Home Retail : Half Year Results - Part 1

22 October 2014

Home Retail Group plc

Half-Year Results

Home Retail Group, the UK's leading home and general merchandise retailer, today announces its results for the 26 weeks to 30 August 2014 .

Operating highlights

§ Good first half, with further like-for-like sales growth at both Argos and Homebase

§ Argos Transformation Plan progress:

-     Completed the national roll-out of the 'hub & spoke' network enabling same day collection of c.20,000 products, and commenced roll-out of online payment and fast track collection in-store

-     32 digital stores now trading across three different formats

-     Internet penetration accounted for 43% of total sales including mobile commerce which grew by 45% and accounted for 22% of total sales

§ Homebase progress:

-     Completed a comprehensive review of the Homebase business

-     Refitted a further 11 trial stores, which included Habitat concessions and improvements to the DIY and home propositions

-     Upgraded the website and grew multi-channel sales by 12%

-     Continued to exit underperforming stores and reduce the size of the store estate

Financial highlights

§ Sales increased by 3% to £2,669m; like-for-like sales up 2.9% at Argos, and up 4.1% at Homebase  

§ Cash gross margin increased by 2% to £981m

§ Operating and distribution costs increased by £15m to £951m

§ Benchmark profit before tax2 increased by 13% to £30.9m

§ Basic benchmark earnings per share3 increased by 20% to 3.0p

§ Reported profit before tax decreased by 5% to £13.5m; reported basic earnings per share of 1.2p

§ Cash generation in the period of £2m with closing net cash of £333m

§ Interim dividend of 1.0p (2013: 1.0p)

John Walden, Chief Executive of Home Retail Group, said:

"The Group has performed well in the first half of the year, delivering further like-for-like sales growth at both Argos and Homebase and a 13% increase in Group benchmark profit before tax. 

"Argos continued to build on its sales growth from the previous financial year, increased its benchmark operating profit whilst also making good progress with its Transformation Plan.  Homebase delivered a good peak trading period, performing well throughout the half despite being up against the tough comparators of a strong second quarter last year.  At this mid-way point in our financial year, we continue to expect to deliver full-year benchmark profit before tax in line with current market expectations, however, as always the full-year outcome will depend upon the important Argos Christmas trading period.

" In April I set out my near term priorities for the Group, which included undertaking a comprehensive review of Group strategy and its priorities going forward, in particular as they relate to Homebase.  I have completed this review, which encompassed a range of market, strategic and operational factors.

" The successful delivery of the Argos Transformation Plan over its remaining three years continues to be the Group's strategic priority and its greatest potential source of shareholder value.  Homebase is a good business with the basis for future growth. In this context, Homebase will pursue a three-year plan through to the end of FY18 to improve the productivity of its store estate, strengthen its propositions and accelerate its digital capabilities by leveraging Argos' investments.  This will position Homebase as a smaller but stronger business, ready for investment and growth."

1.  Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, post-employment benefit scheme administration costs, store impairment and onerous lease charges or releases and costs or income associated with store closures and exceptional items.

2.  Benchmark profit before tax (benchmark PBT) is defined as profit before amortisation of acquisition intangibles, post-employment benefit scheme administration costs, store impairment and onerous lease charges or releases and costs or income associated with store closures, exceptional items, financing fair value remeasurements, financing impact on post-employment benefit obligations, the discount unwind on non-benchmark items and taxation.

3.  Basic benchmark earnings per share (benchmark EPS) is defined as benchmark PBT less taxation attributable to benchmark PBT, divided by the weighted average number of shares in issue (excluding shares held in the Home Retail Group share trust net of vested but unexercised share awards).

Enquiries

Analysts and investors (Home Retail Group)

Richard Ashton                 Finance Director                                   01908 600 291

Media (RLM Finsbury)

Rollo Head                                                                                 020 7251 3801

There will be a presentation today at 9.30am to analysts and investors at the Auditorium, Merrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ.  The presentation can be viewed live on the Home Retail Group websitewww.homeretailgroup.com.  The supporting slides and an indexed replay will also be available on the website later in the day.

An Interim Management Statement, covering the 18 weeks from 31 August 2014 to

3 January 2015, will be published on Thursday 15 January 2015.

Certain statements made in this announcement are forward looking statements.  Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward looking statements.

