Trading Statement Conference Call 14 January Introduction. John Walden Chief Executive

Transcription

1 Trading Statement Conference Call 14 January 2016 Introduction John Walden Chief Executive 1. Preamble Good morning and thank you for joining our call today. I m John Walden, Group Chief Executive and with me is, our Group Finance Director, who will join me in taking your questions in a moment. In addition to our trading update, I will make some comments regarding our announcement last night, issued in response to media speculation, confirming that we are in advanced discussions with regard to the sale of Homebase. Richard and I will, to the extent possible, take your questions on this topic as well. 2. Offer Period The trading information that we are providing today is for the 18 weeks from 30 August 2015 to 2 January 2016, which represents the Group s peak trading period. As you will be aware, the company is currently in an offer period under the Takeover Code, following the statement by J Sainsbury plc on 5 January regarding a possible offer for the company. As a result, I am more constrained than usual as to what I can say to you today, in relation to future guidance and quantified statements. 3. Argos Performance Whilst Argos trading performance was mixed, we made material steps forward in the Argos Transformation Plan. Total sales at Argos were up 0.9% in the period. Net new space contributed 3.1%, principally as a result of 95 digital concession stores added within the past year. Like-for-like sales were down 2.2%. In a similar manner to last year, Black Friday continued to have a disproportionate effect on Argos trading patterns during the period. Argos performed strongly over the Black Friday event period. It achieved sales growth of 41% on Black Friday itself, Argos s highest ever day of sales. Across the week of Black Friday, sales were up 23%. In this week, digital sales performed even more strongly, growing by 45%, resulting in digital participation reaching 62% of total Argos sales in the week, our highest ever participation rate. However, this consumer enthusiasm for Black Friday also resulted in a pronounced sales shift from periods both before and after the event. During 1

2 December, Argos also experienced a 13% reduction in traditional store walk-in sales, exacerbated in high street stores, while digital sales overall increased 10% during the same period. In terms of category performances, the market for electricals still suffers from several declining categories, which is a challenge to growth. Argos like-for-like sales of electrical products as a whole declined, driven principally by video-gaming, tablets and white goods. Sales in computing were strong, as were mobiles, boosted by the iphone 6S partially offsetting these declines. Video-gaming in particular saw good growth in sales of software, but this was not enough to offset significant market-driven declines in sales of consoles. Tablets recorded good volume growth, but further declines in the average selling price resulted in sales value declines. Argos achieved positive like-for-like sales performance in a number of non-electrical product categories such as toys, nursery, furniture and free time, where wearable tech performed well, albeit late in the season, and Argos acquired significant early market share. Jewellery and homewares sales declined. Argos opened a further four net stores in the period and converted a further 19 traditional stores to digital. There are now a total of 172 stores in the digital format, 20% of the total store estate. Argos successfully launched FastTrack delivery and FastTrack collection nationally in October. Over November and December, internet sales grew 13% against last year and represented 55% of total Argos sales, up from 50% last year. There was a strong take-up of the FastTrack delivery offer, such that home delivery, excluding large two-man products, grew by 82% for these months versus the previous year. Operational metrics improved as expected from launch and capacity remained good, with customers being offered same-day slots at on average 90% availability. FastTrack delivery also achieved the highest customer satisfaction scores amongst Argos channels. We are confident that FastTrack is indeed a differentiator and will drive sales growth in the future. For the period in total, internet sales have continued to grow and were up by 9% to represent 53% of total sales, up from 49% from last year. Mobile commerce sales also grew up 9% to represent 31% of total Argos sales, up from 28% in the prior year. Finally on Argos, the gross margin rate for the period was down approximately 225 basis points, with the decrease resulting from an approximate 75-basis-point reduction from the anticipated impact of adverse currency and shipping costs, an approximate 50-basis-point reduction from an increase in the level of promotional sales and an approximate 100-basis-point reduction from the anticipated reversal of the previously disclosed timing benefit recorded during the first half of the current financial year. 2

