Q2 Trading Statement 10 September Richard Ashton Finance Director

Transcription

1 Q2 Trading Statement 10 September 2015 Finance Director 1. Preamble Good morning and thank you for joining our call today. I am, the Group Finance Director, and with me is, our Group Chief Executive, who will join me in taking your questions in a moment. We are conscious that it is a particularly busy reporting day for you all and as such we have agreed with the other retailers reporting today that we will aim to end our call by 8.30am. If any of you therefore do not manage to have your questions answered during the call, please feel free to give either Mark Willis or I a call later on today. The trading information that we are providing today is for the second quarter of our financial year, covering the months of June, July and August. 2. Argos I will begin by giving you some detail on each of our businesses, starting with Argos, where the total sales run-rate improved during the second quarter with total sales being close to flat. Like-for-like sales declined by 2.8%, where as expected, the sales performance continued to be impacted by reductions in a number of important electrical product categories, together with the impact of weaker overall market conditions in August. The reduction in sales of electrical products was principally as a result of declines in TVs, tablets and white goods, partially offset by growth in sim-free mobiles, which included a benefit from the introduction of the iphone 6 to Argos during the quarter. TV sales continued to decline in the quarter, impacted by both annualising the beneficial impact of last year s World Cup, together with the impact of an overall decline in the TV market. Tablet sales continued to decline largely as a result of further selling price reductions. These declines in sales of electrical products were partially offset by sales growth in toys, principally driven by the performance of new product ranges, including a good performance in Chad Valley, our own brand range of toys. Internet sales continued to grow in the quarter and represented 46% of total Argos sales, up from 44% in the prior year. Within this, we continued to see growth in mobile commerce, which grew by 11% to represent 25% of total Argos sales, up from 22% for the same period last year. 1

2 Net new space contributed 2.4% in the quarter, with the store estate increasing by 52 stores to 840. This increase in the number of stores was in line with our previous guidance and was the result of an additional 44 Argos digital concessions within Homebase and eight trial Argos digital concessions in Sainsbury s. There are now a total of 96 digital concessions within Homebase, which together with the 10 in Sainsbury s have generated encouraging early results. The gross margin rate for the period was up approximately 125 basis points, with the principal drivers being an improvement of approximately 100 basis points from the net impact of the favourable movement in currency and shipping costs. As previously guided, given the hedged US dollar position, we expect that FX will have an adverse impact on the gross margin rate in the second half of the current financial year, reversing the majority of the gains we have seen in the first half of the year, resulting in a broadly neutral impact for the full year. There was an improvement of approximately 50 basis points from a small number of other positive items which are timing related and which we expect to unwind in the second half of the year, and an improvement of approximately 25 basis points from the favourable mix impact as a result of a lower level of margin dilutive electrical product sales. These improvements were partially offset by a reduction of approximately 50 basis points as a result of an increase in the level of promotional sales. It is worth noting that the 50 basis point improvement relating to the timing benefit of a small number of positive items that I just referred to is consistent with the impact of approximately 50 basis points that we disclosed in our first quarter trading statement. Therefore, across the first half, there has been a combined timing benefit of approximately 50 basis points, which based on Argos first half sales of 1.7bn, means approximately 8m of gross margin will, therefore, benefit the first half profit versus the prior year profit comparable. We expect this first half profit benefit will unwind in the second half of the current financial year. 3. Homebase Turning now to Homebase, where like-for-like sales were up 5.9%. This performance completed a good first half for Homebase. The sales growth was driven principally by big ticket products, but we also saw growth in both seasonal and the remaining product categories. This growth continued to be partly supported by trade transfer from closed stores, which was broadly in line with the previous guidance of around 15%, and also by a temporary increase in sales as a result of the stock clearance activity in respect of both the store closures and the distribution centre closure. Closed space reduced sales by 8.7% with a further eight stores being closed 2