FINANCIAL SUMMARY

The above tables and those throughout this announcement have been prepared in accordance with Note 1 to the Financial Information on page 23. 

OPERATING COMPANY REVIEWS

Argos

In October 2012 Argos outlined a five-year Transformation Plan to reinvent itself as a digital retail leader; transforming from a catalogue-led business to a digitally-led business.  The plan is designed to address competitive challenges, exploit market opportunities and restore sustainable growth.

There are four key elements to the Transformation Plan:

1.  Reposition Argos' channels for a digital future;

2.  Provide more product choice, available to customers faster;

3.  Develop a customer offer that has universal appeal; and

4.  Operate a lean and flexible cost base.

Argos has continued to make good progress against the Transformation Plan and remains on track to achieve its FY15 Transformation Plan milestones.

Operational review

Reposition Argos' channels for a digital future

Market growth in digital channels is expected to continue to outpace the retail market generally.  By focussing on and leading in these channels, Argos believes it can secure future growth.

Argos has made good progress with the development of its online, mobile and tablet channels.  It implemented a number of developments during the first half of FY15, many of which seek to improve the customer journey across all digital platforms.  For example, the introduction of a new search tool has made it quicker and easier for customers to search and browse an exciting range of products.  In addition, Argos launched new versions of both the Apple and Android apps, which continue to grow in popularity with Argos' customer base and have now had nearly 10 million downloads since their first launch.

Sales via the internet grew in line with total sales during the first half and represented 43% of total Argos sales.  Within this, sales from mobile and tablet devices grew by 45% and accounted for 22% of total Argos sales.

Stores remain a strategic advantage as local points of product collection and customer service, however their role is being adapted to support a digital offer.  Argos has designed a digital store that redefines the role of its stores in a digital future , and has made good progress during the first half of FY15 in trialling three new digital store formats. 

§ It converted 13 existing stores to a digital format, with a further c.10 conversions scheduled in the remainder of the financial year.

§ A trial of a new small format digital store commenced, with three located in London, one in Liverpool, and a further two planned to open in London in the remainder of the financial year.  These stores operate on a smaller footprint of c.3,000 square feet, in comparison to an average Argos store footprint of c.15,000 square feet. 

§ Nine digital concessions opened within Homebase stores, which offer a convenient fulfilment proposition to customers shopping in those stores and which operate from c.1,000 square feet.  A further c.10 digital concessions within Homebase stores are planned in the remainder of the financial year.

Argos' innovative 'hub & spoke' distribution model, which makes c.20,000 products available to all Argos stores for same day collection, enables stores of any size and stock-holding capacity to provide the same compelling product range.  This presents Argos with options for a variety of store configurations such as the small formats and concessions that are currently in trial.

All digital stores benefit from the 'hub & spoke' distribution model together with other new capabilities, such as 'voice pick', tablet based browsing and ordering, streamlined payment and collection and, for customers paying online, fast track collection in 60 seconds.  Argos will have c.50 digital stores trading in time for the Christmas trading period which will enable Argos to understand better their performance across a range of factors.

Argos continues to trial new catalogue formats and launched two further trials during the first half of FY15, including a 'mini sized' catalogue which incorporates a full product listing, and a bespoke catalogue with a reduced number of pages which incorporates a smaller but carefully edited product range.  Argos has also added a digital element to its new Autumn/Winter catalogue and Christmas Gift Guide which includes enabling customers to use their mobile devices to access additional online content by scanning certain pages in the catalogues using the Argos App. 

Provide more product choice, available to customers faster

Fulfilment remains highly competitive amongst leading retailers.  Argos is uniquely positioned through its store estate and supply chain to provide market leading fulfilment options to customers on a national scale.

Argos has now rolled out the 'hub & spoke' distribution model to its entire UK store estate, with c.150 hub and c.550 spoke stores in operation, allowing customers access to c.20,000 products on a same day basis, regardless of their local store size.  In addition, 'voice pick' capability, which enables store colleagues to respond to customer orders even more quickly and efficiently, has also been rolled out across the entire store portfolio during the first half of FY15.