3 4. Homebase Performance Like-for-like sales were up 5%, with sales growth broadly across all product categories but in particular in big ticket kitchens and bathrooms. This growth continued to be supported by trade transfer from closed stores and also by a temporary increase in sales as a result of stock clearance activity. Homebase made further progress with its Productivity Plan, closing a net six stores in the period, resulting in a total of 31 store closures in the year to date, thereby reducing the portfolio to 265 stores. Finally on Homebase, the gross margin rate for the period was down approximately 50 basis points, with an approximate 50-basis-point reduction from the anticipated impact of adverse currency and shipping costs, a reduction of approximately 25 basis points from the mix impact of the growth in sales of margin-diluted big ticket products, partially offset by an approximate 25-basis-point improvement from a reduced level of stock clearance activity in comparison to the prior year. 5. Profit Forecast Finally on trading, as a result of this performance, we expect that the Group benchmark profit before tax (PBT) for the financial year ending February to be around the bottom of the current range of market expectations of 92 million to 118 million. 6. Potential Sale of Homebase As we announced last night, in response to media speculation, we are in advanced discussions for the potential sale of Homebase to Wesfarmers Limited for a cash consideration of 340 million. Home Retail Group and Wesfarmers began discussions in September, due diligence commenced under a confidentiality agreement in October, and Wesfarmers provided the Group with a firm offer letter in November. Wesfarmers has completed its due diligence and the parties are currently finalising transaction documentation. However, discussions are ongoing and there can be no certainty that a transaction will be agreed. I am sure you have all read the announcement from last night and I would refer you to that announcement for details of the potential transaction. In summary, under the terms being discussed, Wesfarmers would acquire the entire Homebase business, including all stores and dedicated distribution centres. Product brands owned by the Group, such as Habitat, Schreiber and Hygena would be excluded from the sale, but licensed for use by Homebase for one year. It would be our intention to distribute the cash proceeds of 340 million from the proposed transaction to our shareholders, net of costs and pension 3

4 contributions. The potential transaction would significantly improve the retained Group s total financial position. Based on FY15 actuals, the total financial position would improve from a net debt of 1.45 billion to a broadly zero net debt position. From FY17, the retained Group s benchmarked PBT would be reduced due to the sale of the Homebase business, which reported benchmarked operating profit of 19.8 million in FY15. Thereafter, the retained Group s benchmarked PBT would be impacted to the extent that the retained Group is unable to absorb surplus overhead capacity remaining after the expiration of transition services through growth of third-party utilisation, or in the event that the retained Group is unable to replace Argos concessions, which are likely to exit Homebase stores, with alternative locations. Any agreement for the sale of Homebase would be subject, among other things, to approval by the Home Retail Group board, the syndicate of banks that provide the Group s revolving credit facility of 250 million and the Group s shareholders. 7. Summary This has been a very eventful period for the Group. Argos traded through a challenging market and achieved overall sales growth, while also launching significant new propositions. Homebase maintained its positive trading momentum and, during the period, we also commenced and progressed discussions for the sale of Homebase and received an approach from J Sainsbury plc for the potential acquisition of the Group. Against this backdrop, whilst Argos s trading performance was mixed, I am pleased that we made material steps forward in the Argos Transformation Plan, building market-leading digital capabilities. Our recently introduced FastTrack delivery and FastTrack collection propositions, underlying hub & spoke network, now-proven digital concession model and improvements to digital channels are beginning to drive impressive increases in both digital sales and participation. I continue to believe that the capabilities being developed in the Argos Transformation Plan will position Argos as a retail leader in an increasingly digital future. Claire Huff, RBC Questions and Answers In terms of the quarter, could you let us know what proportion of orders went through FastTrack since its launch? I am trying to understand whether it lowered the proportion of orders that are not collected from store, given that customers now have the option to pre-pay. 4

5 The second question is partly related, but could you comment on the availability of key lines over the peak period and also the performance of the hub & spoke network versus last year, when you had a few issues with that over the peak? On Homebase, I am trying to understand the statement that the sale will be neutral to the P&L in fiscal year I think you said that you would lose 10 million from the inserts and 30 million if you use consensus on Homebase s EBIT. I am trying to understand what the offsetting drivers are. I think you said that the charge would be 70 million in fiscal year 2016, but you do not mention what that would be in 2017, unless I am misunderstanding that statement. Some colour around that would be great. John Walden I apologise if I did not follow all those. Your first question was about the proportion of our total business that went through FastTrack. Claire Huff How much went through FastTrack? And whether there has been any change to the number or proportion of orders that are not collected, because of that option to pre-pay? John Walden On the latter one first, we certainly saw a change in the shrinkage or uncollected rate from FastTrack collection. FastTrack delivery was, by far, the biggest take-up. FastTrack collection did not have quite as much take-up as FastTrack delivery. That is what we expected, given how different FastTrack delivery is in the market, but we did find that FastTrack collection gave us a much higher collection rate. In fact, FastTrack collection rates are virtually 100%, which you would think would reduce the uncollected rates, and which it has done. In terms of the total proportion of FastTrack on the business, it probably varied over the course of the season, but once it was launched through November/December, it approached 15% or something like that., Chief Financial Officer, Home Retail Group To clarify, that was for total one-man home deliveries. We already have an existing one-man home delivery operation, which does mid-single digit as an element of home delivery. FastTrack is now in addition to that one-man home delivery operation. As John rightly says, that then is a low double digit. We were just over 10% for one-man home delivery sales. We talk today about 80% growth of our one-man home delivery; that was driven by the FastTrack delivery operation. It has not quite doubled, but not far from doubled, the 5