3 in the quarter, taking the total closures in the first half of the financial year to 25. These closures are consistent with our previous guidance for 35 store closures during the current financial year and, as a result, the store portfolio now stands at 271 stores. The gross margin rate for the period was down approximately 75 basis points, with the principal drivers being a reduction of approximately 125 basis points from the ongoing stock clearance activity in respect of the previously announced store closure programme and distribution centre closure, and a reduction of approximately 50 basis points, principally from the adverse mix impact of the growth in big ticket products. These reductions were partially offset by an improvement of approximately 75 basis points from a reduction in the level of promotional activity, and an improvement of approximately 25 basis points from the net impact of the favourable movement in currency and shipping costs. 4. Summary To conclude, Argos continued to make progress on its Transformation Plan, including both the opening of more than 50 digital concessions within Homebase and Sainsbury s and in substantially completing the technology and operational steps necessary in order to be able to introduce new store collection and home delivery customer propositions ahead of the key peak trading season. We are now making additional investments into both marketing and promotions in order to both launch and raise customer awareness of these new propositions, although we do recognise that it may take some time for customers to fully embrace these new offerings. As we approach Argos peak trading period, we are mindful of the disruptive nature of last year s inaugural Black Friday and thus we anticipate that the promotional environment and shape of trading are likely to be less certain. Homebase has successfully completed its peak trading period, delivering good like-for-like sales growth in both the first and second quarter. In addition to store closures, it is continuing to implement other parts of its Productivity Plan, completing further trials of price reductions and promotional effectiveness, together with improvement to customer propositions, including the further 44 Argos digital concessions and 19 Habitat concessions added in the quarter. I will now hand you back to the operator, and John and I will be happy to take your questions. 3

4 Questions and Answers Claire Huff, RBC First, could you talk a bit more around what you have done with the delivery options in the first half, as well as whether there have been any improvements to hub & spoke ahead of peak? Second, could you comment on your thinking around the impact of the living wage? How many of your employees are under 25? Presumably, the number is larger around peak, with temps etc. Any colour on this would be very helpful. To give you some additional context, hub & spoke, which we rolled out last year, allows us to put added stock about 20,000 lines into roughly 150 of our larger stock holding stores. We now run routes from those hubs to the various local stores in the network, which allows us to have all 20,000 lines available virtually immediately in all of our stores. We have talked about, this year, trying to not only improve our hub & spoke operation by becoming better at managing and optimising the stock, which always takes some time, but in addition we had anticipated, this year, introducing something we had referred to as hub-to-home delivery, which is to take advantage of the hub stock levels and the vans that we have routed to various stores and to start doing deliveries to homes from those locations. That has been something that we have been working on all year. We announced earlier in the year that we had hoped to introduce new propositions, including hub-to-home delivery and faster store collection in the second half of the year, and those are on track to be introduced as we expected. We have been trialling those since earlier in the year, to try to answer some of the operational and technological questions associated with it, but we still anticipate introducing those in the second half. In terms of your second question on the living wage, we, like everybody else, are trying to evaluate the exact impact. If you look at a data-point across the entirety of our colleague population, roughly 60% are above %, then, would potentially be the most directly impacted but, in terms of our evaluation of specific numbers and what the impact would be, we are still trying to work through the options to manage our policies and determine what the ultimate impact is. We will, however, share more of that over time. Tony Shiret, Haitong Securities First, you referred to increased marketing and promotional investments in the second half of the year. Can you quantify those? 4

