at 27 February 2010, these instruments, which are classified as available-for-sale financial assets, had a carrying value of
£12.5m (2009: £8.5m).
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using
valuation techniques. The valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity
specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. As at 27 February 2010,
these derivative instruments used for hedging purposes had a net carrying value of £47.7m (2009: £52.1m).
If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. The Group has no level 3
instruments to disclose.
Specific valuation techniques used to value financial instruments include:
� Quoted market prices; and
� The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date.
Home Retail Group Annual Report 2010 71
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
5. SEGMENTAL INFORMATION
The Board of Directors and Operating Board review the Group’s internal reporting in order to assess performance and allocate resources.
Management has determined the operating segments based on these reports, which reflect the distinct retail brands and different risks associated
with the different businesses. The Group is organised into three main business segments: Argos, Homebase and Financial Services together with
Central Activities. The Board of Directors and Operating Board assess the performance of the operating segments based on a combination of revenue
and benchmark operating profit. Benchmark operating profit is defined within note 3.
52 weeks ended 52 weeks ended 27 February 28 February 2010 2009 £m £m
Revenue
Argos 4,346.8 4,281.9
Homebase 1,571.9 1,513.2
Financial Services 104.0 102.3
Central Activities – –
Total segment revenue 6,022.7 5,897.4
Benchmark operating profi t/(loss)
Argos 266.2 303.6
Homebase 41.2 14.9
Financial Services 5.7 6.1
Central Activities (23.4) (24.2)
Total segment benchmark operating profi t 289.7 300.4
Benchmark interest 5.2 29.7
Share of post-tax results of joint ventures and associates (2.0) (2.4)
Benchmark profit before tax 292.9 327.7
Exceptional items – (694.0)
Demerger incentive schemes (7.7) (8.4)
Financing fair value remeasurements 2.7 (28.9)
Financing impact on retirement benefi t obligations (0.7) 11.2
Discount unwind on non-benchmark items (6.7) (1.8)
Onerous lease provision releases 12.5 –
Profit/(loss) before tax 293.0 (394.2)
Taxation (83.2) (18.9)
Profit/(loss) for the year attributable to equity holders of the Company 209.8 (413.1)
The result for Financial Services is after deducting funding costs of £3.5m (2009: £13.6m) (note 10).
72 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
2010 2009 £m £m
Segment assets
Argos 2,364.1 2,391.9
Homebase 896.4 914.7
Financial Services 453.6 455.8
Central Activities 37.1 40.2
Total segment assets 3,751.2 3,802.6
Tax assets 112.1 102.5
Current asset investments 50.0 75.0
Cash and cash equivalents 364.0 209.4
Total assets per balance sheet 4,277.3 4,189.5
Segment assets include goodwill and other intangible assets, property, plant and equipment, investment in joint ventures and associates,
inventories, trade and other receivables and other financial assets. Tax assets, current asset investments and cash and cash equivalents are
not allocated to segments.
Central Activities’ segment assets include £8.2m (2009: £8.4m) in respect of joint ventures and associates.
2010 2009 £m £m
Segment liabilities
Argos (695.4) (647.1)
Homebase (523.9) (547.8)
Financial Services (54.6) (61.4)
Central Activities (51.9) (58.6)
Total segment liabilities (1,325.8) (1,314.9)
Tax liabilities (60.0) (69.8)
Retirement benefi t obligations (24.9) (46.4)
Total liabilities per balance sheet (1,410.7) (1,431.1)
Segment liabilities include trade and other payables, provisions and other financial liabilities. Tax liabilities and retirement benefit obligations are not
allocated to segments.
52 weeks ended 27 February 2010
Financial Central Argos Homebase Services Activities Total
Other segment items Notes £m £m £m £m £m
Depreciation of property, plant and equipment 16 (65.0) (34.2) – (2.5) (101.7)
Amortisation of intangible assets 15 (25.7) (2.1) (0.6) – (28.4)
Impairment of fi xed assets 16 – – – – –
Impairment of goodwill 14 – – – – –
Share-based payment expense 29 (6.4) (3.6) (0.5) (9.9) (20.4)
Additions to property, plant and equipment 16 39.1 30.9 – 3.7 73.7
Additions to intangible assets 15 16.2 1.3 – – 17.5
The share-based payment expense within Central Activities includes £6.3m (2009: £8.6m) relating to demerger incentive schemes for all Group
employees which, together with national insurance costs of £1.4m (2009: £0.2m credit), total £7.7m (2009: £8.4m), and are excluded from benchmark
profit before tax.
Home Retail Group Annual Report 2010 73
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
5. SEGMENTAL INFORMATION CONTINUED 52 weeks ended 28 February 2009
Financial Central
Other segment items Notes Argos
£m Homebase
£m Services
£m Activities
£m Total
£m
Depreciation of property, plant and equipment 16 (79.8) (52.5) – (2.4) (134.7)
Amortisation of intangible assets 15 (22.6) (1.5) (0.6) – (24.7)
Impairment of fi xed assets 16 – (152.2) – – (152.2)
Impairment of goodwill 14 – (381.7) – – (381.7)
Share-based payment expense 29 (5.1) (2.8) (0.3) (13.1) (21.3)
Additions to property, plant and equipment 16 58.6 48.4 – 3.9 110.9
Additions to intangible assets 15 39.2 1.6 3.9 – 44.7
Geographical segments
The Group trades predominantly in the UK and the Republic of Ireland and consequently the majority of revenues, capital expenditure and segment
net assets arise there.
6. ANALYSIS OF REVENUE BY CATEGORY 52 weeks 52 weeks
ended ended 27 February 28 February
2010 2009 £m £m
Sale of goods
Provision of services by Financial Services
5,918.7
104.0
5,795.1
102.3
Total 6,022.7 5,897.4
7. NET OPERATING EXPENSES
Expenses by function
52 weeks ended 27 February 2010
Total£m
52 weeks ended 28 February 2009
Before Exceptional exceptional items items (note 9) Total
£m £m £m
Net operating expenses comprise:
Selling costs
Administrative costs
(1,396.8)
(275.8)
(1,444.4)
(287.2)
(301.7)
(392.3)
(1,746.1)
(679.5)
Total net operating expenses (1,672.6) (1,731.6) (694.0) (2,425.6)
52 weeks 52 weeks ended ended
27 February 28 February 2010 2009
Notes £m £m
Profit/(loss) before tax is stated after (charging)/crediting:
Operating lease rental expense
– Plant and equipment (9.1) (9.8)
– Property (370.0) (363.0)
Cost of inventories recognised as an expense in cost of sales (3,922.6) (3,742.8)
Write down of inventories (133.0) (131.0)
(Loss)/profit on sale of property, plant and equipment (2.5) 0.2
Depreciation of property, plant and equipment 16 (101.7) (134.7)
Amortisation of intangible assets 15 (28.4) (24.7)
Employee benefi t costs 8 (778.2) (776.9)
74 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
52 weeks 52 weeks ended ended
27 February 28 February 2010 2009
Auditors’ remuneration £m £m
Audit services:
Fees payable for the audit of the Company and the consolidated fi nancial statements (0.7) (0.8)
Other services:
Fees payable to the Company’s auditors and its associates for other services
– the audit of the Company’s subsidiaries pursuant to legislation (0.1) (0.1)
– services relating to taxation (0.1) (0.1)
– all other services (0.1) (0.2)
Total fees payable to PricewaterhouseCoopers LLP (1.0) (1.2)
The above disclosure is presented in accordance with SI 2005/2417, where audit fees in respect of the audit of the Company’s subsidiaries pursuant
to legislation are included within other services.
8. EMPLOYEE BENEFIT COSTS AND EMPLOYEE NUMBERS
Employee costs Notes
52 weeksended
27 February 2010
£m
52 weeks ended
28 February 2009
£m
Wages and salaries
Social security costs
Post-employment benefi ts
Share-based payments
24
29
(693.3)
(42.0)
(22.5)
(20.4)
(686.7)
(42.3)
(26.6)
(21.3)
(778.2) (776.9)
Average number of employees
52 weeks ended 27 February 2010
Number of Full time employees equivalent
52 weeks ended 28 February 2009
Number of Full time employees equivalent
Argos
Homebase
Financial Services
Central Activities
32,886
18,842
535
45
17,124
10,259
462
43
33,199
19,951
553
42
17,811
11,455
487
41
52,308 27,888 53,745 29,794
Key management compensation
52 weeksended
27 February 2010
£m
52 weeks ended
28 February 2009
£m
Short-term employee benefi ts
Post-employment benefi ts
Share-based payments
(6.0)
(1.3)
(4.8)
(2.8)
(1.4)
(3.7)
(12.1) (7.9)
Key management consists of the members of the Home Retail Group plc Board and the managing directors of both retail businesses.
Home Retail Group Annual Report 2010 75
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
9. EXCEPTIONAL ITEMS 52 weeks
ended27 February
2010£m
52 weeks ended
28 February 2009
£m
Goodwill impairment (a) – (381.7)
Store impairment charges (b) – (152.2)
Onerous lease provisions (c) – (117.3)
Costs relating to the post-acquisition integration of the Focus DIY stores (d) – (7.6)
Reorganisation and restructuring charges (e) – (35.2)
Exceptional items in operating profi t/(loss) – (694.0)
Tax on exceptional items in profit/(loss) before tax – 58.8
Exceptional corporation tax credit (f) – 27.4
Exceptional deferred tax charge (g) – (3.9)
Exceptional tax – 82.3
Exceptional loss for the year – (611.7)
(a) In the prior year management interpreted the economic environment and resulting retail downturn as an external indicator of impairment. As a result, and as required by IAS 36, the assets of the business were subject to an impairment review. Details of the goodwill value-in-use calculations can be found in note 14. For the 52 weeks to 28 February 2009, this resulted in an impairment charge in respect of the Homebase goodwill of £381.7m.
(b) As a result of the impairment review detailed above, certain assets were written down to their recoverable amount, being the higher of fair value less costs to sell and value-in-use. Value-in-use is calculated by discounting the expected cash flows from the asset at an appropriate discount rate for the risks associated with that asset. The growth rates and discount rates used were consistent with those used in the goodwill calculations, as disclosed in note 14. For the 52 weeks to 28 February 2009, this resulted in a net impairment charge in respect of the Homebase store portfolio of £152.2m.
(c) The onerous lease provisions cover potential liabilities for onerous lease contracts for stores that have either closed, or where projected future trading income is insufficient to cover the lower of exit cost or value-in-use. Where the value-in-use calculation is lower the provisions are based on the present value of expected future cash flows, discounted at a pre-tax rate of 5.8%, relating to rents, rates and other property costs to the end of the lease terms net of expected sublet income. For the 52 weeks to 28 February 2009, this resulted in an onerous lease charge in respect of the Homebase store portfolio of £117.3m.
(d) Represents costs relating to the post-acquisition integration of certain of the Focus DIY stores acquired in the 52 weeks to 1 March 2008.
(e) Represents costs relating to the reorganisation and restructuring programme during the 52 weeks to 28 February 2009. Actions taken included a streamlining of head office functions across all parts of the Group, restructuring of store-based staff and a consolidation of home delivery warehouses.
