Financial review

Sales
Group sales increased by 3% from £7,548m to £7,787m, while sales from continuing operations grew by 7% from £7,119m to £7,600m. At constant exchange rates, sales from continuing operations were 8% higher than last year.

Profit
Group profit before amortisation of goodwill, exceptional items and taxation increased by 10% to £910m. Return on sales from continuing operations before exceptional items and goodwill amortisation rose from 10.7% to 11.3%. The improvement reflects the focus on our core businesses where profitability has risen. The goodwill charge increased to £207m from £193m, largely as a result of a full year's charge on the acquisitions made last year.

Taxation
The Group's effective rate of tax for the year was 24.3%, based on profit before amortisation of goodwill and before profits and losses on sale of businesses. This compares to 23.4% last year. For 2006, we expect the tax rate to increase by about 2% on a UK GAAP basis, mainly affected by our current understanding of recent proposed changes in UK tax legislation.

Shareholder return and dividends
Basic earnings per share before goodwill amortisation and exceptional items were 63.8p in the year to 31 March 2005 compared to 60.7p last year. The Board has proposed a final dividend of 20.5p per share, a rise of 1.5p or 8% on last year. The dividend for the year as a whole of 29.5p is covered 2.16 times from earnings before goodwill amortisation and exceptional items.

Shareholders' funds
Shareholders' funds amount to £2,810m, a fall of £1m in the year. This is equivalent to 276p per share compared with 277p last year.

Share price and total shareholder return
The share price of GUS ranged from a low of 740p to a high of 989p during the financial year. On 31 March 2005, the mid market price was 912p, giving a market capitalisation of £9.3bn at that date.

Total shareholder return (the increase in the value of a share including reinvested dividends) has been 188% over the five years to 31 March 2005. This compares favourably with the total shareholder return for the average FTSE 100 company which was minus 10% over the same period.

Cash flow and net debt
The Group's free cash flow before acquisitions and divestments, dividends, share buybacks and special pension contributions was £374m, compared with £354m in 2004. Capital expenditure in 2005 was £390m, £84m higher than last year. Capital expenditure was equivalent to 146% of the depreciation charge in 2005. Free cash flow was used to fund acquisitions of £181m, dividends of £281m, GUS and Burberry share repurchases of £222m and special pension contributions of £76m. After disposal proceeds of £103m, net cash outflow for the year was £283m.

After the positive impact of exchange rates (£56m), net debt on the GUS balance sheet at 31 March 2005 increased by £227m to £1,427m, up from £1,200m at 31 March 2004.

Liquidity and funding
The maturity, currency and interest rate profile of the Group's borrowings are shown in Note 32 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 2005 undrawn committed borrowing facilities totalled £420m.

Share buyback programme
The £200m share buyback announced in May 2004 has been completed, with GUS buying 22m shares at an average price of 897p. For the purpose of calculating basic EPS, the weighted average number of shares in issue for 2005 was 1,000m. This will fall to 985m in 2006, before allowing for any shares issued in respect of employee share schemes.

Following post-balance sheet acquisitions and disposals, there are no current plans for further share buybacks. However, the Board will continue to review the possibility of returning surplus funds to shareholders, while at the same time ensuring that the interests of bondholders and lenders are protected by maintaining a strong balance sheet.

In January 2005 Burberry Group plc began a programme to buy back £250m of shares from both GUS plc and its other shareholders by March 2006. By 31 March 2005 it had acquired £41m of shares from GUS and £22m from its other shareholders.

Treasury and risk management
The Group's Treasury function seeks to reduce or eliminate exposure 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 is subject to regular Group Internal Audit reviews.

Currency risk management
The Group's reported profit can be significantly affected by currency movements. Approximately 39% of the Group's operating profit generated in the year to 31 March 2005 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 2005 the Group continued to enter into forward foreign exchange contracts to sell the US dollar, the euro and the South African rand, 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 exchange sale and purchase 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 mixes the duration of its borrowings to smooth the impact of interest rate fluctuations.

Interest costs
At £26m, interest costs were £28m lower than last year, with the reduction occurring mainly in the first half. This principally reflects the benefits from selling the Group's share of its property joint venture (£14m benefit), a further 11.5% stake in Burberry (£7m benefit) and the home shopping businesses (£5m benefit) during the previous financial year. Interest on the proceeds of the sale of Lewis shares in September 2004 contributed a further £4m benefit. Funding costs charged against ARG Financial Services operating profit were also £6m higher. The impact of the share buyback was a £3m cost, the majority of which fell into the second half of the year.

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.