6 one-man home delivery volumes. John Walden The traditional one-man delivery, historically, before we did FastTrack is basically what everybody else does in shipping it across the country. That now serves a different role for us. Some deeper-inventory products do not turn around fast enough for us to carry in hubs or spokes but, for the most part, our facility is a backup for FastTrack. When products are either out of stock or they order multiple products, some of which might include products that are not kept in a hub, we fulfil those in a collective way from a central location. It serves a different purpose, but it is generally a back-up for orders that are placed on FastTrack, in the first instance. That is why we look at all home deliveries as a collective. On the potential transaction, just to clarify, the loss of Homebase profits is an impact that goes right the way through from the day of a potential transaction, to FY17, FY18 and FY19 onwards. Whatever you have in your model for Homebase would disappear. The point we are making about FY17 not being impacted is purely from the transitional effects of the sale. That really addresses the fact that, in FY17, all the services that we provide today will fundamentally continue to be provided at the cost which we currently charge Homebase. We will not make more money on it, we are not going to charge a premium; it is a like-for-like service at a like-for-like price. We will then have the unwind of the concessions in Homebase, which will be phased. So the balance of those things will have little to no impact on the profit in FY17. Where the profit impact begins to kick in is, as the services come to an end, there is an element of fixed costs that we will not be able to eliminate. I will give you an example just to illustrate what I mean. We currently have three two-man home delivery operations in the UK. They provide two-man heavy products, for example furniture, white goods and that kind of stuff across the UK. About 80% of that volume is Argos and about 20% is Homebase. In the next 12 to 18 months, we will continue to provide that service to Homebase and will fully recover both the variable and fixed costs that Homebase currently pays. At the end of that, we will eliminate the variable cost element by restructuring and remove as much of that as possible. But we will still need the three facilities as a Group, because we have 80% of Argos volume. That means that the element of rent and rates, which are fixed and which Homebase currently pay, will revert back to the Group. There is little that we can do about that, other than looking for volume growth to reabsorb it. It will give us spare capacity but, on day one, we will end up with some fixed costs that previously 6

7 were paid for by Homebase, but will now revert back to the Group. That is an example of where that 10 million comes from. Claire Huff Is that TSA charge of 70 million in fiscal year 2016 the full charge for the 12 to 18 months or will there be another? That is a per annum charge. Claire Huff Will that therefore be the same in fiscal year 2017? It will not be exactly the same, because the services will be over different periods of time. There will effectively be a full charge in FY17. It will unwind as services are terminated and the charge is stopped, and we kick into the restructuring programme. We will have a restructuring programme, if the transaction goes ahead, which will mirror the services terminating to take out the cost base. Claire Huff To go back to the first question, do you have any comment on the availability of key lines over peak trading? John Walden If I remember correctly, not to put a question back to you, you asked about how hub & spoke performed and what the availability was like as a result. Now that we are at the second peak season for hub & spoke, it performed very well. This year we added a lot more complexity to hub & spoke. As you may recall, last year, we put in the network and used it to provide products to spoke stores for collection. This year, we did a number of things. We added not just increased volume from that operation, but we added FastTrack delivery run out of the same hubs, with vans and a lot more volume going through it. On top of that, we added almost 100 new concessions, which is a pretty material increase in terms of the volume that s provided through that network. There is a lot more complexity into the hub & spoke network and, overall, it performed very well. Our availability levels were high, at least on target for the most part. There is always the odd category that is high in demand but, in general, we did not 7

8 have an availability challenge in the business and I am pretty happy with the way that our team operated the hub and spoke. Geoff Lowery, Redburn Partners On the Homebase transaction, can you confirm that all the property provisions of over 100 million will go with Homebase when you exit it? Are there any big working capital implications for the go-forward Group of not having Homebase in it, in terms of your cash position? Finally in terms of the brands you are retaining, how big were the annualised sales of Hygena, Schreiber, Habitat, etc.? In terms of the property side, as we said before, the vast majority of the provisions for property that we have at Group level, which are around 150 million, are related to the Homebase business. The structure for the potential transaction is such that all of the Homebase stores would go with the transaction, as would the provisions for those stores. There should not be any working implications that are too significant. In the first 12 months, it will be a little hard to say. I say that because we are providing transitional services, and part of those transitional services will be our Asian buying facilities, our UK sourcing facilities, etc. We will carry on doing those kinds of things over a phased approach. To be completely honest with you, it is a little hard to be too clear yet, given that it is still only a potential transaction and these are some of the key things that need to be finalised, if we are to get to a transaction, then we can be clear on exactly what we are providing, for how long and what the impacts would be. We would have to give you more clarity on that at a future point, if we reach that position. Geoff Lowery What are the sales for the brands you are retaining? I do not think I will break those down. We have not broken them down historically at a segment level. There is nothing that you would say is significant; they are all reasonable sized brands within the business. John Walden Those brands have largely been used for Homebase, we have largely been focused on selling those brands through Homebase. However, in many cases, certainly for Habitat and, to some degree, some of the others, have been 8