(f) Represents the recognition of a corporation tax credit arising from the revision and agreement of prior year tax computations and the completion of a periodic review of the tax risks associated with the Group’s overseas trading operations.
(g) The prior year deferred tax charge of £3.9m represented the reversal of a deferred tax asset created on IFRS transition.
76 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
10. NET FINANCING INCOME/(EXPENSE) 52 weeks
ended27 February
2010£m
52 weeks ended
28 February 2009
£m
Finance income:
Bank deposits and other interest 4.4 18.6
Expected return on retirement benefi t assets 34.6 45.1
Financing fair value remeasurements – net exchange gains 7.1 –
Total fi nance income 46.1 63.7
Finance expense:
Unwinding of discounts (a) (9.4) (4.3)
Financing fair value remeasurements – net exchange losses (4.4) (28.9)
Interest expense on retirement benefi t liabilities (35.3) (33.9)
Total fi nance expense (49.1) (67.1)
Less: finance expense charged to Financial Services cost of sales 3.5 13.6
Total net fi nance expense (45.6) (53.5)
Net fi nancing income 0.5 10.2
(a) Included within unwinding of discounts is a £6.7m (2009: £1.8m) charge relating to the discount unwind on exceptional onerous lease provisions.
11. TAXATION 52 weeks 52 weeks
ended ended 27 February 28 February
2010 2009 Analysis of charge in year £m £m
Current tax:
UK corporation tax (78.5) (94.5)
Double tax relief 1.7 1.6
Adjustments in respect of prior years 26.9 27.7
Total current UK tax charge (49.9) (65.2)
Overseas tax (2.8) (3.1)
Total current tax charge (52.7) (68.3)
Deferred tax:
Origination and reversal of temporary differences (11.2) 53.6
Adjustments in respect of prior years (19.3) (4.2)
Total tax charge in income statement (83.2) (18.9)
Home Retail Group Annual Report 2010 77
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
11. TAXATION CONTINUED 52 weeks 52 weeks
ended ended 27 February 28 February
2010 2009 Tax included in other comprehensive income £m £m
Cash fl ow hedges (4.6) (6.5)
Retirement benefi t obligations (1.8) 37.9
Share-based payments 0.5 1.1
Total tax (charge)/credit in other comprehensive income (5.9) 32.5
Factors affecting the tax charge
The effective tax rate for the year of 28.4% (2009: (4.8%)), is higher (2009: lower) than the standard rate of corporation tax in the UK of 28.0%
(2009: 28.0%). The differences are explained below:
52 weeks 52 weeks ended ended
27 February 28 February 2010 2009
£m £m
Profit/(loss) before tax 293.0 (394.2)
Profit/(loss) before tax multiplied by the standard rate of corporation tax in the UK (82.0) 110.4
Effects of:
Benchmark:
Expenses not deductible for tax purposes (10.7) (214.4)
Differences in effective tax rates on overseas earnings 1.3 0.2
Rate change impact – 0.3
Benchmark tax expense (91.4) (103.5)
Non-benchmark:
Tax credit on non-benchmark items 0.6 61.1
Non-benchmark tax credit in respect of prior years 7.6 23.5
Total tax charge in income statement (83.2) (18.9)
Factors that may affect future tax charges
In the foreseeable future, the Group’s tax charge will continue to be influenced by the profile of profits earned in the different tax jurisdictions within the UK
and the Republic of Ireland.
52 weeks 52 weeks ended ended
27 February 28 February 2010 2009
Exceptional tax (note 9) £m £m
Exceptional loss before tax – (694.0)
Exceptional loss before tax multiplied by the standard rate of corporation tax in the UK – 194.3
Effects of:
Expenses not deductible for tax purposes – (135.5)
Net exceptional tax credit in respect of prior years – 23.5
Exceptional tax credit – 82.3
78 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
12. DIVIDENDS 52 weeks 52 weeks
ended ended 27 February 28 February
2010 2009 Amounts recognised as distributions to equity holders £m £m
Final dividend of 10.0p per share (2009: 10.0p) for the prior year (85.7) (86.8)
Interim dividend of 4.7p per share (2009: 4.7p) for the current year (40.6) (40.4)
Ordinary dividends on equity shares (126.3) (127.2)
A final dividend in respect of the year ended 27 February 2010 of 10.0p per share, amounting to a total final dividend of £86.6m, has been proposed
by the Board of Directors, and is subject to approval by the shareholders at the Annual General Meeting. This would make a total dividend for the year
of 14.7p per share, amounting to £127.2m. The proposed dividend has not been included as a liability at 27 February 2010 in accordance with IAS 10
‘Events after the Balance Sheet Date’. It will be paid on 21 July 2010 to shareholders who are on the register of members at close of business on
21 May 2010. The Home Retail Group Employee Share Trust (‘EST’) has waived its entitlement to dividends in the amount of £2.7m (2009: £1.8m).
13. BASIC AND DILUTED EARNINGS PER SHARE (‘EPS’)
Basic earnings per share is calculated by dividing the profit attributable to the equity holders of the Company by the weighted average number of
ordinary shares in issue during the year, excluding ordinary shares held in Home Retail Group’s share trusts, net of vested but unexercised options and
share awards. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion
of all potential dilutive ordinary shares.
52 weeks 52 weeks ended ended
27 February 28 February 2010 2009
Earnings £m £m
Profit/(loss) after tax for the fi nancial year 209.8 (413.1)
Adjusted for:
Exceptional items – 694.0
Demerger incentive schemes 7.7 8.4
Financing fair value remeasurements (2.7) 28.9
Financing impact on retirement benefi t obligations 0.7 (11.2)
Discount unwind on non-benchmark items 6.7 1.8
Onerous lease provision releases (12.5) –
Attributable taxation (0.6) (61.1)
Non-benchmark tax credit in respect of prior years (7.6) (23.5)
Benchmark profit after tax for the fi nancial year 201.5 224.2
Weighted average number of shares millions millions
Number of ordinary shares for the purpose of basic EPS 862.9 866.6
Dilutive effect of share incentive awards 9.3 10.4
Number of ordinary shares for the purpose of diluted EPS 872.2 877.0
EPS pence pence
Basic EPS 24.3 (47.7)
Diluted EPS (a) 24.1 (47.7)
Basic benchmark EPS 23.4 25.9
Diluted benchmark EPS 23.1 25.6
(a) In accordance with IAS 33, as the Group made a loss after tax for the 52 weeks ended 28 February 2009, the effect of share incentive awards is anti-dilutive and as such diluted EPS equals basic EPS.
Home Retail Group Annual Report 2010 79
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
14. GOODWILL Argos Homebase Total
£m £m £m
Cost
At 1 March 2009 and 27 February 2010 1,152.3 770.4 1,922.7
Impairment
At 1 March 2009 and 27 February 2010 – (381.7) (381.7)
Net book value at 27 February 2010 1,152.3 388.7 1,541.0
Argos £m
Homebase £m
Total £m
Cost
At 2 March 2008 and 28 February 2009 1,152.3 770.4 1,922.7
Impairment
At 2 March 2008 – – –
Charge for the year – (381.7) (381.7)
At 28 February 2009 – (381.7) (381.7)
Net book value at 28 February 2009 1,152.3 388.7 1,541.0
Goodwill is allocated to cash-generating units (CGUs) at the level of each business segment. The recoverable amount of each of the business segments
is determined as being the higher of its fair value less costs to sell and its value-in-use. These calculations use cash flow projections based on fi nancial
plans approved by management looking forward five years. Cash flows are extrapolated using a long-term growth rate beyond the fi ve-year plan
period. There are a significant number of inter-connected assumptions that underpin the value-in-use calculations, however the key assumptions,
which management believes are appropriate for both retail businesses, are:
� a long-term growth rate of 2.5% (2009: 2.5%), which has been used to extrapolate cash flows beyond the five-year plan period;
� a post-tax discount rate of 8.5% (2009: 8.5%), which equates to a pre-tax rate of approximately 11.8% (2009: 11.8%), has been estimated taking
account of the specific risks inherent within the Group’s retail businesses and has been applied to the cash fl ow projections; and
� operating profits for the current year, of £266.2m for Argos (2009: £303.6m) and £41.2m for Homebase (2009: £14.9m), have been adjusted into
the plan period, incorporating assumptions in respect of sales growth, gross margin and operating costs.
As a result of the value-in-use calculations as at 27 February 2010 no impairment charge is required against the carrying value of either the Argos or
Homebase goodwill. Management believes that no reasonably possible change in any of the key assumptions detailed above would cause the carrying
value of the Argos or Homebase business segments to exceed their recoverable amounts.
80 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
15. OTHER INTANGIBLE ASSETS Computer software Brands Total
£m £m £m
Cost
At 1 March 2009 210.5 20.6 231.1
Additions 15.6 1.9 17.5
Disposals (15.4) – (15.4)
At 27 February 2010 210.7 22.5 233.2
Amortisation
At 1 March 2009 (127.3) (0.2) (127.5)
Charge for the year (26.2) (2.2) (28.4)
Disposals 15.4 – 15.4
At 27 February 2010 (138.1) (2.4) (140.5)
Net book value at 27 February 2010 72.6 20.1 92.7
Assets in the course of construction included above at 27 February 2010 11.8 – 11.8
Computer software Brands Total
£m £m £m
Cost
At 2 March 2008 186.7 – 186.7
Additions 24.1 20.6 44.7
Disposals (0.3) – (0.3)
At 28 February 2009 210.5 20.6 231.1
Amortisation
At 2 March 2008 (103.0) – (103.0)
Charge for the year (24.5) (0.2) (24.7)
Disposals 0.2 – 0.2
At 28 February 2009 (127.3) (0.2) (127.5)
Net book value at 28 February 2009 83.2 20.4 103.6
Assets in the course of construction included above at 28 February 2009 27.8 – 27.8
Home Retail Group Annual Report 2010 81
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
16. PROPERTY, PLANT AND EQUIPMENT
Freehold properties
£m
Leasehold properties
Long Short leasehold leasehold
£m £m
Plant & equipment
£m Total
£m
Cost
At 1 March 2009 108.2 1.6 336.8 1,058.4 1,505.0
Exchange differences – – – 0.2 0.2
Additions – 0.1 10.1 63.5 73.7
Disposals – – (8.9) (198.4) (207.3)
Transfers between categories 0.3 – (0.3) – –
At 27 February 2010 108.5 1.7 337.7 923.7 1,371.6
Depreciation and impairment losses
At 1 March 2009 (18.2) (0.3) (230.2) (697.0) (945.7)
Exchange differences – – (0.9) (1.1) (2.0)
Charge for the year (1.6) (0.1) (14.2) (85.8) (101.7)
Disposals – – 8.4 194.5 202.9
At 27 February 2010 (19.8) (0.4) (236.9) (589.4) (846.5)
Net book value at 27 February 2010 88.7 1.3 100.8 334.3 525.1
Assets in the course of construction included above at 27 February 2010 – – 3.0 28.7 31.7
Leasehold properties
Freehold properties
£m
Long leasehold
£m
Short leasehold
£m
Plant & equipment
£m Total
£m
Cost
At 2 March 2008 102.3 1.7 382.4 1,158.0 1,644.4
Exchange differences – – 3.0 7.4 10.4
Additions 7.0 – 22.0 81.9 110.9
Disposals (1.1) – (70.7) (188.9) (260.7)
Transfers between categories – (0.1) 0.1 – –
At 28 February 2009 108.2 1.6 336.8 1,058.4 1,505.0
Depreciation and impairment losses
At 2 March 2008 (10.4) (0.4) (200.7) (701.1) (912.6)
Exchange differences – – (0.6) (4.0) (4.6)
Charge for the year (1.3) – (18.1) (115.3) (134.7)
Impairment losses (7.6) – (81.0) (63.6) (152.2)
Disposals 1.1 – 70.3 187.0 258.4
Transfers between categories – 0.1 (0.1) – –
At 28 February 2009 (18.2) (0.3) (230.2) (697.0) (945.7)
Net book value at 28 February 2009 90.0 1.3 106.6 361.4 559.3
Assets in the course of construction included above at 28 February 2009 – – 4.8 44.1 48.9
Store assets are subject to impairment reviews whenever changes in events or circumstances indicate that an impairment may have occurred.