Argos believes that other retailers could benefit from its unique, cost advantaged, national distribution and store network for click and collect fulfilment.  In September 2013, Argos and eBay commenced a trial in which Argos offered select eBay merchants the option to provide product collection in c.150 stores.  On the basis of encouraging results, the parties recently extended the agreement and expanded its scope to provide an estimated 65,000 eBay merchants with access to c.700 Argos stores for product collection. 

Argos is also improving its home delivery offer.  During the first half of FY15 it commenced a trial of a next day delivery proposition for white goods.  During the Christmas trading period, Argos will also trial a same day home delivery service from its 'hub' stores.

Develop a customer offer that has universal appeal

Historically Argos' customer offer, meaning its products, pricing, marketing campaigns and customer experiences, has been biased towards less affluent customers.  Argos believes that by providing an offer that is more appealing across the range of its customers, it has significant opportunity to grow the business.

Argos is progressing its plans to fill gaps in its product ranges, particularly with more premium brands.  In addition to c.20 brands added in the last financial year, during the first half of FY15 Argos added a further 23 aspirational brands such as Recaro child seats, Thule luggage and Denon audio equipment.

Argos believes that by rationalising its portfolio of exclusive brands in order to focus on fewer, more powerful brands, it can grow its exclusive brand business, support category gross margins and build greater brand awareness.  Through the first half of FY15, Argos eliminated c.10% of its exclusive brand portfolio, and in that period it launched the Heart of House power brand and relaunched Chad Valley.  Heart of House provides a fresh look to the furniture and homewares categories, offering a wide range of over 1,100 traditional and contemporary products.  The Chad Valley toy brand has been expanded, such that it now offers a range of over 500 products.  

A key component of creating a universally appealing offer is brand positioning and communications.  Argos recently introduced a new positioning for its brand, with a tag line "Get Set Go Argos", and it has commenced new communications across its customer media including traditional advertising, newspaper inserts, digital channels, in-store marketing, catalogue, and even store colleague uniforms.  The positioning is designed to portray Argos as more innovative and dynamic, and to draw attention to the breadth of its product range and its market-beating propositions.

Financial Review

Total sales in the 26 weeks to 30 August 2014 increased by 3.0% to £1,769m.  Sales increased by 0.1% as a result of the store portfolio increasing by a net 13 stores, including the nine Argos digital concessions within Homebase and the four small format digital stores previously discussed.  The Argos portfolio now comprises 747 stores.  Like-for-like sales increased by 2.9%.  Electrical products continued to deliver sales growth driven by growth in TVs, video gaming and white goods, partially offset by declines in tablets.  This growth together with strong sales of seasonal products during the first quarter, more than offset small declines in furniture, jewellery and homewares. 

The gross margin rate was level with the same period last year, with an adverse product mix impact from the growth in sales of margin dilutive electrical products being principally offset by a reduced level of promotional sales.

Total operating and distribution costs increased by £13.7m as a result of increased sales, underlying cost inflation and investment in strategic initiatives partially offset by further cost saving initiatives.  Cost productivity was 2% for the first half of FY15.  Argos will continue to focus on maintaining a lean and flexible cost base over the remainder of FY15 and beyond, but the further investment in strategic initiatives and the ongoing impact of underlying inflationary cost pressures are expected to result in net cost increases going forward.

Benchmark operating profit was £12.0m; a £4.3m or 57% increase on the comparable period last year.

Homebase

Homebase business review

Background

Homebase competes in several segments of the broader home improvement market, including Do-It-Yourself (DIY) and home enhancement.  As a result of several economic factors, the home improvement market experienced a cyclical downturn for a number of years through to 2012.  Although economic indicators have more recently improved, several structural factors continue to affect home improvement retailing including an excess of retail space, the rise of a generation less skilled in DIY projects, and the growth of non-traditional digital and multi-channel competitors and category specialists.  It is against this market backdrop that the Homebase business review was undertaken.

The review considered a number of factors, including:

§ The market and the competitive context in which Homebase operates;

§ The Homebase customer experience and how it is rated across both its stores and its digital channels; and

§ A diagnosis of the store estate, including analysis of the store refit trials.