9 available in Argos, they have been available on a very limited basis. Going forward, we are interested in how we can do a better job. We have seen furniture pick up at Argos and we think that, as we are making sense of our brand architecture in home-related products, all of them could be interesting for us going forward. Geoff Lowery I take from that that there is no non-compete for the go-forward Argos business, around any product categories with Homebase. You are totally free. Both sides will be allowed to do whatever they have historically done, in the way that they have historically done it. Tony Shiret, Haitong Securities Delving back into history, I remember when you put this thing together, predating you, John, that there were some buying synergies between the two groups. I do not know if you have commented on that in the statement at all. I just wondered whether you are going to see some gross margin effects from loss of scale in certain areas. Regarding Argos, I just wondered whether the metrics you have given about in-store and online sales over the peak period have led you to think about your existing store estate and whether you need to accelerate elements of your digital plans to reduce the existing store estate in the UK. As a small aside, I just wondered if you could confirm that the Homebase pensioners will be going with the deal or whether you are retaining any residual obligations. You are right, Tony. What we said at the time of the announcement of the deal, from memory, is that there was a 20 million synergy across the Group. An element of it was buying. And an element of it was cost synergies, for example the two-man home delivery that I gave as part of that 20 million. We then increased that to a level of 40 million after about two years. Again, a large element of that was cost synergy and an element of it was buying. On your point, we are fairly clear today on the cost synergy of what will happen to that. The buying teams now feel reasonably confident that there will be little to no impact from losing that volume. It is a classic situation with a supplier; you work hard to bring in these benefits and then, once you have them, fight tooth and nail not to lose them. Their view is that we will hold on to the vast majority 9

10 of those. There might be a very small impact, but it is not the sort of thing that we would be flagging as a risk to this transaction. In terms of the pension side, given the announcement we made today about the payment of the pension scheme, it is a little complicated. Let me just try to explain what that is. There is a small DB scheme in the Homebase business, based in Ireland, which is going with the transaction. Fundamentally, the Homebase business has a DC scheme, which is not an issue. Colleagues in Homebase will be able to continue contributing to the DC scheme. The DB scheme is an ex-argos scheme that became a Group scheme. It is partly related to Homebase, but is staying with us. That is effectively the 50 million we are paying in as part of the agreement for the change of the covenant and part of the agreement we have reached with trustees to enable us to do the return of capital to shareholders, because an exit of capital, under pension regulations, is a Type A event and needs the trustees agreement. As I said, the pension side is a little complicated. It has required and is requiring quite a lot of work. Tony Shiret Basically, you have an actuarial valuation going on and presumably know what the result of that is now. I do not know what the result of it is yet, Tony. Effectively, starting 31 March 2015, the trustees had 15 months to do that process, so do not actually need to give us an answer until June Historically, they have usually been fairly helpful and worked to a process that would give us an answer that we could report with our financial results 12 months later. They are still on track to do that. In terms of that likely outcome, as we have said before, if you look at where IAS 19 was three years ago and look at the funding valuation, obviously the funding valuation is quite a bit higher and IAS 19 has gone up in that 3 year period, given what has happened to yields, we would expect the funding valuation to go up. If I was guessing at the moment, and I will give you round numbers, three years ago the deficit was 158 million. My guess at the moment would be that that deficit would be about 100 million higher than that. We would then reduce it by 50 million through the payment that we are making, and so I think that the answer, at the end of all this, would be somewhere in the region of 200 million. 10

