Business review
GUS: financial review
Sales
Group sales from continuing operations grew by 9% from £6,663m to £7,262m. At constant exchange rates, sales from continuing operations were 8% higher than last year.
Profit
Profit before amortisation of acquisition intangibles, store impairment charges, exceptional items, financing fair value remeasurements and taxation – termed benchmark profit - fell by £81m to £829m. The reduction in benchmark profit is largely a result of the profit contribution from discontinued operations falling by £120m in 2006. Return on sales from continuing operations based on benchmark profit, fell from 10.0% to 9.7% largely as a result of lower profits at Argos Retail Group and a higher interest charge. EBIT from continuing businesses grew by 7% to £745m because of the rise in Experian’s profit in the year, partially offset by a reduction in ARG’s profit.
Taxation
The Group’s effective rate of tax for the year was 25.6%, based on benchmark profit. This compares to 26.3% last year.
Shareholder return and dividends
Basic earnings per share were 60.2p in the year to 31 March 2006 compared to 59.6p last year. Benchmark earnings per share increased slightly to 62.3p from 62.0p last year. The Board has proposed a final dividend of 21.9p per share. The dividend for the year as a whole of 31.5p is covered 1.98 times from benchmark earnings. Shareholders who have not bought or sold GUS shares in the last year and retained the Burberry shares they received at the time of the demerger will receive the same dividend in total as last year.
Share price and total shareholder return
The share price of GUS ranged from a low of 827p to a high of 1128p during the financial year.
On 31 March 2006, the mid market price was 1055p, giving a market capitalisation of £9.1bn at that date.
Total shareholder return (the increase in the value of a share including reinvested dividends) has been 21% p.a. over the five years to 31 March 2006. This compares favourably with the total shareholder return for the average FTSE 100 company which was 1% p.a. over the same period.
Shareholders’ funds
Shareholders’ funds amount to £3,131m, an increase of £76m in the year. This is equivalent to 356p per share compared with 300p last year.
Cash flow and net debt
The Group’s free cash flow before acquisitions and divestments, dividends, share buybacks and special pension contributions was £500m, compared with £374m in 2005. Capital expenditure in 2006 was £365m, £21m higher than last year. Capital expenditure was equivalent to 142% of the depreciation charge in 2006. Free cash flow was used to fund acquisitions of £819m, dividends of £284m and special pension contributions of £100m. After proceeds from disposals of businesses of £360m, net cash outflow for the year was £343m.
Net debt on the GUS balance sheet at 31 March 2006 increased by £547m to £1,974m, up from £1,427m at 31 March 2005.
Acquisitions
Acquisitions amounted to £819m, most of which were made by Experian. The largest acquisitions were LowerMyBills.com which was purchased for $330m (£213m) in May 2005 and PriceGrabber.com which was acquired for $485m (£277m) in December 2005. Other acquisitions made by Experian during the year included three US based affiliate credit bureaux, ClassesUSA, Baker Hill and Vente in North America and ClarityBlue and Footfall in the UK. Separately, Argos acquired 33 former Index stores and the Index brand for £44m from Littlewoods Limited.
Disposals
In May 2005 the Group sold its remaining 50% interest in Lewis Group for proceeds of R1,675m, which amounted to £140m. In December 2005 the Group divested its remaining 65% stake in Burberry through a dividend in specie, which was accompanied by a consolidation of GUS shares to keep the share price at a comparable level. GUS shareholders received 305 Burberry shares and 860 new GUS shares for every 1000 existing GUS shares held. In January 2006 the Group sold Wehkamp, the leading home shopping brand in the Netherlands, for @320m (£210m).
Following these disposals, the results of Lewis, Burberry and Wehkamp have been reclassified as discontinued.
Post balance sheet event
In May 2003, the Group disposed of its home shopping businesses in the UK, Ireland and Sweden, together with Reality, its logistics and customer care business in the UK. Deferred proceeds from this sale of £140m were received by GUS in April 2006.