Acquisitions
Acquisitions amounted to £181m, all of which were made by Experian. They included the acquisition of QAS, the leading supplier of address management software in the UK (for a net cost of £90m), and Simmons, a market research company in the US. In March 2005, Experian also bought a further 50% interest in MotorFile from the Automobile Association, taking Experian's holding to 100%. Experian also continued to purchase affiliate credit bureaux in the United States.

Disposals
A partial IPO of Lewis Group took place in September 2004 with 46m shares (46% of the equity) sold for net proceeds of £105m and a further 4m shares allocated to Lewis share incentive schemes. Although the transaction was modestly dilutive to earnings, the listing enabled GUS to realise value, while at the same time enhancing the development opportunities for Lewis.

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. The net book value of assets at the date of completion was estimated at £800m. A provision of £210m was taken in the year to March 2003, with a further charge of £43m made in the year to 31 March 2004. Following agreement of the completion statements and the settlement of certain warranty claims, a further charge of £27m has been made in the year ended 31 March 2005 reflecting full and final settlement of all claims that have arisen out of the disposal of these businesses. A further £140m is receivable by GUS in May 2006 representing deferred proceeds from this sale.

Exceptional items
The only costs treated as exceptional items are those associated with the disposal or closure of businesses. All other restructuring costs have been charged against operating profit in the divisions in which they were incurred.

An exceptional loss of £10m was recorded during the year. The significant exceptional items were the £20m profit on the partial IPO of Lewis Group, net of the cost of associated employee share schemes, and a £27m charge for the loss on the disposal in May 2003 of the Group's home shopping and Reality businesses (as discussed under Disposals above). The loss on sale of other businesses was principally in respect of the sales by Experian International of two small non-core businesses.

Minority interests
Profit attributable to equity minority interests in 2005 of £49m relates mainly to the share of profit attributable to the minority shareholders of Burberry and Lewis Group.

The minority share of the net assets of Burberry and Lewis Group is included within Minority interests on the balance sheet.

Pensions
The Group continues to report pension costs under SSAP 24. In accordance with the FRS 17 transitional arrangements, certain disclosures are included in Note 35 to the financial statements. There is no effect on the primary financial statements.

The Group's two UK defined benefit pension schemes had modest deficits at 31 March 2004. To improve the funding of these schemes, the Group again made voluntary special contributions totalling £76m in March 2005 (2004: £100m). The contributions should marginally increase earnings per share in the current financial year and beyond.

The FRS 17 disclosures show a net deficit for all retirement benefit schemes of £78m net of tax relief at 31 March 2005. This is after taking into account the special contributions. The deficit is equal to less than 1% of the Group's market capitalisation and can prudently be resolved over a period of time.

Accounting policies and standards
The principal accounting policies used by the Group are shown at Note 1 to the financial statements on pages 59 to 61. No new Financial Reporting Standards have been adopted in this financial year but the Group has adopted the provisions of UITF Abstract 37 'Purchases and sales of own shares' and UITF Abstract 38 'Accounting for ESOP trusts' with effect from 1 April 2004. The UITF Abstracts require own shares held by the Company and ESOP trusts to be deducted in arriving at shareholders' funds.

International Financial Reporting Standards
It is now mandatory for the consolidated financial statements of all European Union listed companies to be reported in accordance with International Financial Reporting Standards (IFRS) for periods commencing on or after 1 January 2005.

The move to IFRS will not change how the Group is managed and will have no impact on cash flow. It will, however, be likely to lead to increased volatility in the profit and loss account and balance sheet, with the presentation of the financial statements also affected.

The Group is now prepared for the adoption of IFRS. The greatest impact on net assets and profit is likely to 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.

Initial guidance, based on unaudited numbers, of the overall impact of IFRS is provided in a separate section of the Annual Report on pages 91 to 94.

The financial statements for the year to 31 March 2006 will be reported under IFRS, as will the interim results for the six months to 30 September 2005.

Post balance sheet events
On 18 April 2005 the Group announced that Argos had agreed to buy 33 Index stores and the Index brand from Littlewoods Limited. The purchase price is £44m payable in cash upon completion, which is expected to be in July 2005.

On 5 May 2005 the Group announced that Experian had acquired 100% of the share capital of LowerMyBills.com, a leading online generator of mortgage and other loan application leads in the United States. The purchase price is $330m, plus a maximum performance related earn-out of $50m over the next two years. The acquisition is being funded from the Group's existing banking facilities.

On 19 May 2005 the Group announced that it had successfully completed the offering of its remaining stake in Lewis Group, realising proceeds of £140m.

David Tyler
Group Finance Director