11 John Walden I can address the question about the store estate. What we have observed and announced was that the piece of our business that declined to a fair degree was what we call walk-in business. That is not footfall, because we still have a lot of footfall from people coming into the store to collect FastTrack, or check & reserve orders. These are people who have not previously purchased and walk in to buy, generally from that stores inventory. We are not sure of the exact cause of that, although we suspect it is a couple of things. Certainly footfall on the high street is down, and is down generally across the market. We have seen that and it is going to be a factor. It is probably not a trend that is going to end. The other thing we are seeing is a little of our own making, which is a shift from customers walking in to customers going online first, which is exactly the shift that we are trying to incent. We are certainly trying to incent it a little by the FastTrack offers in the market. The question of whether the stores serve the same role and all pay out in the way they used to is the right question. The strategy that we have been pursuing in the store estate, since the Transformation Plan was announced, has been, as you probably recall, to reduce the average term of our leases. Even as leases arise, although we have not exited substantial volumes yet because the stores still make money, we have renegotiated leases so that we could have a much lower average term. We now have an average lease term below five years. That means that c.20% of our store estate comes up for renewal every year. The purpose of that is to give us flexibility so that, as trends change, which we anticipated, some of our stores may not make sense anymore. Some of the locations may not make sense anymore. We will have flexibility to very quickly change the whole estate aggressively, if we want. The other thing we have demonstrated is this concession model, which has been in motion since the Transformation Plan started. It started with putting in the hub & spoke network, then doing store collection and then starting to do small and concession stores. The point of that is trying to demonstrate that cheaper, lower capital-intensive, smaller locations can make sense for us. We are very pleased with the results of that. In this past year, we scaled that for the first time, having moved past a trial in the year before, and added 95 locations, which contributed 3.1% to our sales. That is exciting for us. I think we have a fair amount of confidence that concessions can work and now have an option to potentially move out of stores. Yes, there is an option for us, which is one we anticipated, to start moving out of stores where it makes sense and start moving into cheaper smaller locations, potentially even concession locations. Over time, we would anticipate that we would relocate some of our less desirable stores into smaller less expensive locations. 11

12 The other opportunity for us, through what we have demonstrated, is that there will probably be more locations over time. They may be smaller and less expensive, but we think that the convenience model makes sense. Rather than people driving a long distance to collect a product at Argos, having more smaller locations, which are more convenient, might make sense. There is a lot of flexibility in our store estate. We have not identified any particular stores that we are planning to close now, but it is an option that we will be evaluating as leases come up and as concession opportunities present themselves. Tony Shiret Just to follow up on that, bearing in mind that you have just decided that you are not going to be doing any Homebase concessions and that, subject to what happens with the Sainsbury bid, you might not be doing any more Sainsbury concessions, have you opened any other discussions with other retailers to put concessions in their stores? John Walden Since we put the partnership with Sainsbury together a year and a half ago, or so, we have had a broader net of potential concession locations in the marketplace, knowing that this could be important to us. We do not have any deals teed up. We do not have anything particular to announce, but we think that there are other options in the marketplace for us to have concessions or small locations. Warwick Okines, Deutsche Bank On the quarter, I remember at your first-half results in mid-october you said that you were hoping for a point or two of like-for-like. You have talked about some of the reasons why that has not happened today, but I was just wondering about the performance of high street versus out-of-town stores during the quarter and if that was a marked point of differentiation between the two types of stores. Secondly on the Homebase proposal, can you just confirm that you are not planning or expecting any savings from your currently reported central cost line? If that is the case, could you just remind me exactly what fits in there? Obviously there are plc costs, but what else falls into that central cost line? The answer on the first one is that there was a difference there. You can see the difference in the public, reported footfall measures. We saw that kind of performance. The high street was definitely weaker than shopping centres, which were themselves slightly weaker than out-of-town retail parks. That is 12

13 as far as I am going to go on that. We do not normally break that out, but that is the trend that we saw. The Homebase cost savings are all mixed up. What we have to remember here is that what you see as central costs, as you probably now understand from last night s announcement, is the balance of a much bigger cost base of Group costs after you have re-charged to Homebase. When I come to the answers that we talked about in the announcement last night, there is no separate Group cost per se. That 10 million net overhang is after attacking the whole of the central cost base and then reabsorbing some fixed costs. Partly to your answer, there will be savings made in areas that are not directly related to the recharged operations. The net of all that will end up with an overhang of about 10 million. There is no other cost saving plan, over and above that 10 million overhang; it is embedded. What I mean by that, just to explain it, is that the fixed cost overhang, for example, might be 15 to 20 million, against which we make other savings that are not part of that re-charge to return it to the net 10 million. Does that make sense? Warwick Okines Yes, it makes perfect sense. Just back on the LFLs, so the high street underperformed. John said earlier that he thinks the footfall is a trend and yet, at the same time, you are saying that, over the long term, you do not think that people will make long drive times to get to stores and that you need a more convenience-driven model. Can you square that circle, because it sounds like it is a bit contradictory? John Walden I am observing that the trend that continues is high streets. That is generally well known. The footfall rates in high street versus out-of-town or other formats have been declining. We might expect that to continue, but not fall off a cliff. We still think that people will use locations for collection and we are still seeing that even in our high street stores. People who click and collect, check and reserve or use FastTrack collect are using the stores for those locations. We think that that model is supported by concessions. We are seeing some pretty strong growth from putting in new smaller locations, which is contributing a fair amount to this period. We think that more smaller locations are still of value to consumers, whether that s on the high street, someplace elsewhere or in other cost-effective places that we can put those. They are all options for us. 13