The review identified that Homebase is a good business, with a strong customer franchise which had c.60 million customer transactions during FY14.  It has established scale and strength in several product categories including decorating, garden and fitted kitchens and bathrooms, and it has developed successful own brands such as Habitat, Odina, Schreiber and Hygena.  Additionally, Homebase has demonstrated early success in both its refit trials and its digital capabilities. 

However, the review also identified that Homebase faces several challenges, including inconsistent store operating standards and a large estate with low sales densities that result in a challenged financial model.  These factors are currently limiting Homebase's operational efficiency and constraining the success of a more aggressive store investment programme.  

The conclusion of the review was that Homebase should pursue a three-year Productivity Plan through to the end of FY18, to improve its store productivity, strengthen its customer propositions, and accelerate its digital capabilities by leveraging Argos' investments, in order to position itself to be ready for future investments.

Store productivity and customer propositions

A central aim of the Homebase Productivity Plan is to improve in-store customer experiences by raising and ensuring consistency of store operating standards, including standards for product availability, presentation, signage, and importantly a culture of both efficiency and great customer service among store colleagues.  Early results from Homebase refit trials have demonstrated that increases in operating standards can improve both a store's customer experiences and its financial performance, and are essential to support more significant future store investments. 

Under the Plan, Homebase will also seek to improve the competitiveness of its customer propositions.  For example, it will make promotional programmes more efficient and selectively invest in more competitive product pricing.  Homebase will also continue to improve the propositions in its 26 refit trial stores and selectively trial new versions.  These trials have generated good overall sales growth so far and with further iteration could provide a path to future long-term growth.  Although a significant rollout of complete Homebase refits is unlikely during the Plan period, trials could give rise to promising components being implemented.  For example, trials of Argos and Habitat concessions within Homebase stores are currently proving successful for both Homebase and the Group.  The Plan will include further rollouts of both Habitat and Argos concessions, subject in some cases to planning consents.

Another key component of the Homebase Productivity Plan will be to reduce the size of the store estate.  The current estate is too large relative to the demands of the UK market and changing digital shopping patterns.  It is also costly to operate and as with most traditional retailers, Homebase has a tail of stores that are either unprofitable or are in decline.  The Plan will accelerate the reduction in the number of Homebase stores by c.25% by the end of FY18, from 323 as at the end of FY14, through scheduled lease expirations and a series of property exit transactions.  The result should be a more efficient and productive estate that can support future investments.

Accelerate digital capabilities, leverage Argos' investments

The Group is committed to exploiting the digital revolution.  Indeed Argos is progressing well with its Transformation Plan to reinvent itself as a digital retail leader, and is investing in systems and other capabilities that may be distinctive in UK retailing.  Homebase will seek to leverage some of these digital capabilities such as multi-platform apps, features and functions, and product fulfilment across the Argos store network as they become available. These capabilities should accelerate Homebase's digital offering towards the end of the three-year Productivity Plan.

Summary

Over the long-term Homebase has the opportunity to grow and create meaningful shareholder value.  However such growth will require Homebase to first undertake an ambitious agenda to address its store and digital foundations, which constrain its future success.  The Homebase agenda must also consider the Argos Transformation Plan which will be the Group's greatest potential source of shareholder value, and must therefore be the near-term priority of both the Group's focus and its resources.  The Homebase Productivity Plan is designed to address these challenges. If successful, by the end of FY18 Homebase will be a smaller but stronger business, better positioned to support future investment and growth, with improved financial ratios for sales, costs and profits, better store operating and customer service standards, and more competitive store propositions and digital capabilities. 

Following the completion of the Homebase business review, Paul Loft, Managing Director of Homebase, and the Group have agreed that now would be an appropriate time for Paul to step down from his role. Paul has agreed to remain in position until such time as a suitable successor has been appointed and to assist in an orderly transition of the leadership of Homebase.

Operational review

Store estate and format development

An additional 11 trial proposition stores were completed during the first half of FY15 taking the total number completed to 26.  Whilst these 26 have demonstrated successful sales growth overall, there are further improvements to be achieved to ensure sustainability of store standards and consistency of proposition improvements across key product categories.  Homebase will complete a further seven trial stores, which are currently in progress, during the second half of the year and as outlined in the Productivity Plan, will use this 33 store trial portfolio to develop further improvements to the store proposition.