5 Second, regarding the Argos concessions within Homebase, could you give us an update on the sales performance? You gave some pretty punchy numbers last time. The additional opex investment in terms of marketing and promotions is going to be a low-to-mid-single-digit-million pounds number in the second half of the current financial year. I cannot be exact at the moment because that might change as we go through the process, but it will be of that kind of magnitude. In addition, there are the previously announced additional operating costs coming through in Argos in the second half of FY16 in relation to the costs of the new propositions. Hub-to-home will require additional vans, drivers and management etc, so the cost guidance that we gave for Argos with the FY15 results presentation will have already factored some of those elements in. What it will not have factored in are some of the incremental promotions, which is the extra expenditure that I have just mentioned. Tony Shiret Do you think that consensus will come down by mid-single digits relative to what it is at the moment for the year? It could do, if people factor that in as an incremental cost. It depends on their overall views. It depends on what they do with all the other factors in the business as, although that is an incremental cost, there are a lot of other moving parts in the P&L. I might also say, Tony, when we talk about the marketing and promotion of the new proposition, it is not as simple as pick a number say, 5 million and we are going to spend 5 million on marketing. There are a lot of moving parts in there, between the promotional aggressiveness, the price of the products themselves, incentives we may invest in from time to time, and above-the-line marketing. There are a number of moving parts that all go into figuring out whether we are getting the demand and the take-up rate that we are looking for. Overall, it may balance, as Rich described, but there are a lot of moving parts in the promotional and marketing equation of launching new propositions like these. In terms of the Argos digital concessions in Homebase, the guidance that we gave previously still stands. We are only just reaching the stage where we have traded some of the stores for a full 12 months, and therefore seeing a 5

6 like-for-like comparison for the first time. The metrics that we previously gave with the FY15 year-end results were that, on average, we expect these stores to be around 1,000-3,000 sq ft. They will be more weighted towards the 1,000 sq ft size than the 3,000 sq ft, but there are a small number that are 2,000-3,000 sq ft, depending on the particular Homebase it is located in. On average, we expect them to generate c. 2 million of sales, of which about 25% will be cannibalisation from the existing store estate, so about 1.5 million will be incremental. Based upon what we have seen so far, those are still our best-guess numbers. Tony Shiret When you say they are sales, are those sales generated in those stores by people entering into the ipads in the stores themselves, or are they collection of Check & Reserve? It is a combination. A large proportion of Argos sales across its whole estate are placed before people even get to the store using the Check & Reserve facility. That is the best way to shop the format, particularly in the digital concessions, because given their relatively small size, they have a much lower stock holding. If you do not use Check & Reserve and instead shop whilst in the store, it is possible you end up having to come back again to collect your product. Check & Reserve, then, is clearly the best way to shop that particular model. Tony Shiret If you take your 2 million, what proportion of that is generated by a sales order within the store? We are seeing a higher percentage of online orders for store collection in the concessions, which you would expect for the reasons Rich mentioned. Warwick Okines, Deutsche Bank First, on costs, I was not clear what you were trying to say on your cost guidance. You were very clear at the full-year when you said that you expected flat costs across the Group, with Argos up and Homebase down. You pointed to the incremental cost of marketing today, which I understand, so is that the only thing that changes? You also mentioned that there are lots of moving parts. Could you clarify that? 6

7 Yes, you are right: we mentioned incremental marketing but, if you go back to the first quarter of this financial year, one of the things that we said then, which is Homebase-related and therefore part of the overall picture of the Group cost base, was that the store closure programme was running slightly ahead of where we had anticipated. The question came at that time asking, Does that mean that you will make a greater level of operational cost savings than you had previously guided to? We said, We may do. It is a bit early to say. At the moment, however, that store-closure plan is still running a little ahead of our original plan. On Homebase, therefore, the cost savings for FY16 may end up being a little better than we originally thought. At this stage therefore, at a Group level, I am not sure that I would change the overall guidance from costs being broadly flat versus last year, but we are talking about just a few single millions here in a cost base of around 2 billion, so it is hard to be that precise halfway through the financial year. Warwick Okines Second, on digital store numbers by year-end, I think you had said you would have more than 200. You look like you are, if anything, going to be ahead on the Homebase conversions. Could you say whether you still expect 200 to be about the right number? Also, what pace of converting existing stores to the digital format are you running at currently? At the half-year, we have about 100 Homebase concessions and 10 Sainsbury s concessions, which gets us to around 110. We have around 10 small format stores, which have previously been announced and opened, and we have about 30 digital conversions, which we have previously announced. That, then, gets us to about 150. Our plan for the second half of FY16 is to complete a further tranche of around 50 digital conversions which would result in a total of around 200 digital format stores by the end of FY16. The 200 number we guided to with our FY15 year end results is still therefore our best view, but, as we said at year-end, we focused in the first half of FY16 on the digital concessions, because we thought there were better returns to be had from these formats than there would be on the digital conversions. As we have now operationally delivered those concessions by the end of the first half of this financial year, the second half focus would be on the digital conversions. At this stage I still think 200 is about the right number. Warwick Okines Wrapping that into your capex guidance, then, is that 200m which you guided to at the full-year still intact? 7