14 Jamie Merriman, Bernstein I was wondering whether you could give us any colour about whether the proposed Homebase transaction has changed your plans about store closures at all. Are any on hold? Are the ones that you have already announced going ahead as planned? No, it has not changed any plans for Homebase. Our plans at the start of the year were to shut around 35 stores in the current year. In the year to date, we have closed 31. We have eight weeks for the small number left to go. Clearly, if we are in a position whereby we have agreement and a signed transaction, and we have uncommitted legal closures, which a potential buyer might not want, then we are perfectly open to a conversation that says, If you have now committed to buying the business and want to keep that store, it is fine with us. That would be their call but, at the moment, we are running the business, it is our business and we will continue with the plans that we have. Jamie Merriman How many of the remaining closures are you committed to? We are effectively committed to the ones this year. They are announced as closures. It will not really change the 35 this year. It would only change the number for FY17, whereby they are less commited. We are in discussions or conversations, which we can end, or the buyer can buy the business and continue them and exit them, according to what they are comfortable with. The point that I am really making is that it will not change the direction of the guidance we have given you for the current year nor, for the avoidance of doubt, will a potential transaction change the receipt of the cash flows on Battersea, which we will be maintaining. Chris Chaviaras, Barclays I have a clarification. Did you say that the pension deficit would end up, after the 50 million payment, being 200 million? Yes, I did. Just to be clear, I said that, three years ago, it was 158 million. With the reduction in yields and discount rates that we have seen, it is likely to end up somewhere around 250 million. That would be my guess from the calculations I have done of what I think it would be. We have also agreed to 14

15 pay a 50 million lump sum. If all that happened, mathematically, it would come back to about 200 million. That would be my guess. For the avoidance of doubt, we will maintain that pension fund. It is an ex-argos scheme, and fundamentally, it is Argos members in that scheme. Chris Chaviaras That was very clear. I will have to come back to the cost savings for Homebase or the fixed costs that you cannot yet save. Can I confirm whether the 10 million that you might potentially lose for Argos concessions is additional to the 10 million of fixed costs that you might not recover? You will be looking for ways to recover that, hence you guide for 20 million from FY19 onwards. Am I getting something wrong here? That is exactly right. We are saying that we expect the cost reabsorption to be 10 million and the impact of losing the concessions in Homebase to be 10 million. We are saying that, in FY17, there will be no impact from either of those things, because we are fully covered under the TSA for FY17 and the concessions will unwind over time so we will have little to no profit impact in FY17. In 2018, given that we have roughly six months coverage for the cost base and an unwind programme, we will see a 5 million and 5 million impact from those two factors. This is very rough. In FY19, it would annualise with a further 5 million and 5 million. The concession impact is fairly clear and known, so that 5 million and 5 million is there unless you can find alternatives to open new concessions that would then offset it. From a cost perspective that is the fact of where we are today, but we will have spare capacity in the network for other growth opportunities that we may be able to identify over the next couple of years that would then reabsorb that. From where we sit today, that 5 million and 5 million impact in FY18 that annualises to a 10 million and 10 million impact in FY19 would be the situation for the retained Group as it is today. Chris Chaviaras That was very clear. On the outlook, given a lot of your categories declined, so like-for-likes declined despite much increased marketing over the Christmas season, I wonder in your thinking what will go in your favour in What do you hope for? 15

16 John Walden In the mix of trading results, there is a lot of variability by category, as you can imagine. There are a couple of things that we expected to be a bigger deal in the fourth quarter, which got a late start for us, for example wearables and 4K TV. At the beginning of the year, we expected that they would start to show meaningful growth in the second half. They finally started to pick up; over the whole quarter, 4K TV was 18% of our mix, but went as high as 31-32%. That is starting to catch on and we think that could potentially be the beginning of a longer cycle that could help us over time. The other one that I would speak about is wearables, which we also expected to be a very big deal. It started to kick in late in the year, starting with Black Friday week. We participated fully. In fact, we achieved something in the neighbourhood of a third of the market share in those products, but it was a late start. Although we have had a couple of secular problems in electronics that we have had for a while in places like photographic and tablet, with price erosion and some others, we would like to see a couple of categories start to kick in positively and those are a couple that we would look for. We have also seen non-electronic products contribute more than they have historically. We have seen a turnaround in our furniture business, which was up roughly 5%. That is a nice story, because that was a problem category for us earlier in the year. We did very well in nursery and toys. We did very well in computers in a market that was down almost 10%. We are up almost 10%. We have some good stories in that mix. Mobiles is up over 50%. There is quite a mix. Overall, yes, like-for-likes were down, but there is a lot of good news and a lot of signs of growth, with us taking market share in categories that we think can help us in the future, if we can button down some of those that are in decline. Chris Chaviaras When you say that 4K TVs were 18% of the mix, do you mean of the TV mix? Can you say what percentage of your overall Argos sales these were? John Walden Yes, I am talking about our TV mix. Chris Chaviaras Can you tell what it is as a percentage of the overall Argos sales? 16