Store assets are written down to the higher of fair value less costs to sell and value-in-use. The key assumptions for the value-in-use calculations
are the same as those detailed for the goodwill impairment model in note 14. Management believes that no reasonably possible change in any of
these key assumptions would cause the carrying value of store assets to exceed their recoverable amounts.
82 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
17. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES 2010 2009
£m £m
At 1 March 2009 8.4 7.7
Exchange differences – 1.1
Share of loss after tax (0.7) (0.4)
Additions 0.5 –
At 27 February 2010 8.2 8.4
The Group’s interest in joint ventures consists of a 50% holding in Home Retail Group Personal Finance Limited, a company incorporated in England,
and its interest in associates consists of a 33% shareholding in Ogalas Limited (which trades as ‘home store + more’), a company incorporated in the
Republic of Ireland.
The Group’s share of the revenue of its joint venture for the 52 weeks ended 27 February 2010 is £2.9m (2009: £2.9m) and its share of the loss after tax
is £1.8m (2009: £2.0m). At 27 February 2010, the Group’s share of the net liabilities of its joint venture amounted to £14.5m (2009: £9.3m), consisting
of assets of £17.8m (2009: £25.7m) and liabilities of £32.3m (2009: £35.0m). No liability has been recognised in the Group’s balance sheet in respect
of the joint venture, but the Group’s share of the accumulated losses has been taken initially against the carrying value of the investment, then
subsequently against the carrying value of a loan made by the Group to the joint venture, which is reported within other financial assets in note 25.
The Group’s share of the revenue of its associate for the 52 weeks ended 27 February 2010 is £7.0m (2009: £5.9m) and its share of the loss after tax is
£0.2m (2009: £0.4m). At 27 February 2010, the Group’s share of the net assets of its associate amounted to £8.2m (2009: £8.4m), consisting of assets
of £9.3m (2009: £9.5m), which includes goodwill of £4.9m (2009: £4.9m), and liabilities of £1.1m (2009: £1.1m).
18. INVENTORIES 2010 2009
£m £m
Goods for resale 935.4 930.3
Home Retail Group Annual Report 2010 83
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
19. TRADE AND OTHER RECEIVABLES Current Non-current Current Non-current
2010 2010 2009 2009 £m £m £m £m
Trade receivables:
– Instalment receivables 497.2 – 491.1 0.2
– Other trade receivables 55.4 – 59.3 –
Less: provision for impairment of receivables
552.6
(70.8)
–
–
550.4
(70.1)
0.2
(0.2)
Other receivables
Prepayments and accrued income
481.8
57.3
43.0
–
4.0
–
480.3
56.4
57.0
–
3.4
–
582.1 4.0 593.7 3.4
The carrying values of current trade and other receivables are a reasonable approximation of their fair values due to their short-term nature. Long-term
receivables have been discounted where the time value of money is material. All receivables due after more than one year are due within fi ve years
from the balance sheet date. There is no concentration of credit risk with respect to trade receivables, as the Group has a broad customer base.
The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold
any collateral as security.
As at 27 February 2010, trade receivables of £74.0m (2009: £86.0m) were impaired. The amount of the provision was £70.8m as at 27 February 2010
(2009: £70.3m). The impaired receivables mainly relate to store card holder balances on customer accounts on which indications of possible default
have been identifi ed.
Movements in the provision for impairment of trade receivables are as follows:
£m
At 1 March 2008 (61.4)
Charge for the year (42.1)
Utilised 33.2
At 28 February 2009 (70.3)
Charge for the year (53.2)
Utilised 52.7
At 27 February 2010 (70.8)
As at 27 February 2010, trade receivables of £26.4m (2009: £28.7m) were past due but not impaired. These mainly relate to store card holders and
corporate customer receivable balances. The ageing analysis of these trade receivables is as follows: 2010 2009
£m £m
Less than 3 months 23.1 26.5
3 to 6 months 2.7 1.7
6 to 9 months 0.1 0.2
9 to 12 months 0.4 0.3
More than 12 months 0.1 –
26.4 28.7
The other classes within trade and other receivables do not contain impaired assets.
84 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
20. CURRENT ASSET INVESTMENTS 2010 2009
£m £m
Term cash deposit 50.0 75.0
The current asset investment comprises a term cash deposit invested for a period of six (2009: nine) months which is due to mature after the balance
sheet date on 10 May 2010 (2009: 15 April 2009). The interest rate on this deposit is 1.3% (2009: 6.1%).
21. CASH AND CASH EQUIVALENTS 2010 2009
£m £m
Cash at bank and in hand 364.0 209.4
The effective interest rate during the year ended 27 February 2010 for cash and cash equivalents was 0.9% (2009: 4.8%). Under the terms of a
re-insurance agreement, bank balances totalling £2.9m (2009: £2.9m) are the subject of custodial agreements and may not be withdrawn without
the consent of the re-insured. The Group has provided letters of credit totalling £12.5m (2009: £12.5m) to AIG Europe (UK) Limited as part of their
re-insurance agreement. These letters are secured by cash deposits.
22. TRADE AND OTHER PAYABLES Current Non-current Current Non-current
2010 2010 2009 2009 £m £m £m £m
Trade payables (511.5) – (486.0) –
Social security costs and other taxes (34.9) – (45.0) –
Accruals and deferred income (408.3) (62.5) (380.1) (64.0)
Other payables (87.7) – (88.1) –
(1,042.4) (62.5) (999.2) (64.0)
Trade and other payables are non-interest bearing and the fair values are not considered to differ materially from the recognised book values.
Long-term payables have been discounted where the time value of money is material.
Home Retail Group Annual Report 2010 85
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
23. PROVISIONS Onerous Insurance Restructuring
leases provisions provisions Other Total £m £m £m £m £m
At 1 March 2009 (173.4) (33.1) (33.6) (10.1) (250.2)
Charged to the income statement – (2.8) – – (2.8)
Released to the income statement 12.5 – 0.8 0.6 13.9
Transfer (2.3) – (0.8) 1.1 (2.0)
Utilised during the year 8.6 3.2 19.0 0.9 31.7
Discount unwind (9.3) – (0.2) (0.2) (9.7)
At 27 February 2010 (163.9) (32.7) (14.8) (7.7) (219.1)
2010 2009 Analysed as: £m £m
Current (20.8) (51.6)
Non-current (198.3) (198.6)
(219.1) (250.2)
The onerous lease provision covers potential liabilities for onerous lease contracts for stores that have either closed, or where projected future trading
revenue is insufficient to cover the lower of exit cost or value-in-use. Where the value-in-use calculation is lower, the provision is based on the present
value of expected future cash flows relating to rents, rates and other property costs to the end of the lease terms net of expected sublet income.
The majority of this provision is expected to be utilised over the period to 2017.
Provision is made at the year-end for the estimated costs of claims incurred by the Group’s captive insurance company but not settled at the balance
sheet date, including the costs of claims that have arisen but have not yet been reported to the Group. The estimated cost of claims includes expenses
to be incurred in settling claims. The majority of this provision is expected to be utilised over the period to 2014.
A number of organisational changes were undertaken to improve the operational efficiency of the Group and drive further cost productivity. Actions
taken included a streamlining of head office functions across all parts of the Group, restructuring of store-based staff and a consolidation of home
delivery warehouses. The majority of this remaining provision is expected to be utilised within one year.
Other provisions include legal claims and other sundry provisions. The majority of this provision is expected to be utilised within one year.
24. POST-EMPLOYMENT BENEFITS
The Group operates both defi ned benefit and defined contribution schemes. A defi ned benefit scheme is a pension plan that defines an amount of
pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
A defined contribution scheme is a pension plan under which both the Group and employees pay contributions into an independently administered
fund. The cost of providing these benefits, recognised in the income statement, comprises the amount of contributions payable to the schemes
in respect of the year.
Pension arrangements for UK employees are operated principally through a defi ned benefit scheme (the Home Retail Group Pension Scheme) and
a defined contribution scheme (the Home Retail Group Stakeholder Pension Scheme). In other countries, benefits are determined in accordance
with local practice and regulations and funding is provided accordingly.
Defi ned benefi t schemes
The Home Retail Group Pension Scheme The scheme has rules which specify the benefits to be paid and are financed accordingly with assets being held in independently administered funds.
A full actuarial valuation of this scheme is carried out every three years with interim reviews in the intervening years. The latest full actuarial valuation
of the scheme was carried out as at 31 March 2009 by independent, qualified actuaries, Towers Watson, using the projected unit method and resulted
in a deficit of £102m. The next full actuarial valuation of the scheme will be carried out as at 31 March 2012.
86 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
IAS 19 valuations The valuations used for IAS 19 have been based on the most recent actuarial funding valuations and have been updated by Towers Watson to take
account of the requirements of IAS 19 in order to assess the liabilities of the schemes at 27 February 2010 and 28 February 2009.
The movements during the year in the net (obligation)/asset recognised in the balance sheet were as follows: 2010 2009
£m £m
At 1 March 2009 (46.4) 83.7
Total charge recognised in the consolidated income statement (16.4) (8.6)
Actuarial gain/(loss) recognised in the consolidated statement of comprehensive income 6.6 (135.4)
Contributions paid 31.3 13.9
At 27 February 2010 (24.9) (46.4)
During the year, the Group has paid contributions totalling £31.3m (2009: £13.9m) to the Home Retail Group defi ned benefit pension plans including
£17.3m as part of the deficit recovery plan and increased employer contribution rate agreed with the scheme trustees following the completion of the
31 March 2009 actuarial valuation. The estimated amount of contributions expected to be paid by the Group during the next financial year is £28m,
including £12m as part of the deficit recovery plan.
