Business review
Homebase: progress in 2006
Operational review
The UK DIY market was very challenging during the year, with weak demand from consumers and increasing promotional activity from major competitors. Homebase continued to gain share in its market, although some of the price reductions that it pursued, especially in the second half of the year, did not generate the desired volume uplifts. As a result, Homebase intends to pursue a less aggressive promotional stance in the current year.
Homebase continues to invest in initiatives to differentiate itself further from other players. More range reviews were completed during the year so that all major product groups have now been repositioned since the acquisition of Homebase in December 2002. Homebase has also continued to improve the shopping experience for its customers by raising in-store standards, improving stock availability and offering better customer service.
In home enhancement, Furniture Extra, a catalogue offering over 700 lines, was rolled out to all stores by December 2005, with product displays in 135 stores. This has significantly improved the sales performance in furniture. A new 200-page home furnishings catalogue is being trialled in 30 stores from Easter 2006, while new merchandising techniques for textiles, cookshop and home accessories are currently being trialled in 11 stores.
Homebase continues to add space through new stores and mezzanine floors, enabling it to serve new regions and sell new products more effectively. During the year, Homebase opened a net ten new stores, bringing the total at 28 February 2006 to 297. In the current year, it plans a net increase of 15 stores, being a mix of traditional and small store formats.
At the year end, 144 stores had a mezzanine floor, up from 111 a year ago. Sales uplifts from the latest mezzanine floors continue to be above those generated by earlier trials. In the current year, Homebase plans to add mezzanines to at least another ten stores.
Homebase continues to leverage the ARG infrastructure. Being part of ARG gives Homebase considerable advantage over what it could achieve on its own. For example, the proportion of goods directly imported now stands at 22%, compared to 8% at acquisition. This growth has been accelerated by Homebase having access to ARG’s established buying offices in Hong Kong, Shanghai and Shenzhen. The Homebase website, which was relaunched in February 2005 using the Argos IT infrastructure, is performing well, albeit from a small base. The relocation of about 500 Homebase roles to Milton Keynes, where Argos is based, was completed successfully during the year and is expected to deliver benefits in terms of closer cooperation throughout ARG.
Homebase |
|||
| 12 months to 28 February | 2006 £m |
2005 £m |
Change |
| Sales | 1,562 | 1,580 | (1%) |
| Total change | (1%) | 6% | |
| Like-for-like change | (4%) | 3% | |
| EBIT1 | 51.8 | 113.8 | (54%) |
| Charge for reorganisation costs | – | (18.3) | |
| Total reported | 51.8 | 95.5 | |
| EBIT margin2 | 3.3% | 7.2% | |
| At 28 February | |||
| Number of stores | 297 | 287 | |
| Of which: number with mezzanine floor | 144 | 111 | |
12005 EBIT has been adjusted as a
result of clearer IFRS interpretation now available on store impairment
since GUS restated its results under IFRS in June 2005. The result has
been to increase Homebase EBIT by £5.2m
2Excluding one-off charge for reorganisation
costs
Financial review
In the year to 28 February 2006, sales at Homebase fell slightly in total, outperforming the DIY market as a whole. New stores contributed 3% to sales and are trading in line with plan. Like-forlike sales were down 4% for the year, although this performance was worse in the latter part of the period. Despite the difficult economic environment, total sales of kitchens and furniture saw doubledigit percentage increases, driven by the investment in Furniture Extra and additional mezzanines. Core DIY and decorating sales fell by mid-single digit percentages on a like-for-like basis. Gross margin for the year as a whole was in line with last year, although down in the second half.
Both the gross margin and operating costs as a percentage of sales at Homebase are significantly higher than at Argos. Total costs increased by 8% year-on-year, reflecting 4% underlying cost inflation and a 4% increase from investment in areas such as new stores and mezzanine space. These were only partly funded by cost savings and productivity improvements. The combined impact of lower sales, cost inflation and investment in new space led to a sharp reduction in EBIT to £52m.