17 All we have said historically is that TVs participation of total sales is mid-single digits. You can work it out from that mathematically. Simon Irwin, Credit Suisse On Homebase, can you give us some more flavour of which categories traded well and not so well in the quarter? Did you see any positive or negative weather impact? More broadly, why are you selling Homebase? Obviously quite a lot of the 340 million disappears into pension contributions and deal costs etc. You are seeing lower synergies and central costs going forwards. Obviously Argos loses distribution through the concessions, so I am struggling to see why this is of benefit in the medium term to the Home Retail Group. There is not really a great deal I can add to the Homebase categories, other than what we said in the statement today. We saw LFL performance being positive across all three of the categories we talk about. We break it down into three, which are big ticket, seasonals and everything else. Within the seasonals, your point is right: it was a fairly odd weather pattern for us, but across the season, there is a mix of categories. We have actually seen some categories perform better than you would have expected because it has been warmer, and some categories perform worse because it has been colder. Actually, overall for the season, those two factors have offset each other and it is broadly neutral from that perspective. Can you remind me of the Homebase question, Simon? Simon Irwin It was just why you are selling it really. There is quite a lot of leakage from the 340 million. Let me just cover the pension point, because it is a bit of red herring, in that that money is going to leave the business, whether we sell Homebase or not. That deficit exists today and the money is going to leave the Group. The fact that we are including it as part of this transaction, as an agreement with the trustees, is a bit of a moot point. I would not put the 50 million for the pension as a value leakage from selling Homebase. The deficit is the deficit, and I need to pay it, whether I sell Homebase or not. John will probably pick up the broader question. 17

18 John Walden Maybe I can step back and give you a little more context. You may recall that, in 2014, we put in place a Productivity Plan, which was the forward plan for Homebase after we had done a pretty comprehensive review of the business. The theory of that was that we did not want to spend a lot of money on Homebase at the time, until it had addressed some fundamentals of its model; in particular the productivity of its stores, which included both the number of stores, many of which were not producing the kinds of results we needed for the space, as well as inside the stores cleaning up the standards and cleaning up the pricing and promotion model, which is very inconsistent across the business. The other thing we had to balance at the time is that we were a year or two into the Argos Transformation Plan, which we were convinced at the time and are still convinced is the biggest source of shareholder value for the Group. We could not distract the business or spend a lot of our capital resources on Homebase if we felt like we needed to do so on Argos. We had to balance the two, and concluded that the three-year Productivity Plan was the best plan for the next couple of years to position the business for either substantial investment or other options, should we be successful in increasing the value. We found that we had perhaps overachieved on the Productivity Plan, in a fairly short time, particularly the aspect of that that related to store closures. It has in fact added value to the business. Other things that helped were good performance in a couple of proposition areas and a bit of digital growth. The business has performed well in the first half and the first three quarters. It is at a good point of value, which is not insignificant from an outsider s perspective. A couple of other factors we thought about were the strategy of starting to return some capital to shareholders. With the amount of cash we have on our balance sheet, an ongoing question is whether some of that is available to our shareholders. We did not want to handicap the Argos business and not have capital available to invest, should we need it. This potentially offered an opportunity for us to both have good shareholder value and then to share that value with our shareholders, while still retaining enough cash and other resources on the balance sheet to potentially fund what was left of the transformation of Argos. In fact, looking at the deal and balance sheet effects, it does a good job of that. There are a number of factors, but the timing was right. We were not looking to sell it but, net net, it checks a lot of boxes for us, including a good value and the ability to return cash to shareholders, which we think is a good idea. 18

