Chief executive’s statement

As the UK’s leading home and general merchandise retailer, the Group operates with a clear scale advantage derived from a well invested infrastructure which has been built up over a period of many years.

We continue to expect a return to attractive growth rates in our product markets over the longer term, driven particularly by consumers investing in their home environment, new technology and new product developments. Even in the current challenging economic environment both Argos and Homebase continue to strengthen their customer propositions by further investing in multi-channel initiatives, expanding choice, developing both ranges and services, enhancing product presentation in stores, in catalogues and online and delivering value to the customer.

These investments will shape the future of shopping for our customers, ensuring that we continue to build successful businesses that bring unrivalled convenience and value to customers’ every day lives, whether shopping at home or on the move.

Strategic focus

Leadership in multi-channel retailing

Home Retail Group is the UK’s market leader in multi-channel retailing. We have developed highly successful internet and mobile channels to meet consumer demand and we will continue to develop an integrated shopping experience that encompasses the latest technology and new ways in which customers want to interact and shop.

Argos has continued to grow its multi-channel sales, which now represent £1.9bn or 46% of its sales. Argos is the second largest internet retailer in the UK, with 400 million website visits in the year. During May 2010 Argos launched its iPhone app which, to date, has seen more than 1.3m downloads and has been used to drive about 1% of Argos’ sales. Future developments include the introduction of a TV shopping channel and mobile apps for iPad and Android.

The introduction of Reserve & Collect at Homebase has helped to drive further growth in its internet sales and there has also been strong growth in traffic to the Homebase website.

Differentiated and market leading formats

The Group’s retailing formats are well positioned and clearly differentiated from other retailers in the market and continued investment in store presentation remains a key focus.

Stores represent an integral part of the Argos model as places to shop as well as providing convenient ‘pick up points’ for the customer. The programme to refurbish Argos stores is performing ahead of plan.

Homebase continues to roll out its Midi Refit programme that significantly improves its big ticket offer as well as enhancing its home and decorative offerings.

Expanding our product ranges and related services

The Group uses the strength of its retail brands to drive leadership in its core markets and grow market share through expanding its product ranges.

During the period under review, Argos has seen market share held or gained in most of its product categories and it continues to develop ways to further expand choice, reviewing category opportunities which can leverage its highly flexible operating model and online presence.

Homebase offers 38,000 products to support the home and garden enhancer using inspirational roomsets and an installation service to extend its presence into big ticket items. Homebase’s differentiated proposition continues to drive market share gains.

Delivering value to the customer

The Group maintains its competitive price position using its purchasing scale and capabilities in all areas of sourcing to create a highly advantaged supply base particularly for direct import and direct sourcing of product.

Argos has maintained its commitment to being highly price competitive through the use of weekly price comparisons on around 10,000 products and is able to offer even greater value to customers through Argos Value and ‘WOW’ lines.

Homebase continues to improve its value position, through its Value range, best buys, bulk deals and other promotional offers. Actions taken over the last two years have resulted in a significant improvement in the customer’s perception of value at Homebase.

Leveraging scale and infrastructure

The Group’s scale and infrastructure enables it to leverage financial benefits and synergies that would be difficult to replicate given the investment required and the period of time over which these scale advantages have been established. The Group also provides an in-house financial services operation, providing customers with a range of both revolving and promotional credit products, as well as a home delivery service which supports the multi-channel proposition at both Argos and Homebase.

Efficient cost base

Over the past two financial years the Group has successfully delivered a number of significant organisational and infrastructure changes that have reduced costs by £125m and improved the flexibility of our business for the future. This cost reduction has been achieved through a rationalisation of the distribution network, store-based management restructuring programmes, headcount reductions in central office and numerous other cost efficiency initiatives together with a lower level of unit volumes.

Financial strength

The Group has strong cash flow characteristics, which are reflected in the significant net cash generation in the period since demerger. This cash generation resulted in the Board taking the decision in April 2010 to undertake a share buy-back programme, returning £150m to our shareholders during the course of the 2010/11 financial year. The Group’s strong financial position continues to support investment for growth and it therefore plans to continue investing in its retail formats, developing the multi-channel retail offer and opening new stores.

Outlook

Prospects for the 2011/12 financial year are uncertain as consumers’ disposable income, and their willingness to spend, is impacted by an increased VAT rate, an increase in personal taxes and the rising cost of living plus the additional threat of public sector job losses and potential interest rate increases.

Given the volatility in trading experienced at the end of the 2010/11 financial year and the ongoing challenging retail environment, the Group has adopted a cautious stance in its planning for the 2011/12 financial year. The Group is planning for like-for-like sales performances that could see a low-to-mid single-digit percentage decline at Argos and a broadly flat outcome at Homebase. Our view on the potential gross margin movements is for a marginal reduction at Argos and a marginal improvement at Homebase. The combination of increasing operating cost inflation and the ongoing investment in long-term growth initiatives, offset in part by further cost efficiencies, will likely result in absolute costs being moderately higher year-on-year in both businesses.

Given our strong financial position, with a net cash balance of £259m, we are investing ahead of the recovery in consumer demand. We therefore remain confident in the Group’s ability to deliver growth in shareholder value over the long term by maintaining our clear competitive advantage as the UK’s leading home and general merchandise retailer.

Terry Duddy