Business review
Argos: progress in 2006
Operational
review
Argos Extra, which offers customers over 17,000 lines compared to around 13,000 previously, was successfully rolled out to all stores and channels for both the Autumn/Winter catalogue (launched in July 2005) and the Spring/Summer catalogue (launched in January 2006). Of the 657 stores at the year end, 191 stocked in the additional ranges, up from 128 last year. The remaining stores offer customers the option to order-in for later collection from store or for home delivery. Argos Extra is trading in line with expectations and is estimated to have contributed about 2% to total sales growth in the year.
Looking forward, the emphasis will be on optimising the product offer and further improving customer awareness of the extended ranges. After such major growth in the last year, the number of catalogue lines in the next twelve months is unlikely to increase significantly.
Argos is also trialling a separate “Home” catalogue which is designed to increase ARG’s market-leading share of the fragmented furniture and home accessories market. The trial started in March 2006 with a 340-page catalogue available in 100 stores. It offers consumers over 3,000 products from the existing Argos catalogue presented in a more aspirational manner.
Argos has further reduced prices for consumers. In the current Spring/Summer catalogue, prices on reincluded lines are 3% lower than last year. Argos is also committed to lowering prices during the life of each catalogue; for example, over 1,800 price reductions were made in the 2005 Autumn/Winter catalogue. Its “non stop price drop” campaign reinforces this message to customers.
Argos continues to be able to fund these lower prices as it delivers further supply chain benefits. For example, the proportion of directly imported goods in the current catalogue is 32% of sales, up from 26% last year and 16% three years ago. Direct importing drives gross margin benefits by lowering the cost of goods sold, albeit that it requires additional infrastructure investment and costs to support the more sophisticated supply chain.
Argos opened 65 stores during the year, including the 33 acquired from Index in July 2005. The integration and refitting of the Index stores was achieved on plan and these stores contributed 2% to total sales growth. Of the 65 openings, 10 were in new towns with the balance being second or third stores in existing catchments. At 31 March 2006, Argos operated 657 stores. It expects to open around 30 stores in the current year.
Argos is benefiting from the growth in online shopping in the UK, with 12% of its sales now ordered over the Internet for delivery to home or for later collection in store. This is a 55% increase on the previous year and the first time that the value of orders over the Internet has exceeded that over the phone.
Argos Direct, the delivery to home operation, grew sales by 10% in the year, representing 22% of revenue. Self-service kiosks are in over 300 stores and account for about 10% of sales in those locations. The new advertising campaign at Argos reinforces the message about how convenient it is to shop from Argos.
Argos |
|||
| 12 months to 31 March | 2006 £m |
2005 £m |
Change |
| Sales | 3,893 | 3,652 | 7% |
| Total change | 7% | 8% | |
| Like-for-like change | (1%) | 3% | |
| EBIT1 | 291.0 | 320.0 | (9%) |
| Charge for OFT fine | – | (16.2) | |
| Total reported | 291.0 | 303.8 | |
| EBIT margin2 | 7.5% | 8.8% | |
| At 31 March | |||
| Number of stores | 657 | 592 | |
| Of which: Argos Extra stocked-in | 191 | 128 | |
12005 EBIT has been adjusted as a
result of clearer IFRS interpretation now available on lease accounting
since GUS restated its results under IFRS in June 2005. The effect has
been to reduce EBIT by £1.2m
2Excluding one-off charge for the OFT
fine
Financial review
Sales in the year to 31 March 2006 increased by 7% in total. Of this, 8% came from new space while like-for-like sales fell by 1% in the year. There were strong performances from consumer electronics, bedroom furniture, textiles and white goods while jewellery remained weak. Gross margin was in line with last year.
EBIT in the year was £291m, a £29m decline on the previous year excluding the charge for the OFT fine last year. There were £11m of one-off costs incurred in the first half of the year: £7m transitional costs relating to the Index stores and £4m restructuring costs associated with changing staffing arrangements in-store. Excluding these, operating costs increased by 10% year-on-year, of which underlying cost inflation was about 4%. The balance reflects the direct costs of higher sales and further investment in areas such as Argos Extra, new space and infrastructure investment (especially the new warehouses which are currently running below full capacity utilisation). These costs have been partly offset by cost saving initiatives.