8 It is, yes. There are no changes to that. Chris Chaviaras, Barclays First, in terms of this peak season, what do you expect to be the contributing growth areas potentially? Into Christmas, do you expect, for example, largescreen TVs to be commoditised? What are the areas where you would expect some positive momentum? Second, on the living wage, one of the retailers that reported today mentioned that one of the mitigating factors would be price increases. Is this going to be a mitigating factor, potentially, for you? If not, what are the mitigating factors that you may have? In terms of growth areas for peak, there are a number of them. Not a single one is the blow-away like we may have had in prior years with things like videogame launches etc, but there are a number of them that we are looking forward to. For example, 4K televisions will start picking up steam. They have started already, and the ranges are filling out. That will become a bigger deal this Christmas. I think portable-fitness technologies like Fitbit are increasing, and that is becoming a really interesting area for us and for others. Licensed products like Star Wars will be interesting. We expect a big year from toys like Lego. With the videogames market and with the hardware pretty wellsettled now, in the Xbox and PlayStation formats, we expect the games business to be interesting this Christmas as well. There are, then, a lot of bits of it that we think will contribute to areas of growth. Chris Chaviaras In terms of the living wage, might price increases be a mitigating factor? What other leverage can you pull there, potentially? On the living wage, all of us are assessing different things that we can do about that, with the level of impact. It is possible that price increases could help but, for us, I am not sure that that is as obvious a leverage. Given the categories that we compete in, I am just not sure that I see price increases being placed in the market, given the level of competitiveness. I think some combination of people trying to offset them with prices but also a number of other activities will be explored, as people try to make sense out of the additional cost of the living wage. For us, however, it is not quite as direct a relationship with selling prices. 8

9 Sunita Entwisle, Nomura First, could you talk about furniture and homewares, and how they have performed over the quarter? Second, I wanted to understand where you are at with developments on your own brands. You talked today about toys being strong, and I wondered if you could remind us what you have done on Chad Valley and what you are doing on Bush and Alba. Also, I think there were some press articles about plans for Habitat, so I am wondering how that fits into everything. Third, when do you think you will be ready to start marketing in the second half? On furniture and homewares, we are seeing some positive signs. As you know, we have had some challenges historically in those categories. We just introduced new ranges in the Argos business in July, as you may know. We coincided that with a new catalogue release, so we have early data very early, particularly given the strange patterns we saw in August. We are, however, seeing some trends. Furniture is starting to show some positive growth. In a number of sub-categories in furniture, we have seen, over the last quarter, some good growth and some turnaround. Without giving you too much specific detail on sub-categories, we have seen good growth in beds, for example. We have seen good growth in upholstered furniture. We are, then, seeing some strength in furniture. In homewares, the strength is a little narrower, although we are also seeing more positive signs in homewares as well. We still have some work to do there, but we are seeing some good growth in areas like Heart of House, for example. Again, however, it is early. Our new ranges were just launched in July, but we are seeing some pretty significant growth in Heart of House homewares year on year, even at this early stage. We are seeing growth in categories like laundry and cleaning as well. There are, then, some subcategories of homewares, but we still have a bit more work to do in that area. Broadly, however, if we include core electricals, we are seeing some good success stories in homewares, particularly in areas where we have added ranges, for example within coffee machines. With things like Nespresso, we are now in the market and we are starting to see some really good activity there, as well as small domestic appliances. There are, then, good signs there signs that give us optimism that we are making progress across furniture and homewares. I would say, however, that furniture is in a good place but we have a little more work to do in homewares. We are seeing enough momentum there that gives us optimism. On the related question on the development of own brand, toys have been 9

