Business review
ARG: progress in 2006
- Sales up 4% to £5.5bn; EBIT of £349m
reflects the difficult UK retail environment, especially in DIY
- Both Argos and Homebase outperformed their
markets, benefiting from investment in key strategic initiatives
- Significant operational improvements in 2006;
well executed in both Argos and Homebase
- ARG remains cautious on the outlook for a recovery in consumer spending
The annual rate of growth in consumer spending in the UK slowed markedly in the year under review. Higher interest payments and utility bills, a moderation in the growth of disposable income and a more cautious approach to borrowing (influenced in particular by a slow housing market) all combined to subdue spending. This weak demand, coupled with higher cost inflation for retailers in areas such as rents, business rates, wages, utilities and fuel bills, has adversely impacted many retailers’ profits including those of Argos and Homebase. Both businesses have continued to manage their costs effectively during the year, while investing to strengthen their longterm competitive positions.
In the year under review, ARG has successfully implemented a significant number of operational improvements. These include:
Argos
- roll-out of Argos Extra to all stores in July
2005;
- acquisition, integration and rebranding of
33 Index stores;
- opening of 32 additional new stores;
- opening of two new warehouses supporting Argos
Direct, Argos Extra and direct importing;
- reorganisation of store staffing to serve customers
more effectively; and
- introduction of a trial of the Argos Home catalogue in 100 stores.
Homebase
- opening of 10 new stores;
- addition of 23 mezzanines;
- national roll-out of Furniture Extra; and
- relocation of about 500 roles in buying, merchandising and other functions to Milton Keynes alongside Argos.
Looking forward, ARG remains cautious on the outlook for a recovery in the rate of growth in consumer spending and is planning on this basis. It expects the DIY market in particular to remain difficult. In the current financial year, underlying cost inflation in both businesses is likely to be about 4% - the same as 2006. ARG will continue to work to mitigate the impact of this through cost reduction programmes and productivity improvements while still investing in its key initiatives.
ARG has a clear strategy in place to deliver further share gains. GUS believes that both Argos and Homebase are well-positioned in their markets – Argos as a leading multi-channel general merchandise retailer and Homebase as a strong brand across the wider home enhancement market. There are continuing synergies available from Argos and Homebase working closely together in areas such as sourcing and supply chain initiatives, home delivery and product development.
Argos Retail Group (ARG) |
||||
| Sales | EBIT | |||
| 12 months to 31 March | 2006 £m |
2005 £m |
2006 £m |
2005 £m |
| Argos | 3,893 | 3,652 | 291.0 | 320.0 |
| Homebase1 | 1,562 | 1,580 | 51.8 | 113.8 |
| Financial Services | 93 | 81 | 6.1 | 0.2 |
| Sub-total | 5,548 | 5,313 | 348.9 | 434.0 |
| Argos - charge for OFT fine | – | – | – | (16.2) |
| Homebase - charge for reorganisation costs |
– | – | – | (18.3) |
| Total | 5,548 | 5,313 | 348.9 | 399.5 |
| EBIT margin2 | – | – | 6.3% | 8.2% |
2005 EBIT has been adjusted as a result of clearer IFRS interpretation now available on lease accounting and store impairment since GUS restated its results under IFRS in June 2005. The result has been to reduce Argos EBIT by £1.2m and increase Homebase EBIT by £5.2m
1 Homebase sales and EBIT for
12 months to 28 February
2 Excluding one-off charges for
Argos OFT fine and Homebase reorganisation costs
