Homebase

Homebase is positioning itself as the UK’s leading home enhancement retailer.

Homebase - operational review

Continued gross margin progress offset weak market demand. Adverse weather conditions were the cause of the like-for-like sales decline at Homebase given its greater exposure to the seasonal ranges area of the market. To offset this, Homebase traded to maintain gross margin progress, with execution of this trading strategy being a key operational highlight in yet another set of challenging market conditions for the business.

Home enhancement offer further strengthened. The Homebase ‘Furniture and Furnishings’ catalogue was made available in 106 stores from August. It includes more dining room and bedroom products and more feature pages to ‘create the look’ which coordinates products across the broader home enhancement ranges from paint and wallpaper to furniture, lighting and accessories.

Kitchen installation roll out enhancing market share gains. The trial was extended from around 100 stores to nearly 200 by the end of the half. Installation services are helping to capture new orders and sell high-priced ranges and accessories. There is good customer feedback and recommendation levels are high for our installation service. Homebase has also recently been awarded a ‘Gold Award for Excellence’ by the Furniture Industry Research Association for its kitchen installation process and procedures.

Acquisition of 27 Focus DIY store properties accelerates new space opening programme. The majority of these stores have been selected where Homebase had targeted the potential to open a new store organically over the coming years. Five sites have been chosen so that the existing uninvested Homebase store can potentially be replaced by the acquired store. The properties are expected to be transferred over the period up to 31 December 2007 and will then be re-fitted to the Homebase fascia over the course of several months in readiness for the peak Spring trading period. Approximately 700 store-based colleagues previously employed by Focus will be transferred and continue their employment with Homebase.

Organic new space programme continues. Homebase continues to expect to open 10 to 15 new stores a year, the majority of them being in its smaller store format that successfully still offers an authoritative range across the broader home enhancement categories. In the first half the store portfolio increased from 310 stores to 311, as there were four new store openings and three closures; there were also two relocations completed in the period. Excluding the integration of the acquired Focus stores, the pipeline of new stores is back-end weighted this financial year; Homebase expects to open a further net nine stores in the second half, with 11 new stores and two closures planned, as well as one further relocation. We continue to believe there is the potential for a portfolio of over 450 Homebase stores across the UK and Ireland.

Format roll out trials indicate further investment opportunity. Around 100 Homebase stores have received minimal or no store refurbishment investment for a number of years. Trials carried out in seven stores have shown encouraging results on investment spend averaging around £500k per store. The results indicate that approximately 70 of the uninvested stores are suitable for this level of investment. This will involve a refit of the existing space so as to provide the proven home enhancement offer that is already successfully in place throughout the majority of the Homebase chain.

Additional trials are now in place to test further the indicated levels of investment spend. The start of a full investment programme will not commence until after the 2008 peak trading season, as effort will be concentrated on the conversion programme of the recently acquired Focus DIY stores.

New product ranges. Further range reviews have been carried out in areas including tiling, power tools and ‘interior store’. The latter, which includes ranges across homewares, decorating, soft furnishings and accessories, has seen new merchandising put in place across a large number of stores and also includes more in-store ‘create the look’ displays. There has also been a new in-store and online campaign, called ‘Eco Home’, to bring together around 900 products to reduce the environmental impact across three areas of water, energy and sustainability. Extra ‘eco points’ have also been made available on the Spend & Save customer loyalty card.

More target marketing. Combining the strengths of its four million customer Spend & Save programme and the Ideas magazine, Homebase has rolled out its new Garden Living Club on a nationwide basis. This offers customers a seasonal magazine, discounts on Homebase product ranges and concessions on gardening events such as Hampton Court Palace flower show.

Successful transfer of a national distribution centre. Homebase has relocated its national distribution centre for small items and high-value products to a new 350,000 square foot site at Wellingborough. The four-month migration programme required the relocation of around 10,000 product lines from approximately 300 suppliers.

Homebase - financial review

Sales in the 26 weeks to 1 September 2007 declined by 0.3% in total; like-for-like sales declined by 2.5%. The benefit of warm weather in the first two months of the half saw good growth of seasonal categories, but this was more than offset by the adverse weather conditions over the following four months. Non-seasonal categories were generally stable through the half, with kitchen sales continuing to see good growth.

The contribution to sales growth from net new space was 2.2%, at the lower end of the 2% to 3% rate of organic net new space contribution expected for the full financial year due to the planned later phasing of store openings.

Gross margins were ahead by approximately 300 basis points, driven principally by ongoing supply chain initiatives and foreign exchange benefits, as well as further improvements in stock management procedures.

Benchmark operating profit for the 26 weeks to 1 September 2007 grew 12% to £47.0m. Underlying operating cost inflation reduced slightly to approximately 3% from 4% last year. A one-off increase in distribution costs as a result of the successful relocation of one of Homebase’s distribution centres was approximately offset by the one-off benefit from store-related property transactions in the half. Other operating cost growth was approximately 2%, principally reflecting additional investment in new space.

In relation to the 27 acquired Focus DIY store properties, there will be transitional operating costs incurred from the date of transfer to the re-commencement of trading the properties. The current estimate of the costs to be incurred in the second half of this financial year is approximately £15m. This also includes an element of closure costs in respect of the potential five relocations of existing Homebase stores to newly acquired Focus properties. These transitional costs are expected to be recorded as an exceptional item and will therefore be excluded from Homebase’s benchmark operating profit and group benchmark PBT.

Top of page