Minority interests
Profit attributable to equity minority interests in 2006 of £26m relates mainly to the share of profit attributable to the minority shareholders of Burberry and Lewis Group. Following the demerger of Burberry and the disposal of Lewis Group in 2006, the Group now has negligible minority interests.
Liquidity and funding
The maturity, currency and interest rate profile of the Group’s borrowings are shown in Note 27 to the financial statements. The maturity profile is spread over the next eight years, to avoid excessive concentration of re-financing needs.
At 31 March 2006 undrawn committed borrowing facilities totalled £530m.
Treasury and risk management
The Group’s Treasury function seeks to reduce exposures to foreign exchange, interest rate and other financial risks, to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. It does not operate as a profit centre and transacts only in relation to underlying business requirements. It operates policies and procedures which are periodically reviewed and approved by the Board and are subject to regular Group Internal Audit reviews.
Currency risk management
The Group’s reported profit can be significantly affected by currency movements. Approximately 41% of the Group’s EBIT generated in the year to 31 March 2006 was earned in currencies other than sterling. In order to reduce the impact of currency fluctuations on the value of investments in overseas countries, the Group has a policy of borrowing in US dollars and euros, as well as in sterling, and of entering into forward foreign exchange contracts in its key overseas currencies. During the year ended 31 March 2006 the Group continued to enter into forward foreign exchange contracts to sell the US dollar and the euro in order to hedge a proportion of the value of its investment in its overseas businesses. Additionally, the Group has a policy of hedging foreign currency denominated transactions by entering into forward foreign exchange contracts.
Interest rate risk management
The Group’s interest rate exposure is managed by the use of fixed and floating rate borrowings and by the use of interest rate swaps to adjust the balance of fixed and floating rate liabilities. The Group also spreads the duration of its borrowings to smooth the impact of interest rate fluctuations.
Group cash flow |
||
| for the years ended 31 March | 2006 £m |
20051 £m |
| Benchmark profit before interest | ||
| for continuing operations | 746 | 695 |
| Depreciation | 257 | 230 |
| Capital expenditure | (365) | (344) |
| Change in working capital | 3 | (3) |
| Operating cash flow | 641 | 578 |
| Interest | (33) | (34) |
| Corporation tax | (108) | (170) |
| Free cash flow | 500 | 374 |
| Acquisitions and divestments | 459 | (70) |
| Dividends | (284) | (281) |
| Share buy back – GUS | - | (200) |
| Special pension contribution | (100) | (76) |
| Net cash outflow | (343) | (253) |
| Foreign exchange movements | - | 56 |
| Net debt flow of discontinued operations | (204) | (30) |
| Movement in net debt | (547) | (227) |
12005 numbers have been restated. Under IFRS, the net cash flow of discontinued operations is shown separately (in the penultimate line of the table).
Interest costs
At £36m, interest costs were £13m higher than last year, reflecting higher net debt levels largely resulting from the £819m spent on acquisitions during the year. The reported net interest line benefits from the recharge to ARG Financial Services of interest on its loan book (£18m), from £8m of income from a £140m loan note which did not form part of net debt, and from a credit to interest of £8m relating to the excess of the expected return on pension assets over the interest on pension liabilities (2005:£2m).
Credit risk
The Group's exposure to credit risk is managed by dealing only with banks and financial institutions with strong credit ratings, within limits set for each organisation. Dealing activity is closely controlled and counter-party positions are monitored daily.
Exceptional items
The only costs treated as exceptional items are those associated with the disposal, demerger or closure of businesses. All other restructuring costs have been charged against EBIT in the divisions in which they were incurred.
The exceptional items during the year were a profit on the disposal of Lewis and Burberry shares, a loss on the disposal of Wehkamp and various costs relating to the Burberry and Group demerger projects.
Other adjustment items
IFRS requires that, on acquisition, specific intangible assets are identified and recognised separately from goodwill and then amortised over their useful economic lives. These include items such as brand names and customer lists, to which value is first attributed at the time of acquisition. As permitted by IFRS, acquisitions prior to 1 April 2004 have not been restated. As it did with goodwill under UK GAAP, the Group has excluded amortisation of these acquisition intangibles from its definition of Benchmark PBT because such a charge is based on uncertain judgements about their value and economic life.