The amounts recognised in the consolidated balance sheet are determined as follows: 2010 2009
£m £m
Fair value of scheme assets 667.7 504.4
Present value of funded scheme liabilities (679.2) (539.8)
Deficit in the funded scheme (11.5) (35.4)
Present value of unfunded pension arrangements (13.4) (11.0)
Retirement benefit obligation recognised in the balance sheet (24.9) (46.4)
The amounts recognised in the consolidated income statement were as follows: 2010 2009
£m £m
Current service cost (15.8) (20.4)
Curtailment 0.1 0.6
Discount unwind on scheme liabilities (35.3) (33.9)
Expected return on scheme assets 34.6 45.1
Total charge to consolidated income statement (16.4) (8.6)
The current service cost includes £1.4m (2009: £1.8m) in respect of unfunded pension arrangements.
The charge is recognised in the following line items in the consolidated income statement: 2010 2009
£m £m
Administrative costs (15.7) (19.8)
Finance expense (note 10) (35.3) (33.9)
Finance income (note 10) 34.6 45.1
Total charge to consolidated income statement (16.4) (8.6)
Home Retail Group Annual Report 2010 87
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
24. POST-EMPLOYMENT BENEFITS CONTINUED The principal actuarial assumptions used to calculate the present value of the defi ned benefit obligations were as follows:
2010 2009 % %
Rate of infl ation 3.6 3.4
Rate of increase for salaries 4.6 4.7
Rate of increase for pensions in payment 3.5 3.3
Rate of increase for deferred pensions 3.6 3.4
Discount rate 6.0 6.5
The impact of changing material assumptions is as follows: 2010 2009
Increase/ decrease in
assumptions
Indicative effect
on scheme liabilities
£m
Indicative effect
on annual service cost £m
Indicative effect
on scheme liabilities
£m
Indicative effect
on annual service cost
£m
Rate of infl ation
Rate of increase for salaries
Rate of increase for pensions in payment
Rate of increase for deferred pensions
Discount rate
Life expectancy
0.1%
0.1%
0.1%
0.1%
0.1%
1 year
+/- 13.3
+/- 2.5
+/- 7.3
+/- 3.0
-/+ 14.6
+/- 19.9
+/- 0.6
+/- 0.2
+/- 0.3
+/- 0.1
-/+ 0.6
+/- 0.7
+/- 9.4
+/- 2.2
+/- 5.0
+/- 2.8
-/+ 11.0
+/- 14.9
+/- 0.6
+/- 0.2
+/- 0.2
+/- 0.1
-/+ 0.5
+/- 0.7
The discount rate is based on market yields on high-quality corporate bonds of equivalent currency and term to the defi ned benefi t obligation.
The IAS 19 valuation assumes that mortality will be in line with ‘PA92 Series’ tables with ‘medium cohort’ projections for mortality improvements up
to the current year. The allowance for mortality improvements beyond the current year is based on medium cohort improvements with a 1% fl oor.
Previously it had been assumed that the probability of death occurring at each age would decrease by approximately 0.25% each year. The effect of
this change to the mortality assumption has been to add between 1 to 1.5 years to the average expectation of life on retirement.
Based on these assumptions the average expectation of life on retirement in normal health is assumed to be:
� 23.0 years at age 65 for a male currently aged 65 (2009: 22.5)
� 25.4 years at age 65 for a female currently aged 65 (2009: 25.6)
� 24.4 years at age 65 for a male currently aged 50 (2009: 23.9)
� 26.8 years at age 65 for a female currently aged 50 (2009: 27.0)
The assets of the Home Retail Group Pension Scheme and the expected rates of return are summarised as follows:
2010 2009
Fair Percentageof scheme
Expected long-term
rate of Fair Percentage of scheme
Expected long-term
rate of value
£m assets
% return
% pa value
£m assets
% return
% pa
Market value of scheme assets:
Equities 307.5 46 8.1 302.3 60 8.4
Fixed interest securities 163.3 24 5.4 190.4 38 5.4
Fund of hedge funds 94.3 14 6.7 – – –
Senior secured loans 30.5 5 6.0 – – –
Property 38.1 6 7.6 – – –
Cash and net current assets 34.0 5 4.4 11.7 2 4.5
667.7 100 6.9 504.4 100 7.2
88 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
The overall expected rate of return on scheme assets is the weighted average of the best estimate of the individual asset categories and their inherent
expected rates of return.
Changes in the present value of the defi ned benefit liabilities are as follows: 2010 2009
£m £m
Opening defi ned benefi t liabilities (550.8) (562.8)
Current service cost (15.8) (20.4)
Curtailment 1.4 0.6
Interest cost (35.3) (33.9)
Contributions paid by employees (6.1) (6.8)
Actuarial (loss)/gain on liabilities recognised in the statement of comprehensive income (101.1) 58.9
Benefi ts paid 15.1 13.6
Closing defi ned benefi t liabilities (692.6) (550.8)
Changes in the market value of the scheme assets are as follows: 2010 2009
£m £m
Opening market value of scheme assets 504.4 646.5
Settlement/curtailment (1.3) –
Expected return 34.6 45.1
Actuarial gain/(loss) on assets recognised in the statement of comprehensive income 107.7 (194.3)
Contributions paid by the Group 31.3 13.9
Contributions paid by employees 6.1 6.8
Benefi ts paid (15.1) (13.6)
Closing market value of scheme assets 667.7 504.4
Cumulative actuarial loss included in the statement of comprehensive income (94.8) (101.4)
The actual return on scheme assets was a gain of £142.3m (2009: £149.2m loss).
The Group has in place arrangements which secure unfunded pension benefit arrangements for certain directors and senior managers by granting
charges to an independent trustee over independently managed portfolios of marketable securities owned by the Group. The amount of assets
charged in this way is adjusted annually to keep the ratio of assets charged to the discounted value of the accrued benefits secured in this way as close
as possible to the corresponding ratio in the Home Retail Group Pension Scheme. The total value of the assets charged in this way at 27 February 2010
was £12.5m (2009: £8.5m). Further details of the pension arrangements for directors appear in the audited part of the directors’ remuneration report.
History of experience gains and losses: 2010 2009 2008 2007 2006
£m £m £m £m £m
Present value of defi ned benefi t liabilities (692.6) (550.8) (562.8) (628.0) (579.1)
Fair value of scheme assets 667.7 504.4 646.5 637.3 604.6
Net (deficit)/surplus on the scheme (24.9) (46.4) 83.7 9.3 25.5
Experience (loss)/gain on scheme liabilities (12.1) 1.5 (4.3) 20.8 0.2
Percentage of scheme liabilities (1.7%) 0.3% (0.8%) 3.3% 0.0%
Experience gain/(loss) on scheme assets 107.7 (194.3) (44.8) (18.0) 70.9
Percentage of scheme assets 16.1% (38.5%) (6.9%) (2.8%) 11.7%
Defined contribution schemes
The pension cost represents contributions payable by the Group to the defined contribution schemes and amounted to £6.8m (2009: £6.8m).
Contributions totalling £0.7m (2009: £0.3m) were payable to the schemes at 27 February 2010 and are included within trade and other payables.
Home Retail Group Annual Report 2010 89
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
25. OTHER FINANCIAL ASSETS AND LIABILITIES Current Non-current Current Non-current 2010 2010 2009 2009 £m £m £m £m
Other fi nancial assets
Forward foreign exchange contracts – cash fl ow hedges 42.3 – 25.5 –
Forward foreign exchange contracts – fair value hedges 7.2 – 28.2 –
Available-for-sale fi nancial assets – 13.2 – 9.2
Total other fi nancial assets 49.5 13.2 53.7 9.2
Other fi nancial liabilities
Forward foreign exchange contracts – cash fl ow hedges (1.8) – (1.5) –
Total other fi nancial liabilities (1.8) – (1.5) –
Forward foreign exchange contracts
The forward foreign exchange contracts are intended to hedge the foreign currency exposures of future purchases of inventory. The hedged cash fl ows
are expected to occur up to one year into the future.
Gains and losses recognised in the hedging reserve in shareholders’ equity on forward foreign exchange contracts as at 27 February 2010 and
28 February 2009 will be released within one year from the balance sheet date. The notional principal amounts of the outstanding forward foreign
exchange contracts at 27 February 2010 were £869.6m (2009: £671.9m). The fair value of forward foreign exchange contracts is determined using
quoted forward exchange rates at the balance sheet date.
Available-for-sale fi nancial assets
Available-for-sale financial assets are measured at fair value or, where fair value cannot be reliably measured, at cost less impairment.
26. DEFERRED TAX 2010 2009
£m £m
The movements on the net deferred tax account are as follows:
At 1 March 2009 61.1 (20.8)
Income statement (charge)/credit (note 11) (30.5) 49.4
Exchange differences 0.6 –
Tax on pensions and share schemes (charged)/credited to equity (7.4) 32.5
At 27 February 2010 23.8 61.1
The deferred tax amounts recognised are as follows:
Deferred tax assets:
– Deferred tax asset to be recovered after more than one year 61.6 87.4
Deferred tax liabilities:
– Deferred tax liability to be settled after more than one year (37.8) (26.3)
Net deferred tax asset 23.8 61.1
90 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax
jurisdiction, is as follows: Accelerated
Asset tax provisions depreciation Other Total
Deferred tax assets £m £m £m £m
At 2 March 2008 34.1 – 12.5 46.6
Income statement credit/(charge) 28.5 – (12.0) 16.5
Tax credited to equity 1.1 – 37.9 39.0
Transfer from deferred tax liabilities 0.1 0.7 (15.5) (14.7)
At 28 February 2009 63.8 0.7 22.9 87.4
At 1 March 2009 63.8 0.7 22.9 87.4
Income statement charge (12.5) (8.4) (10.4) (31.3)
Tax charged to equity (1.0) – (1.8) (2.8)
Transfer to deferred tax liabilities – 7.7 – 7.7
Exchange differences 0.6 – – 0.6
At 27 February 2010 50.9 – 10.7 61.6
Deferred tax liabilities
Property valuations
£m
Accelerated tax
depreciation £m
Other £m
Total £m
At 2 March 2008 (21.8) (30.1) (15.5) (67.4)
Income statement credit 2.1 30.8 – 32.9
Tax charged to equity – – (6.5) (6.5)
Transfer to deferred tax assets – (0.7) 15.4 14.7
At 28 February 2009 (19.7) – (6.6) (26.3)
At 1 March 2009 (19.7) – (6.6) (26.3)
Income statement credit 0.8 – – 0.8
Tax charged to equity – – (4.6) (4.6)
Transfer from deferred tax assets – (7.7) – (7.7)
At 27 February 2010 (18.9) (7.7) (11.2) (37.8)
Deferred tax assets are recognised for tax loss carry-forwards and other temporary differences to the extent that the realisation of the related tax
benefit through the future taxable profits is probable.
The Group has not recognised deferred tax assets of £1.1m (2009: £1.1m) in respect of all non-trading losses, which total £3.9m (2009: £3.9m),
that can be carried forward against future taxable income. In addition, the Group has not recognised deferred tax assets of £32.2m (2009: £32.2m)
in respect of capital losses, which total £114.9m (2009: £114.9m), that can be carried forward against future taxable gains. These losses are
available indefi nitely.