Homebase now has 26 Habitat concessions, up from 15 at the start of the year.  In addition, nine Argos digital concessions were opened within Homebase stores during the first half, with a further c.10 planned in the remainder of the current financial year.

In line with the Productivity Plan, Homebase will now target a greater number of exits of its least productive stores.  It currently expects to exit a total of c.30 stores in the current financial year, which will reduce the store portfolio to c.295 stores by the end of FY15.

Multi-channel offer

Homebase's upgraded website significantly enhances the online customer experience by offering a more modern look and feel through high quality, inspirational content.  The site has been made easier to navigate by simplifying the way product categories are organised and searched.  Customers are prompted to register and log in, which allows Homebase to collect valuable customer data that it can use to personalise content and promotions.  Once logged in, customers also have access to a newly created list tool, which enables them to set up lists to organise projects or events better and easily purchase their product choices. The upgraded website has helped multi-channel sales grow by 12% year-on-year in the first half of FY15 to represent c.7% of total Homebase sales.  

Exclusive brands

A key differentiator for Homebase remains its strong portfolio of exclusive brands, such as Habitat, Odina, Schreiber, Hygena and Qualcast.  Habitat concessions have formed a significant part of its store refurbishment trials, offering ranges such as furniture, paint and wallpaper. The Habitat brand gives the Homebase customer greater choice around premium quality and contemporary styling, as well as some bestselling iconic designs.  Sales of Habitat products in Homebase, including concessions, have grown by over 45% against the same period last year.

Homebase's premium Odina kitchen range has now been rolled out to 65 stores, up from 49 stores at the end of the FY14 financial year.  Sales of Schreiber kitchen ranges continued to grow and are now available in the majority of its stores.  Alongside these premium and mid-market ranges the Essentials kitchen range offers customers great value products.  Sales of this range have grown by over 20% versus the same period last year.  

Financial review

Total sales in the 26 weeks to 30 August 2014 increased by 1.5% to £835m.  Homebase closed seven stores in the period, reducing its store portfolio to 316 stores, which reduced sales by 2.6%.  Like-for-like sales increased by 4.1%.  Growth was driven by a strong performance in seasonal products with the growth in the first quarter more than offsetting the decline against the previous year's tough comparator in the second quarter.  There was also further growth in sales of big ticket products, particularly fitted kitchens and bathrooms, whilst sales in the remaining categories were broadly flat.

The gross margin rate was down by approximately 75 basis points principally driven by an adverse sales mix impact from the growth in the margin dilutive seasonal and big ticket product categories, together with an increased level of stock clearance in respect of store closures.

Total operating and distribution costs were broadly flat.  The cost impacts of increased sales, underlying cost inflation and cost investment in strategic initiatives were offset by further cost saving initiatives. Cost productivity was 3% for the first half of FY15. Benchmark operating profit was £27.8m; a £0.6m or 2% increase on the comparable period last year.

Financial Services

Financial Services continues to work in conjunction with Argos and Homebase to provide their customers with the most appropriate credit offers to drive retail sales, and to maximise the total profit from the transaction for Home Retail Group.

Operational review        

In-house store card credit sales increased by 7% to £321m (2013: £300m) and represented 10.5% (2013: 10.1%) of Group retail sales.  This increased level of both credit sales and penetration is a result of specific product range support and sales increases in categories that have higher credit attachment rates such as video gaming and white goods.  In addition to credit sales placed on the Group's own store cards, credit offers for purchases at Homebase, which are greater than £1,000, are principally provided through product loans from a third party provider. Including these product loans, total credit sales increased by 10% to £372m (2013: £339m) and represented 12.1% (2013: 11.4%) of Group retail sales. 

Financial review

Total sales in the 26 weeks to 30 August 2014 increased by 14% to £65m.  Delinquency rates continue their downward trend of the last few years resulting in a small reduction in the bad debt cost.  Financing costs were marginally higher than last year due to the growth in the loan book, with this internal financing cost recharge being based upon UK base rates with a corresponding credit being recognised in Group net interest income.  The improved performance in sales and the reduced bad debt cost were partially offset by an increase in operating costs, with the remaining net improvement in the financial performance of Financial Services benefitting both retail companies, which is where both the transactions and customer relationships originate.  Benchmark operating profit remained flat at £3.1m (2013: £3.1m).