As a result of clearer IFRS interpretation on impairment reviews, Argos Retail Group now performs store impairment tests on a store by store basis and this has led to a store impairment charge at Homebase of £13m in 2006 (2005:nil).
An element of the Group’s derivatives is ineligible for hedge accounting under IFRS. Gains or losses on these derivatives arising from market movements are charged or credited to the income statement. In the year to 31 March 2006, this amounted to a charge of £3m (with no comparable credit or charge as the Group had previously elected to defer implementation of IAS 32 and 39).
Exceptional and other adjustment items |
||
| 12 months to 31 March | 2006 £m |
2005 £m |
| Exceptional items | ||
| Continuing operations: | ||
| Costs incurred relating to the Group separation | (4) | – |
| Loss on sale of businesses | – | (7) |
| (4) | (7) | |
| Discontinued operations: | ||
| Profit on disposal of Lewis Group | 36 | 24 |
| Loss on disposal of Wehkamp | (19) | – |
| Disposal of shares in Burberry | 10 | 3 |
| Costs incurred relating to the demerger of Burberry | (5) | – |
| Loss on disposal of other discontinued operations | – | (24) |
| 22 | 3 | |
| Total exceptional items | 18 | (4) |
| Other adjustment items | ||
| Continuing operations: | ||
| Amortisation of acquisition intangibles | (37) | (11) |
| Homebase store impairment | (13) | – |
| Financing fair value remeasurements | (3) | – |
| Total other adjustment items | (53) | (11) |
| Total exceptional and other adjustment items | (35) | (15) |
Pensions
Following the transition to IFRS the consolidated balance sheet now reflects retirement benefit assets/obligations. Note 25 to the financial statements shows the assumptions used (including mortality assumptions) together with the other disclosures required in accordance with IAS 19.
The Group’s two UK defined benefit pension schemes had modest deficits at 31 March 2005. To improve the funding of these schemes the Group again made voluntary special contributions totalling £100m in March 2006 (2005:£76m). This helped to generate a net surplus for all retirement benefit schemes on an IAS19 basis of £18m at 31 March 2006.
International Financial Reporting Standards
The Group has prepared its financial statements under International Financial Reporting Standards for the year ended 31 March 2006, with comparative information for the year ended 31 March 2005 restated. The Group has taken the option to defer the implementation of IAS 32 and IAS 39 on financial instruments until the year commencing 1 April 2005, without restating comparative amounts.
The key impacts of the restatement of 2005 on an IFRS basis are shown in Note 38 to the financial statements. The greatest impact on net assets and profit at GUS has come from changes to the accounting treatment of goodwill amortisation and impairment, other intangibles, financial instruments, share-based remuneration, pension costs, tax and deferred tax.
Use of non-GAAP measures
GUS has identified certain measures that it believes provide additional useful information on the performance of the Group. This approach is comparable with that previously used but as the measures are not defined under IFRS they may not be directly comparable with other companies' adjusted measures. The non-GAAP measures are not intended to be a substitute for, or superior to, any IFRS measures of performance. The non-GAAP measures identified by the Group are shown in Note 2 to the financial statements.
Accounting policies and standards
The principal accounting policies used by the Group are shown in Note 37 to the financial statements. Detailed indicative disclosures in respect of IFRS on the reported position and results for the year ended 31 March 2005 were issued in June 2005, and are available on the Company website at www.gusplc.com/gus/investors/IFRS. A summary of the impact of IFRS on certain key reported figures is set out in Note 38 to the financial statements.
Since the issue of the indicative disclosures in respect of IFRS in June 2005, Burberry and Wehkamp have been reclassified as discontinued operations and some further adjustments have been made as a result of clearer IFRS interpretation becoming available. These further adjustments relate to store impairment testing, guaranteed rental uplifts on leased premises, taxation and acquisition intangibles. Further information is provided in Note 38 to the financial statements.