19 Simon Irwin In terms of how that Productivity Plan is going, you are selling it on a moderate multiple on a very low margin. Are you effectively saying that, given what you have seen of the Productivity Plan to date, you would not expect that margin to improve materially over the next couple of years? What we are saying, Simon, is that you are looking purely at the P&L impact, and we are looking at the combination of the P&L and balance sheet impact. The balance sheet impact, for us, is very, very strong. The P&L impact is not as compelling, but we think that the combination of the two makes it the right thing to do. Alistair Davies, Investec Squaring the circle on that flat profit impact next year, how does licensing income fit in, if the costs from Homebase are offset by that TSA? Do you have any comments in terms of how the ebay partnership is progressing and what contribution that is making? Sorry, Alistair, I did not quite understand the question. What we are saying at the moment is that, currently, in our numbers for FY16, we charge Homebase 70 million for services that we provide to Homebase from the Group. Next year in FY17, we will continue to incur and charge the same 70 million, and provide all the same services throughout the entirety of FY17. Hence there is no profit impact from those things in FY17. As I mentioned earlier in reply to Claire s question, clearly there is the profit loss from the sale of the Homebase business; whatever was in your model for Homebase, in its entirety, would be a profit impact that comes out. Alistair Davies Does the licensing income from Habitat, etc., go back on top or is it part of the 70 million? It is all part of the 70 million, all wrapped up in one number. There is nothing outside of it. That is the entirety of the relationship, in the arrangements between Group and Homebase. 19

20 John Walden It is going well with ebay. As you may know, we extended the relationship back in the autumn. We had over 1.6 million collections through our stores from ebay customers over the quarter. Also interesting was that you may recall that part of the extension of the agreement was to start trialling the ability for Argos customers to drop off products that they had sold in the secondary market for it to be moved to a collection location for whoever purchased it. That trial went well; we have actually expanded it now to 150 stores. In general, the relationship is going well and I think it is proving of value to ebay and to its customers. Assad Malic, Citi Coming back to Argos and trading over Q3, it looked like you had a slightly different product mix. What were the volume value trends over the period? Was there not a positive mix effect on the margin from lower electricals? I will give you the usual metrics that we have given before. Value in the third quarter was up about 3% in Argos. Volume was down about 5%. On an LFL basis that gets you to the -2%. For the record for Homebase, volume was up +3% and value was up +2% to get you to +5%. Assad Malic Given the decline of electricals in the mix, I was surprised that you did not potentially have a positive impact on the margins. That is in the roundings really. When we say we are down in electricals, we are talking about the odd point or so of LFL different to the balance of the portfolio. Is there a mix impact? Yes, there is, but it does not get to a rounding of 25 basis points, which is our reporting criteria to break it out. Assad Malic The 50 basis points of increased promotional investment seems to have been a theme for the year. I was just wondering whether Black Friday was more promotional than you expected and whether you think there will be a requirement for further promotional spend as you go into It was not, to be honest. The guidance that we gave with our half-year results said that we expected the FX benefit in the first half, which was plus 75 basis 20

21 points, to unwind. Today, we have reported it as negative 75 basis points, so that was bang on the money, but we would expect that to be fairly close given that we knew the hedges. We knew about the timing benefit that we had in the first half and said that that would unwind. Clearly that was fairly certain. We had also made an assumption in that guidance that said that we would expect the pricing and promotional number down 50 basis points to continue through the third quarter. Again that is what we have seen. Actually, the level of pricing and promotions we had built into our expectations was very similar to the levels at which we traded the business in the third quarter. Assad Malic Are you happy with your price position or do you think that, going into next year, you will have to run it at a similar rate of investment? John Walden It is a universal truth that price competition is intense. We are seeing a lot of deflation, particularly in some categories, which we do not think will let up. We do not have a view as to whether we keep declining at a similar rate, but it is something we will have to trade through. We do not see that changing. Assad Malic The 75 million restructuring costs seem quite large to me. I was wondering if you could break that down into some smaller buckets. I cannot at the moment, Assad. We will in due course. To give you a rough idea, we are going to have to work to attack a cost base of around 70 million. This is all very high-level and is just to give you a rough idea but, if you work on the basis that that is going to cost you somewhere in the region of 75p in 1 to exit, that is the biggest chunk of where the 75 million comes from. There is a whole raft of transaction-related costs. For example, we have communications that will have to go out to our Financial Services cardholders. They are currently allowed to use an Argos card in both Argos and Homebase, which they will not be able to do going forward. There could potentially be re-card activity, because the cards are co-branded. There are things like that, which is not just restructuring, but various separation costs. We run a reasonably integrated back-office set of functions, which we need to separate going forward. There will be costs incurred from doing that. 21

22 Geoff Ruddell, Morgan Stanley Given the 10 million you are guiding to as a loss from the concessions coming out of Homebase, is it reasonable to think that a concession makes about 100,000 a year profit? If that is the case, does that apply across the Sainsbury estate as well? I knew what the second question was going to be, Geoff. I am going to be really helpful to you here. Given that we said that 10 million is the profit impact and that there are 100 concessions, I am fairly comfortable to confirm that the impact on Homebase is about 100,000. I will not comment on the second part. If you want to give us a call on your follow up that is fine. John Walden Thanks for participating. Give us a call with questions. Have a good day. 22