27. SHARE CAPITAL 2010 2009
Number 2010 Number 2009 of shares £m of shares £m
Ordinary share capital of 10p each
Authorised 2,000,500,000 200.1 2,000,500,000 200.1
Allotted, called-up and fully paid 877,445,001 87.7 877,445,001 87.7
Home Retail Group Annual Report 2010 91
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
28. NOTES TO THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Merger reserve
The merger reserve arose on the demerger of the Group from GUS plc during 2006.
Other reserves Treasury Hedging Translation Total other
shares reserve reserve reserves £m £m £m £m
Balance at 1 March 2009 (27.1) 17.4 45.1 35.4
Other comprehensive income – 11.9 (3.6) 8.3
Net movement in own shares 2.9 – – 2.9
Balance at 27 February 2010 (24.2) 29.3 41.5 46.6
Treasury shares
£m
Hedging reserve
£m
Translation reserve
£m
Total other reserves
£m
Balance at 2 March 2008
Other comprehensive income
Net movement in own shares
(6.0)
–
(21.1)
0.9
16.5
–
9.0
36.1
–
3.9
52.6
(21.1)
Balance at 28 February 2009 (27.1) 17.4 45.1 35.4
Net movement in own shares of £2.9m (2009: (£21.1m)) represents the purchase, and subsequent utilisation or sale, of shares for the purpose of
satisfying obligations arising from the Group’s share-based compensation schemes. Shares in Home Retail Group plc are held in the following trusts
which have been established since demerger:
Home Retail Group Employee Share Trust (‘EST’) The EST provides for the issue of shares to Group employees under share option and share grant schemes (with the exception of the Share Incentive
Plan). At 27 February 2010, the EST held 13,899,537 shares with a market value of £35.4m. The shares in the EST are held within equity of the Group
at a cost of £20.0m. During the year 3,112,268 shares were acquired for a cost of £9.4m. 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 Group employees under the Share Incentive Plan.
At 27 February 2010, the Trust held 1,007,291 shares with a market value of £2.6m. These shares are held within equity of the Group at a cost
of £4.2m. No additional shares were purchased during the year.
29. SHARE-BASED PAYMENT ARRANGEMENTS
The Group operates a number of share-based payment schemes. These can be analysed into three categories, being those rolled over from old GUS plc
schemes as a result of the demerger from GUS on 11 October 2006, incentive schemes specifically related to the demerger (‘Demerger incentive
schemes’) and new Home Retail Group plc schemes subsequent to the demerger.
Prior to the demerger, a number of Home Retail Group plc employees participated in old GUS plc share-based payment schemes. As part of the
demerger, some of these schemes had early vesting with vesting occurring prior to completion of the demerger, while others were modified by rolling
them over to become Home Retail Group plc share-based payment schemes. Specifically, all executive share option schemes in operation following
the demerger from GUS plc were rolled over from a GUS plc share option arrangement to a Home Retail Group plc arrangement. Furthermore, certain
share grant schemes (namely the co-investment plan and the performance share plan) which originally operated as GUS plc share grant schemes,
were rolled over as Home Retail Group plc share grant schemes. Under IFRS 2, these changes were treated as modifications to the schemes and hence
revalued as at the demerger date.
Summary of the total cost of share-based compensation in respect of ordinary shares in the Company 52 weeks 52 weeks
ended ended 27 February 28 February
2010 2009 £m £m
Share option awards (5.0) (7.4)
Share grant awards (15.4) (13.9)
Total expense recognised (all equity-settled) (20.4) (21.3)
92 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
The total share-based payments charge of £20.4m (2009: £21.3m) includes £6.3m (2009: £8.6m) relating to demerger incentive schemes which,
together with national insurance costs of £1.4m (2009: £0.2m credit), total £7.7m (2009: £8.4m), and are excluded from benchmark profit before tax.
Summary of share option and share award arrangements
During the year ended 27 February 2010, Home Retail Group plc had a number of share option and share award arrangements for its employees,
all of which are equity-settled. Details of these arrangements are as follows:
Rolled over from old GUS plc schemes
Share options The 1998 approved and non-approved executive share option schemes. Under these schemes, the exercise price of granted options was equal
to the market price of the shares over the three dealing days preceding grant. The options became exercisable three years from the grant date, subject
to the Group’s EPS compound annual growth exceeding compound annual retail price inflation by 4% per annum over a continuous three-year period
and the employee completing three years’ service. The EPS growth target is not a market-based performance condition as defined by IFRS 2. The options
have a maximum term of 10 years from grant. No new options have been granted under these schemes since demerger.
Share awards The (ex-GUS plc) performance share plan. Awards made under this plan normally vested three years after the date of grant for nil consideration,
with the percentage of the award distributed to participants determined by ranking total shareholder return relative to a comparator group, which
is considered a market-based performance condition under IFRS 2. Awards under this plan were valued using a Monte Carlo simulation with historic
volatilities and correlations measured over the three-year period preceding valuation. All awards under this plan have now vested and have been
distributed to participants.
The (ex-GUS plc) co-investment plan permitted the awards of matching shares to participants, conditional on the achievement of specifi ed
performance targets related to the benchmark operating profit of the Group. The matching shares are a nil consideration option and have been
classified as an award of shares because the nature of the award is the same. The grant date was the start of the financial year in which performance
was assessed, which was one year before the quantity of shares awarded was determined. Awards made under this plan normally vest after a four-year
period for nil consideration, and participants have a further two years to exercise their awards. The underlying value of the award was known at grant
date, subject to the outcome of the performance condition.
Demerger incentive schemes
Share awards The performance share plan. Awards made under this plan normally vested three years after the date of grant, at which time shares were distributed
to participants for nil consideration. All awards under this plan have now vested.
The re-investment plan is a three-part scheme running over three, four and five years, under which participants were awarded matching shares.
The matching shares are a nil consideration option and have been classified as an award of shares because the nature of the award is the same.
The percentage of the award distributed to participants is conditional upon continued service, ranking of total shareholder return relative to a
comparator group and the achievement of specified performance targets related to the return on invested capital of the Group. The total shareholder
return performance condition is considered a market-based performance condition under IFRS 2. Awards under this plan have been valued using a
Monte Carlo simulation with historic volatilities and correlations measured over the three-year period preceding valuation. Awards under the fi rst part
of this scheme, running over three years, have now vested and have been exercised.
The long-term incentive plan. Under the long-term incentive plan a one-off grant of matching shares was made to participants at demerger, based
upon the operating profit performance of the Group over the three years prior to demerger. The matching shares were a nil consideration option and
were classified as an award of shares because the nature of the award was the same. The quantity of shares was determined at demerger, following
assessment of performance, and awarded in June 2007. The awards made under this plan normally vested two years later, and participants have a
further two years to exercise their awards. All awards under this plan have now vested.
The share incentive plan was a one-off free share grant to all employees at the time of the demerger. The shares were acquired by a trust on behalf
of participants and will normally be forfeited if a participant’s employment with the Group ceases within three years of the grant date. All awards
under this plan have now vested after this initial three-year period and participants can now exercise their awards, however awards can be exercised
free of tax after a further two years. The shares continue to be held by the trust until the awards are either exercised by participants or lapse.
Home Retail Group Annual Report 2010 93
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
29. SHARE-BASED PAYMENT ARRANGEMENTS CONTINUED New Home Retail Group plc schemes
Share options The Home Retail Group plc Sharesave Plan permits the grant to employees of options over the Company’s shares linked to a building society
save-as-you-earn contract for a term of three or five years with contributions from employees of between £5 and £250 per month. Options are
normally capable of being exercised at the end of the three or five-year period at an exercise price calculated at a 20% discount to market price
over the three dealing days preceding invitation to participants. Options must be exercised within six months of the end of the three or fi ve-year
save-as-you-earn contract.
Share awards The performance share plan. Awards made under this plan will normally vest three years after the date of grant for nil consideration, with the
percentage of the award distributed to participants determined by ranking total shareholder return relative to a comparator group, which is considered
a market-based performance condition under IFRS 2. Awards under this plan have been valued using a Monte Carlo simulation with historic volatilities
and correlations measured over the three-year period preceding valuation.
The co-investment plan permitted the awards of matching shares to participants. The matching shares are a nil consideration option and have been
classified as an award of shares because the nature of the award is the same. Awards made under this plan normally vest after a four-year period for
nil consideration, and participants have a further two years to exercise their awards. Vesting is normally conditional on the achievement of specifi ed
performance targets in two stages. The grant date was the start of the financial year in which the first performance stage (the achievement of specifi ed
performance targets related to the benchmark operating profit of the Group) was assessed, which was one year before the quantity of shares awarded
is determined. No new awards were granted under this plan during the year.
The deferred bonus plan permits the award of a deferred bonus that will be converted into a conditional award of shares and will operate for the
year ended 27 February 2010 only. The award is based on performance against a benchmark PBT and a Group net cash target and will be made at the
maximum; 150% of salary. The award will be made in May 2010. The grant date is the start of the financial year in which the performance stage is
assessed, which is one year before the shares are awarded. Subject to continued employment and satisfactory Group performance for the year in
which performance is measured, the shares will vest and be released on a phased basis, for nil consideration. 1/6 will vest on the fi rst anniversary
of the award, 2/6 on the second and 3/6 on the third anniversary.
The deferred share plan is a discretionary one-off award of deferred shares. This award has no performance conditions, other than a level of personal
performance. Awards made under this plan will vest on a phased basis for nil consideration; being 1/6 one year after the award is made, 2/6 two years
after the award is made and 3/6 three years after the award is made.
Information relating to share option valuation techniques
The weighted average fair value of options granted during the year over the Company’s shares under the Home Retail Group plc Sharesave Plan,
determined using the Black-Scholes option pricing model, was £0.44 (2009: £0.55) per option. The significant inputs into the option pricing model
were as follows:
52 weeks 52 weeks ended ended
27 February 28 February 2010 2009
Weighted average:
Share price on grant date (£) 2.65 2.38
Exercise price (£) 2.00 1.90
Expected volatility 46.3% 42.4%
Expected dividend yield 5.5% 6.2%
Risk free interest rate 3.1% 4.4%
Expected option life to exercise 3.6 years 3.7 years
Expected volatility is a measure of expected fluctuations in the share price over the expected life of an option. For each financial year the measure
of volatility used by the Company in its pricing model has been calculated by using implied volatility from market quoted prices of traded options
over the Company’s shares.
94 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
Reconciliation of movement in the number of share options 52 weeks ended 52 weeks ended
27 February 2010 28 February 2009
Weighted Weighted average average
Number of exercise price Number of exercise price options £ options £
Outstanding at beginning of year 23,247,239 2.71 17,160,056 3.76
Granted 3,817,037 2.00 14,266,007 1.90
Forfeited (6,629,823) 3.11 (7,828,759) 3.48
Exercised (112,285) 1.91 (758) 1.90
Expired (658,757) 3.70 (349,307) 3.73
Outstanding at year-end 19,663,411 2.41 23,247,239 2.71
Exercisable at year-end 3,842,182 3.57 4,733,476 3.57
The weighted average share price for share options exercised during the year was £2.93 (2009: £2.14).