10 good for us in the last quarter. We saw growth in toys. We saw growth in market share in toys, and Chad Valley was a pretty good part of that. As you may have seen from our range reviews that we did some months ago, Chad Valley has a lot of new ranges in the market for Christmas this year. They were introduced with our catalogue and our range launches in July, so there is a bit more to see in terms of what transpires with Chad Valley. In the second quarter, however, we saw good growth there. In terms of Bush and Alba, we have just relaunched those brands. There is not as much change to Bush and Alba as in others. That was more of a repackaging and less about a new marketing or a new positioning. While we have not seen a dramatic change there, those are both pretty good-sized ranges for us and we are really hopeful that we can continue to occupy good pieces of market with those as opposed to expecting to see dramatic growth. Habitat is a similar issue: it is a small part of Argos at this stage. We have been working with the Habitat team in filling out our ranges, which have just been expanded with our last catalogue. It is still small but we anticipate improving those ranges over time and starting to see growth in the future. It is, however, not a big piece of the business today. The last question was about marketing. We are not going to give the week and the day when marketing starts, but it will be before peak when we go into market. There are a lot of pieces, and those pieces have started already. We have been doing some marketing trials in our test markets to try to understand the impact of various marketing activities in driving our new propositions. We do, then, have some data on which things are working and which are not, and there are a lot of things in motion there. In terms of the big push and the big launch, however, we would rather not communicate the dates there, although it will be before peak. Jamie Merriman, Bernstein Given your Check & Reserve model, as I think about hub & spoke, what portion of products that you bring to the spoke do not get picked up? Operationally, what do you do with those? Do you end up bringing them back to the hub? What happens? Looking backwards, historically our collection rates have been 60-70% this is not a collection rate we expect to be the case going forward, when we launch new propositions and some of our new offers. However, assuming nothing changes and it is still about reservations and collections, and consumers do not have a reason to behave differently, if you applied the same collection rate, you would see it react similarly, whether the stock happens to sit in the store or is brought from a hub. 10

11 If you have 30-40% of the product that is not collected, the choice is to either leave it in the spoke store or to backhaul it. Through the hub & spoke network, we have vans visiting stores two or three times a day, so backhauling back to the hub is not a difficult proposition. That is generally what we do: if the product is not picked up within the timeframe we provide, we will stick it back on the van and move it back to the hub, so it can be made available to other stores in the network. Jamie Merriman Given what you just said, are you planning to change that Check & Reserve model to one where you have to pay in advance? Yes, we have talked about how we will have online payment and Fast Track collection in the market. When people pay, the collection rate should be much closer to 100%. Jamie Merriman You are not, however, going to force that mechanism. It is just going to be an option. We have not yet decided. There are lots of options when people prepay. Let us keep in mind that, with every other online retailer, payment is assumed, so it is not an outrageous concept for us to ask people to pay if they buy from us. We have not decided that, in all cases, we will require that. That will not be the case, but it could be that one of our options is to require payment if we move the product in the network. That is one of the variables that we have been testing this year. Alistair Davies, Investec In terms of incremental marketing, are you maybe a bit ahead in terms of your system s progress or something else in the P&L? I just would have thought this might have already been within the budget, given that you are already looking at resolving the systems and technical issues going into peak trading as it was. We are not ahead of anything in terms of the launches etc. I think we said we would have to have readiness for peak. The decision that we have just taken as a business is that we think that, given we are in that position to raise awareness with customers, it is a sensible decision to invest a bit extra. It is 11

12 something that was in our minds at the start of the current financial year and it was not necessarily in our plans, until we got to the position where things are ready and are confirmed as ready. We have made that decision to invest a little more than we originally anticipated and are flagging that today, but there is not much more to it than that. Alistair Davies It is, then, not that you have been encouraged by responses from early trials and so on. No, not particularly. It is as I said: it is just about getting that awareness out ready for peak. Closing Comments We have overrun our time slot; I am aware that there are a couple of names still in the queue so, if those individuals want to give us a call later on today, feel free and we can pick up the questions that you have. Thank you for joining us. I know you have a busy day ahead of you and we look forward to talking to you on 21 October with the half-year results. Thank you very much. 12