Share options outstanding at the end of the year
Share options at the end of the year had the following exercise prices and remaining contractual lives:
As at 27 February 2010
Weighted Weighted average remaining lives average
Range of exercise prices Number of exercise price Expected Contractual £ options £ years years
1.00 – 1.99 10,608,251 1.90 2.3 2.8
2.00 – 2.99 3,582,773 2.01 3.1 3.6
3.00 – 3.99 5,472,387 3.66 0.4 4.1
As at 28 February 2009
Range of exercise prices £
Number of options
Weighted average
exercise price £
Weighted average remaining lives
Expected Contractual years years
1.00 – 1.99 12,984,269 1.90 3.3 3.8
2.00 – 2.99 34,097 2.79 – 3.9
3.00 – 3.99 10,228,873 3.74 1.1 5.8
Information relating to share award valuation techniques
The value of the awards is determined as the observed market closing share price on the date awarded grants are issued to participants. For the
co-investment plan, this occurs after the first year of performance is assessed. The performance share plan’s and the re-investment plan’s market-
based performance condition is included in the fair value measurement on grant date and is not revised for actual performance.
All of the share awards are equity-settled. Under the share awards, the participants have an entitlement to either dividend equivalents or dividend
distributions from issue date until point of vesting. The observed market share price on the day of valuation is considered inclusive of future
dividend distributions.
There were 5,646,908 ordinary share awards (2009: 7,609,354) granted during the year with a weighted average fair value of £1.13 (2009: £1.84).
Home Retail Group Annual Report 2010 95
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
30. OPERATING LEASES 2010 2009
£m £m
Future aggregate minimum lease payments under non-cancellable operating leases are as follows:
Less than one year (380.1) (393.0)
Between one and fi ve years (1,382.3) (1,394.3)
More than fi ve years (2,315.8) (2,537.0)
Total operating leases (4,078.2) (4,324.3)
The Group leases various retail stores, offices and warehouses under non-cancellable operating lease agreements. The leases have varying terms,
escalation clauses, contingent rentals and renewal rights.
31. COMMITMENTS 2010 2009
£m £m
Capital expenditure for which contracts have been placed:
Property, plant and equipment (7.5) (17.6)
Intangible assets (0.9) (4.0)
Total commitments (8.4) (21.6)
32. CONTINGENT LIABILITIES
There are a number of contingent liabilities that arise in the normal course of business, which if realised, are not expected to result in a material liability
to the Group.
33. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS 52 weeks ended 52 weeks ended
27 February 28 February 2010 2009
Cash generated from operations £m £m
Profit/(loss) before tax 293.0 (394.2)
Adjustments for:
Share of post-tax losses of joint ventures and associates 2.0 2.4
Net fi nancing income (0.5) (10.2)
Operating profi t/(loss) 294.5 (402.0)
Loss/(profit) on sale of property, plant and equipment 2.5 (0.2)
Depreciation and amortisation 130.1 159.4
Impairment losses – 533.9
Finance expense charged to Financial Services cost of sales 3.5 13.6
(Increase)/decrease in inventories (5.1) 74.5
Decrease in receivables 11.5 12.6
Increase/(decrease) in payables 63.2 (97.3)
Movement in working capital 69.6 (10.2)
(Decrease)/increase in provisions (40.8) 146.9
Movement in retirement benefi ts (15.6) 5.9
Share-based payment expense (net of dividend equivalent payments) 17.2 21.1
Cash generated from operations 461.0 468.4
96 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the financial statements continued For the 52 weeks ended 27 February 2010
34. RELATED PARTIES
The ultimate parent company of the Group is Home Retail Group plc. The principal subsidiary and associate undertakings at 27 February 2010 are
shown in note 36. Transactions between Home Retail Group plc and its subsidiaries have been eliminated on consolidation and are not disclosed in
this note. Transactions carried out with related parties in the normal course of business are summarised below:
Joint Venture
The Group lent £5.1m (2009: £2.0m) to and invested £0.5m (2009: £nil) in a joint venture, Home Retail Group Personal Finance Limited. The total loan
of £15.2m (2009: £10.1m) was outstanding as at 27 February 2010.
Key management personnel
Remuneration of key management personnel is disclosed in note 8. During the year, there were no material transactions or balances between the
Group and its key management personnel or members of their close families.
35. POST BALANCE SHEET EVENTS
On 28 April 2010, the Group announced a share buy-back programme. The Board anticipates that over the financial year to February 2011, up to
£150m of capital may be returned to shareholders in this manner, with this being funded out of the Group’s existing cash resources.
36. PRINCIPAL SUBSIDIARY, JOINT VENTURE AND ASSOCIATED UNDERTAKINGS Country of Percentage of
Description incorporation ordinary shares held
Home Retail Group (UK) Limited* Group holding company England 100
Argos Limited General merchandise retailing England 100
Argos Distributors (Ireland) Limited General merchandise retailing Republic of Ireland 100
Homebase Limited Home enhancement retailing England 100
Homebase House and Garden Centre Limited Home enhancement retailing Republic of Ireland 100
Hampden Group Limited Home enhancement retailing Northern Ireland 100
Home Retail Group Card Services Limited Financial services England 100
ARG Personal Loans Limited Financial services England 100
Argos Business Solutions Limited Financial services England 100
Home Retail Group Insurance Services Limited Financial services England 100
Home Retail Group (Hong Kong) Limited Product sourcing for the Hong Kong 100
Home Retail Group companies
* Held directly by the Parent Company
Details of interests in joint ventures and associated undertakings are given within note 17.
Home Retail Group Annual Report 2010 97
FINANCIAL STATEMENTS
Independent auditors’ report to the members of Home Retail Group plc – Parent
We have audited the Parent Company financial statements of Home Retail Group plc for the 52 weeks ended 27 February 2010 which comprise the
Parent Company balance sheet, the Parent Company statement of changes in equity, the Parent Company statement of cash flows, and the related
notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006.
Respective responsibilities of directors and auditors
As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the Parent Company fi nancial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Parent Company financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of
the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any
other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Scope of the audit of the fi nancial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the
financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting
policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of
significant accounting estimates made by the directors; and the overall presentation of the fi nancial statements.
Opinion on fi nancial statements
In our opinion the Parent Company fi nancial statements:
� give a true and fair view of the state of the Company’s affairs as at 27 February 2010 and of its cash flows for the 52 weeks then ended;
� have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the
Companies Act 2006; and
� have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
� the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and
� the information given in the directors’ report for the financial year for which the Parent Company financial statements are prepared is consistent with
the Parent Company fi nancial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
� adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited
by us; or
� the Parent Company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting
records and returns; or
� certain disclosures of directors’ remuneration specified by law are not made; or
� we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group consolidated financial statements of Home Retail Group plc for the 52 weeks ended 27 February 2010.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 28 April 2010
98 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Parent Company balance sheet At 27 February 2010
27 February 28 February 2010 2009
Notes £m £m
ASSETS
Non-current assets
Investment in subsidiary 6 2,895.6 2,895.6
Total non-current assets 2,895.6 2,895.6
Current assets
Trade and other receivables 7 30.7 21.5
Current tax assets – 2.5
Total current assets 30.7 24.0
Total assets 2,926.3 2,919.6
LIABILITIES
Current liabilities
Trade and other payables 8 (388.6) (270.5)
Total current liabilities (388.6) (270.5)
Total liabilities (388.6) (270.5)
Net assets 2,537.7 2,649.1
EQUITY
Share capital 9 87.7 87.7
Retained earnings 2,450.0 2,561.4
Total equity 2,537.7 2,649.1
The financial statements were approved by the Board of Directors on 28 April 2010 and were signed on its behalf by:
Terry Duddy, Richard Ashton,
Chief Executive Finance Director
Home Retail Group Annual Report 2010 99
FINANCIAL STATEMENTS
Parent Company statement of changes in equity For the 52 weeks ended 27 February 2010
Attributable to equity holders of the Company
Share Retained capital earnings Total
£m £m £m
Balance at 1 March 2009 87.7 2,561.4 2,649.1
Loss for the year – (2.4) (2.4)
Other comprehensive income – – –
Total comprehensive income for the year ended 27 February 2010 – (2.4) (2.4)
Transactions with owners:
Movement in share-based compensation reserve – 20.4 20.4
Equity dividends paid during the year – (126.3) (126.3)
Other distributions – (3.1) (3.1)
Total transactions with owners – (109.0) (109.0)
Balance at 27 February 2010 87.7 2,450.0 2,537.7
Attributable to equity holders of the Company
Share Retained capital earnings Total
£m £m £m
Balance at 2 March 2008 87.7 2,673.8 2,761.5
Loss for the year – (6.4) (6.4)
Other comprehensive income – – –
Total comprehensive income for the year ended 28 February 2009 – (6.4) (6.4)
Transactions with owners:
Movement in share-based compensation reserve – 21.3 21.3
Equity dividends paid during the year – (127.2) (127.2)
Other distributions – (0.1) (0.1)
Total transactions with owners – (106.0) (106.0)
Balance at 28 February 2009 87.7 2,561.4 2,649.1
Parent Company statement of cash fl ows For the 52 weeks ended 27 February 2010
There were no cash movements during the year for the Company as any cash transactions were executed by other members of the Home Retail Group
on behalf of the Company. As a result no statement of cash flows has been presented in these fi nancial statements.
100 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the Parent Company fi nancial statements For the 52 weeks ended 27 February 2010
1. GENERAL INFORMATION
Home Retail Group plc (‘the Company’) is a public limited company incorporated and domiciled in the United Kingdom under the Companies Act
2006 (‘the Act’) and listed on the London Stock Exchange. The Company’s registered number is 5863533 and the registered office of the Company
is Avebury, 489 – 499 Avebury Boulevard, Milton Keynes MK9 2NW.
Statement of compliance
The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) and International
Financial Reporting Interpretations Committee interpretations (‘IFRICs’) as adopted by the European Union. They also comply with those parts of the
Companies Act 2006 applicable to companies reporting under IFRSs.
2. BASIS OF PREPARATION
These separate financial statements of the Company are presented in sterling, rounded to the nearest hundred thousand. They are prepared under
the historic cost basis modified for the revaluation of certain fi nancial instruments.
The Company is the ultimate parent entity of Home Retail Group (‘the Group’). The Company’s financial statements are included in Home Retail
Group plc’s consolidated financial statements for the 52 weeks ended 27 February 2010. As permitted by section 408 of the Act, the Company
has not presented its own comprehensive income statement.
The investment in Home Retail Group (UK) Limited has also been recorded at the nominal value of shares issued, under the provisions of
section 615 of the Act. IFRS 1, First-time Adoption of International Financial Reporting Standards, has been applied in preparing these fi nancial
statements. The financial statements are the first Company financial statements to be prepared in accordance with IFRS.
The financial statements of the Company until 28 February 2009 had been prepared in accordance with UK Generally Accepted Accounting Principles
(‘UK GAAP’). UK GAAP differs in certain respects from IFRS. When preparing the financial statements to 27 February 2010, management has amended
certain accounting methods applied in the UK GAAP financial statements to comply with IFRS. The comparatives were also restated to refl ect
these adjustments.
Reconciliations and descriptions of the effect of the transition from UK GAAP to IFRS on the Company’s equity are given in note 12.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
The Company’s principal accounting policies are the same as those set out in note 3 of the Group financial statements, with the addition of those
noted below. Unless otherwise stated, these policies have been consistently applied to all the periods presented.
Investments
Investments are included in the balance sheet at their cost of acquisition. Where appropriate, a provision is made for any impairment in their value.
Loans and other payables
Loans from other Group undertakings and all other payables are initially recorded at fair value, which represents the proceeds received. They are then
subsequently carried at amortised cost, less any provision for impairment as appropriate.
Share-based payments
The Company operates a number of equity-settled, share-based compensation plans. Awards are granted to employees of the Company’s subsidiaries,
and the Company is reimbursed by its subsidiaries for the fair value of the shares granted over the vesting period. Fair value is measured at the date
of grant using whichever of the Black-Scholes or Monte Carlo models, or closing market price is most appropriate to the award. Market-based
performance conditions are included in the fair value measurement on grant date and are not revisited for actual performance. Further details
of the Company’s share-based compensation plans are set out in note 29 to the Group fi nancial statements.
4. INCOME STATEMENT DISCLOSURES
The Company’s retained loss for the financial year was £2.4m (2009: £6.4m loss).
The Company has no employees, other than the Company directors. No directors received any remuneration from the Company during either year.
Further information on directors’ remuneration, which forms part of the audited Group financial statements, can be found in the directors’
remuneration report on pages 47 to 51.
There were no non-audit services provided by the Company’s auditors PricewaterhouseCoopers LLP.
Home Retail Group Annual Report 2010 101
FFIINNAANCINCIAALL SSTTAATTEMENEMENTTSS
Notes to the Parent Company financial statements continued For the 52 weeks ended 27 February 2010
5. DIVIDENDS 52 weeks 52 weeks
ended ended 27 February 28 February 2010 2009
Amounts recognised as distributions to equity holders £m £m
Final dividend of 10.0p per share (2009: 10.0p) for the prior year (85.7) (86.8)
Interim dividend of 4.7p per share (2009: 4.7p) for the current year (40.6) (40.4)
Ordinary dividends on equity shares (126.3) (127.2)
A final dividend in respect of the year ended 27 February 2010 of 10.0p per share, amounting to a total final dividend of £86.6m, has been proposed
by the Board of Directors, and is subject to approval by the shareholders at the Annual General Meeting. This would make a total dividend for the year
of 14.7p per share, amounting to £127.2m. The proposed dividend has not been included as a liability at 27 February 2010 in accordance with IAS 10
‘Events after the Balance Sheet Date’. It will be paid on 21 July 2010 to shareholders who are on the register of members at close of business on
21 May 2010. The Home Retail Group Employee Share Trust (‘EST’) has waived its entitlement to dividends in the amount of £2.7m (2009: £1.8m).
6. INVESTMENT IN SUBSIDIARY 2010 2009
£m £m
Cost
At beginning and end of the year 2,895.6 2,895.6
The Company’s sole investment is in Home Retail Group (UK) Limited, which is a 100% owned subsidiary incorporated within the UK and is a Group
holding company.
7. TRADE AND OTHER RECEIVABLES Current Current
2010 2009 £m £m
Amounts owed by related party (note 11) 30.7 21.5
The amounts owed by a related party were unsecured, repayable on demand and non-interest bearing. No balances owed by a related party are past due.
8. TRADE AND OTHER PAYABLES Current Current
2010 2009 £m £m
Amounts owed to Group companies (note 11)
Other creditors
(388.0)
(0.6)
(270.0)
(0.5)
(388.6) (270.5)
All amounts owed to Group companies are unsecured, non-interest bearing and repayable on demand.
9. SHARE CAPITAL 2010
Number of shares
2010 £m
2009 Number of shares
2009£m
Ordinary share capital of 10p each
Authorised
Allotted, called-up and fully paid
2,000,500,000
877,445,001
200.1
87.7
2,000,500,000
877,445,001
200.1
87.7
102 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Notes to the Parent Company fi nancial statements continued For the 52 weeks ended 27 February 2010
10. COMMITMENTS
On 12 July 2006, Argos Limited, a subsidiary of the Company, entered into a five-year multi-currency revolving loan facility of £700m with a syndicated
group of banks. This facility has since been extended by one year and then subsequently £685m of this facility has been extended a further year.
On 27 October 2006 the Company acceded to this facility as a borrower and a guarantor. As at the balance sheet date there were no drawings made
under this facility.
There are no capital or operating lease commitments.
11. RELATED PARTY TRANSACTIONS
The principal subsidiary undertakings of the Company are shown in note 36 of the Group financial statements. Transactions between the Company
and its subsidiaries and the Home Retail Group Employee Share Trust (‘EST’) are shown below. All transactions carried out with related parties are
in the normal course of business. 2010 2009
£m £m
Transactions with subsidiary undertakings
Recharge of costs
Interest payable
Transfer of cash to the EST by subsidiary undertakings on behalf of the Company
Settlement of liabilities by subsidiary undertakings on behalf of the Company
20.4
–
9.3
129.4
21.3
(9.1)
21.4
127.3
Amounts owed to subsidiary undertakings (388.0) (270.0)
Transactions with other related parties
Amounts owed by other related party – EST 30.7 21.5
12. UK GAAP TO IFRS TRANSITION
Reconciliation of equity at 1 March 2008
ASSETS
Non-current assets
Investment in subsidiary
Total non-current assets
UK GAAP £m
2,895.6
2,895.6
Transition adjustments
£m
–
–
IFRS £m
2,895.6
2,895.6
Current assets
Trade and other receivables 161.6 – 161.6
Current tax assets 2.2 – 2.2
Total current assets 163.8 – 163.8
Total assets 3,059.4 – 3,059.4
LIABILITIES
Current liabilities
Trade and other payables (297.9) – (297.9)
Total current liabilities (297.9) – (297.9)
Total liabilities (297.9) – (297.9)
Net assets 2,761.5 – 2,761.5
EQUITY
Share capital 87.7 – 87.7
Retained earnings 2,679.8 (6.0) 2,673.8
Treasury shares (6.0) 6.0 –
Total equity 2,761.5 – 2,761.5
Home Retail Group Annual Report 2010 103
FFIINNAANCINCIAALL SSTTAATTEMENEMENTTSS
Notes to the Parent Company financial statements continued For the 52 weeks ended 27 February 2010
12. UK GAAP TO IFRS TRANSITION CONTINUED Transition
Reconciliation of equity at 28 February 2009UK GAAP
£madjustments
£mIFRS £m
ASSETS
Non-current assets
Investment in subsidiary 2,895.6 – 2,895.6
Total non-current assets 2,895.6 – 2,895.6
Current assets
Trade and other receivables – 21.5 21.5
Current tax assets 2.5 – 2.5
Total current assets 2.5 21.5 24.0
Total assets 2,898.1 21.5 2,919.6
LIABILITIES
Current liabilities
Trade and other payables (270.3) (0.2) (270.5)
Total current liabilities (270.3) (0.2) (270.5)
Total liabilities (270.3) (0.2) (270.5)
Net assets 2,627.8 21.3 2,649.1
EQUITY
Share capital 87.7 – 87.7
Retained earnings 2,567.2 (5.8) 2,561.4
Treasury shares (27.1) 27.1 –
Total equity 2,627.8 21.3 2,649.1
Explanation of transition adjustments:
Under UK GAAP company shares held in trust on behalf of participants are shown within the Company balance sheet within ‘Treasury shares’. Under
IFRS the share trust is not included as part of the Company balance sheet and hence there is a transition adjustment to eliminate all associated
balances. In addition, any balance due between the Company and the share trusts are reinstated, as these would have previously been eliminated
on consolidation under UK GAAP.
104 Home Retail Group Annual Report 2010
FINANCIAL STATEMENTS
Group fi ve-year summary
52-week 52-week 52-week 52-week 52-week period to period to period to pro forma to pro forma to
27 February 28 February 1 March 3 March 4 March 2010 2009 2008 2007 2006
Income statement £m £m £m £m £m
Argos 4,346.8 4,281.9 4,320.9 4,164.0 3,858.8
Homebase 1,571.9 1,513.2 1,568.5 1,594.2 1,559.0
Financial Services 104.0 102.3 95.4 93.2 92.5
Sales 6,022.7 5,897.4 5,984.8 5,851.4 5,510.3
Argos 266.2 303.6 376.2 325.0 297.0
Homebase 41.2 14.9 45.1 53.4 51.4
Financial Services 5.7 6.1 5.5 5.0 6.1
Central Activities (23.4) (24.2) (28.8) (24.0) (22.7)
Benchmark operating profi t 289.7 300.4 398.0 359.4 331.8
Net fi nancing income 5.2 29.7 33.3 16.6 9.5
Share of post-tax (loss)/profit of joint ventures and associates (2.0) (2.4) 1.6 0.7 (4.2)
Benchmark PBT 292.9 327.7 432.9 376.7 337.1
Statistics 52-week 52-week 52-week 52-week 52-week period to period to period to pro forma to pro forma to
Argos 27 February
201028 February
2009 1 March
2008 3 March
2007 4 March
2006
Like-for-like change in sales (2.1%) (4.8%) 0.7% 2.4% (1.4%)
New space contribution to sales change 3.6% 3.9% 3.1% 5.5% 7.5%
Total sales change 1.5% (0.9%) 3.8% 7.9% 6.1%
Number of stores at year-end 745 730 707 680 655
Of which Argos Extra stocked-in 339 314 278 238 189
Homebase
Like-for-like change in sales 2.7% (10.2%) (4.1%) (1.4%) (3.1%)
New space contribution to sales change 1.2% 6.7% 2.5% 3.6% 3.1%
Total sales change 3.9% (3.5%) (1.6%) 2.2% 0.0%
Number of stores at year-end 349 345 331 310 297
Of which contain a mezzanine fl oor 190 188 181 165 144
Financial Services
Store card gross receivables (£m) 497 488 482 448 378
Home Retail Group Annual Report 2010 105
FINANCIAL STATEMENTS
Group five-year summary continued
27 February 28 February 1 March 3 March 31 March 2010 2009 2008 2007 2006
Balance sheet £m £m £m £m £m
Invested capital 2,377.7 2,435.5 3,138.0 3,014.0 3,105.4
Retirement benefi t (obligations)/assets (24.9) (46.4) 83.7 9.3 25.5
Net tax assets/(liabilities) 52.1 32.7 (52.0) (2.6) (4.8)
Derivative fi nancial instruments 47.7 52.2 1.5 (2.2) 1.8
Financing net cash/(pro forma net debt) 414.0 284.4 174.0 60.2 (200.0)
Pro forma net assets 2,866.6 2,758.4 3,345.2 3,078.7 2,927.9
Net GUS group balances – – – – 22.0
Reported net assets 2,866.6 2,758.4 3,345.2 3,078.7 2,949.9
52-week 52-week 52-week 52-week 52-week period to period to period to pro forma to pro forma to
27 February 28 February 1 March 3 March 4 March 2010 2009 2008 2007 2006
Benchmark pre-tax return on invested capital £m £m £m £m £m
Benchmark operating profi t 289.7 300.4 398.0 359.4 331.8
Share of post-tax (loss)/profit of joint ventures and associates (2.0) (2.4) 1.6 0.7 (4.2)
Benchmark pre-tax return 287.7 298.0 399.6 360.1 327.6
Benchmark pre-tax return on invested capital 12.1% 12.2% 12.7% 11.9% 10.5%
52-week 52-week 52-week 52-week 52-week period to period to period to pro forma to pro forma to
Earnings and dividends 27 February
201028 February
2009 1 March
2008 3 March
2007 4 March
2006
Basic benchmark EPS 23.4p 25.9p 33.9p 29.3p 25.6p
Dividends per share (interim paid and fi nal proposed) 14.7p 14.7p 14.7p 13.0p n/a
Dividend cover 1.59x 1.76x 2.31x 2.25x n/a
The change in both the year-end and the Group’s capital structure on demerger in 2006 resulted in statutory reported results that are non-comparable.
To assist with analysis and comparison, certain pro forma information has therefore been provided in respect of the comparative periods to eliminate the
distortions of these two impacts on the performance of the Group.
106 Home Retail Group Annual Report 2010
MORE INFORMATION
Shareholder information
Who are the Group’s shareholders?
The Group had 32,691 ordinary shareholders at 27 February 2010, comprising a mix of corporations and individuals. Their holdings can be analysed
as follows: Percentage of
Number of total number Number of Percentage of shareholders of shareholders ordinary shares ordinary shares
Over 1,000,000 119 0.36 698,612,021 79.62
100,001 – 1,000,000 338 1.04 119,531,897 13.62
10,001 – 100,000 814 2.49 23,774,411 2.71
5,001 – 10,000 1,004 3.07 6,839,562 0.78
2,001 – 5,000 3,800 11.62 11,483,435 1.31
1 – 2,000 26,616 81.42 17,203,675 1.96
32,691 100.00 877,445,001 100.00
Corporate
Individuals*
Number of shareholders
4,388
28,303
Percentage of total number
of shareholders
13.42
86.58
Number of ordinary shares
835,550,634
41,894,367
Percentage of ordinary shares
95.23
4.77
32,691 100.00 877,445,001 100.00
* Employee shareholdings under the Group’s share schemes are held in trust and are not therefore reflected in the number of individual shareholders.
I have an enquiry or want to update my details. Who should I contact?
For all enquiries and shareholder administration, please contact Capita Registrars:
Postal address: Capita Registrars, Northern House, Woodsome Park, Huddersfield HD8 0GA.
Email: [email protected]
• Telephone: 0871 664 0437* (from abroad +44 208 639 3377)
Lines are open 8.30am to 5.30pm Monday to Friday
• Text phone: 0871 664 0532* (from abroad +44 208 639 2062)
Lines are open 8.30am to 5.30pm Monday to Friday
• Fax number: 01484 600914 (from abroad +44 1484 600914)
*Calls cost 10p per minute plus network extras.
Can I choose to receive information by email?
Shareholders can register to receive reports and notifications by email, browse shareholder information and submit voting instructions at
www.homeretailgroup-shares.com. This service is provided by Capita Registrars.
Does the Group have an investor relations website?
Investor relations information, such as webcasts of results presentations to analysts and investors and accompanying slides, is available at
www.homeretailgroup.com.
Can I reinvest my dividends?
Shareholders can use their cash dividends to purchase further shares in the Group through the dividend reinvestment plan. Completed mandate
forms for this year’s final dividend must be received by Capita Registrars by 26 June 2010. To find out more or obtain a mandate form, please
contact Capita Registrars.
Home Retail Group Annual Report 2010 107
MORE INFORMATION
Shareholder information continued
Where can I find the Group’s share price?
www.homeretailgroup.com
Does the Group provide a share dealing facility?
Investors can buy or sell Group shares through Capita Share Dealing Services. Go to
www.capitadeal.com or call 0871 664 0445*. Lines are open between 8.00am and 4.30pm
Monday to Friday.
* Calls cost 10p per minute plus network extras
When are the next major events for shareholders?
Final dividend ex-dividend
Final dividend record
Interim Management Statement
Annual General Meeting
Payment of final dividend
19 May 2010
21 May 2010
10 June 2010
30 June 2010
21 July 2010
When and where is this year’s AGM?
The 2010 AGM will be held from 11.00 am on Wednesday 30 June 2010 at the Jurys Inn Milton Keynes, Midsummer Boulevard, Milton Keynes MK9 2HP.
Where is the registered offi ce?
The registered office address is Home Retail Group plc, Avebury, 489-499 Avebury Boulevard, Milton Keynes MK9 2NW.
The Company is registered in England and Wales, No. 5863533.
108 Home Retail Group Annual Report 2010
MORE INFORMATION
Index
REVIEW OF THE BUSINESS
Who we are and what we do .....................................................................................04
Group performance ...................................................................................................... 06
Operating highlights .................................................................................................................... 06
Financial highlights ....................................................................................................................... 06
Group key performance indicators........................................................................................ 07
Chairman’s statement ................................................................................................. 08
Chief Executive’s statement ...................................................................................... 09
Our product markets ....................................................................................................11
Argos business review ..................................................................................................14
Argos operational review ............................................................................................................14
Argos key performance indicators ..........................................................................................15
Argos fi nancial review...................................................................................................................17
Homebase business review .........................................................................................18
Homebase operational review..................................................................................................18
Homebase key performance indicators ...............................................................................19
Homebase fi nancial review........................................................................................................21
Financial Services business review ...........................................................................22
Financial Services operational review ...................................................................................22
Financial Services fi nancial review..........................................................................................22
Financial Services key performance indicators ................................................................ 23
Responsible retailing .....................................................................................................24
Responsible retailing key performance indicators...........................................................25
Financial summary ........................................................................................................26
Group fi nancial review .................................................................................................28
Principal risks and uncertainties ...............................................................................32
GOVERNANCE
Board of Directors and Operating Board ...............................................................34
Directors’ report .............................................................................................................36
Principal activities and business review............................................................................... 36
Profit and dividends ...................................................................................................................... 36
Directors ............................................................................................................................................ 36
Directors’ interests........................................................................................................................ 36
Substantial shareholdings .......................................................................................................... 36
Share capital and control ............................................................................................................ 36
Purchase of own shares............................................................................................................... 36
Employee share plans....................................................................................................................37
Political donations..........................................................................................................................37
Employees ..........................................................................................................................................37
Creditor payment ...........................................................................................................................37
Articles of Association ..................................................................................................................37
Annual General Meeting..............................................................................................................37
Financial risk management ........................................................................................................37
Relevant audit information ........................................................................................................37
Auditors...............................................................................................................................................37
Corporate governance report ....................................................................................38
Chairman’s introduction............................................................................................................. 38
The Board .......................................................................................................................................... 38
Board committees......................................................................................................................... 39
Remuneration committee ......................................................................................................... 39
Nomination committee ............................................................................................................. 40
Audit committee ............................................................................................................................ 40
Accountability and audit .............................................................................................................41
Going concern ................................................................................................................................. 42
Relations with shareholders...................................................................................................... 42
Directors’ remuneration report ................................................................................43
Chairman’s statement ..................................................................................................................43
Background information .............................................................................................................43
Proposed changes to remuneration policy..........................................................................43
Remuneration policy applied in the year under review ................................................ 44
Remuneration Committee . ...................................................................................................... 46
Performance graph ...................................................................................................................... 46
Directors’ emoluments................................................................................................................47
Current share plans ....................................................................................................................... 48
Deferred bonus plan ..................................................................................................................... 48
Legacy arrangements .................................................................................................................. 49
Pensions ............................................................................................................................................. 51
Statement of directors’ responsibilities .................................................................52
Home Retail Group Annual Report 2010 109
MORE INFORMATION
Index continued
FINANCIAL STATEMENTS
Independent auditors’ report – Group ....................................................................53
Consolidated income statement ..............................................................................54
Consolidated statement of comprehensive income ..........................................55
Consolidated balance sheet .......................................................................................56
Consolidated statement of changes in equity.....................................................57
Consolidated statement of cash fl ows ...................................................................58
Analysis of net cash/(debt) .........................................................................................59
Notes to the fi nancial statements.......................................................................... 60
1 General information ................................................................................................................. 60
2 Basis of preparation ................................................................................................................... 60
3 Summary of principal accounting policies .......................................................................62
4 Financial risk management.................................................................................................... 68
5 Segmental information ........................................................................................................... 72
6 Analysis of revenue by category...........................................................................................74
7 Net operating expenses ...........................................................................................................74
8 Employee benefit costs and employee numbers ..........................................................75
9 Exceptional items ........................................................................................................................76
10 Net fi nancing income/(expense)...................................................................................... 77
11 Taxation ....................................................................................................................................... 77
12 Dividends ......................................................................................................................................79
13 Basic and diluted earnings per share (‘EPS’) ..................................................................79
14 Goodwill ...................................................................................................................................... 80
15 Other intangible assets..........................................................................................................81
16 Property, plant and equipment ......................................................................................... 82
17 Investments in joint ventures and associates ..............................................................83
18 Inventories ...................................................................................................................................83
19 Trade and other receivables ................................................................................................ 84
20 Current asset investments ...................................................................................................85
21 Cash and cash equivalents ...................................................................................................85
22 Trade and other payables......................................................................................................85
23 Provisions.................................................................................................................................... 86
24 Post-employment benefi ts................................................................................................. 86
25 Other financial assets and liabilities ............................................................................... 90
26 Deferred tax ............................................................................................................................... 90
27 Share capital ...............................................................................................................................91
28 Notes to the consolidated statement of changes in equity ..................................92
29 Share-based payment arrangements .............................................................................92
30 Operating leases...................................................................................................................... 96
31 Commitments .......................................................................................................................... 96
32 Contingent liabilities .............................................................................................................. 96
33 Notes to the consolidated statement of cash fl ows ................................................ 96
34 Related parties ...........................................................................................................................97
35 Post balance sheet events.....................................................................................................97
36 Principal subsidiary, joint venture and associated undertakings ........................97
Independent auditors’ report – Parent .................................................................. 98
Parent Company balance sheet.................................................................................99
Parent Company statement of changes in equity...........................................100
Parent Company statement of cash fl ows .........................................................100
Notes to the Parent Company fi nancial statements...................................... 101
1 General information ...............................................................................................................101
2 Basis of preparation .................................................................................................................101
3 Summary of principal accounting policies....................................................................101
4 Income statement disclosures ...........................................................................................101
5 Dividends .....................................................................................................................................102
6 Investment in subsidiary.......................................................................................................102
7 Trade and other receivables .................................................................................................102
8 Trade and other payables......................................................................................................102
9 Share capital ...............................................................................................................................102
10 Commitments ........................................................................................................................103
11 Related party transactions................................................................................................103
12 UK GAAP to IFRS transition...............................................................................................103
Group fi ve-year summary ........................................................................................ 105
MORE INFORMATION
Shareholder information .......................................................................................... 107
110 Home Retail Group Annual Report 2010
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HOME RETAIL GROUP PLC Avebury
489–499 Avebury Boulevard
Milton Keynes
MK9 2NW
Tel: 0845 603 6677
www.homeretailgroup.com
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