Store card net receivables grew by £46m versus a year ago to £516m, principally as a result of the increase in credit sales.  The Group finances these receivables internally with no third party debt being required. 

GROUP FINANCIAL REVIEW

Sales and benchmark operating profit

Group sales increased by 3% to £2,669m (2013: £2,596m) while Group benchmark operating profit increased 13% to £29.9m (2013: £26.4m).  The drivers of the Argos, Homebase and Financial Services performances have been analysed as part of the preceding business reviews.  Central Activities represents the cost of central corporate functions.  Costs increased by 12% to £13.0m (2013: £11.6m), with the increase being driven principally by additional costs to support the Group's various strategic initiatives.

Benchmark net interest income

Net interest income within benchmark PBT was unchanged at £1.0m (2013: £1.0m). 

Benchmark PBT

Benchmark PBT increased 13% to £30.9m (2013: £27.4m) driven by the factors previously discussed.

Amortisation of acquisition intangibles

A charge of £0.9m was incurred (2013: £0.9m), relating to the amortisation of the value of the brand which arose on the Habitat UK acquisition. 

Post-employment benefit scheme administration costs

A charge of £0.7m was incurred (2013: £1.0m), in respect of the administration costs of the Home Retail Group Pension Scheme. 

Adjustments in respect of store impairment and property provisions

A net credit of £0.7m (2013: £5.4m) was recorded.  The net credit reflects a £1.0m reversal in respect of previous property provisions that are no longer required, partially offset by a charge of £0.3m relating to store closures.

Exceptional items

The exceptional charge incurred was £11.8m (2013: £12.6m).  This includes a charge of £6.7m relating to the ongoing programme to transform Argos into a digital retail leader and which forms part of the total charge announced at the time of the Argos Transformation Plan of c.£50m over the first three years of the Plan to FY16.  In addition, there was a charge of £5.1m relating to costs associated with the outsourcing of the management of the Group's information systems infrastructure and associated services.

Financing fair value remeasurements

Certain foreign exchange movements are recognised in the income statement within net financing income.  These amounted to a net gain of £0.3m (2013: £1.2m), which arose principally as a result of translation differences on overseas subsidiary currency balances.Equal and opposite adjustments to the translation differences are recognised as part of the movements in reserves.  As required by accounting standards, the net nil exchange adjustment is therefore split between the income statement and the statement of comprehensive income.

Financing impact on post-employment benefit obligations

The financing impact on post-employment benefit obligations is a net charge of £1.6m (2013: £1.8m). 

Discount unwind on non‑benchmark items

A charge of £3.4m (2013: £3.5m) within net financing income relates to the discount unwind on onerous lease provisions.  As these provisions were items previously excluded from benchmark PBT, the discount unwind has also been excluded from benchmark PBT. 

Net interest reconciliation

The following table illustrates both the benchmark and non-benchmark impact of net financing items within the income statement.

Profit before tax

Profit before tax decreased by 5% to £13.5m (2013: £14.2m).

Taxation

Taxation attributable to benchmark PBT was £7.9m (2013: £7.8m), representing an estimated effective tax rate for the period of 25.5% (2013: 28.5%).  The lower effective tax rate principally reflects two elements: the favourable impact of a 2% reduction in the UK corporation tax rate together with the favourable impact of a relatively fixed level of disallowable expenditure for tax purposes in comparison to a higher level of profits.

Taxation attributable to non-benchmark items amounted to a credit of £3.9m (2013: £6.1m).  The total tax expense was therefore £4.0m (2013: £1.7m).

Number of shares and earnings per share

The number of shares for the purpose of calculating basic earnings per share (EPS) was 773.1m (2013: 800.0m), representing the weighted average number of issued ordinary shares of 813.4m (2013: 813.4m), less an adjustment of 40.3m (2013: 13.4m) representing shares held in the Group share trust net of vested but unexercised share awards.

The calculation of diluted EPS reflects the potential dilutive effect of employee share incentive schemes.  This increases the number of shares for diluted EPS purposes by 28.3m (2013: 23.6m) to 801.4m (2013: 823.6m).  Basic benchmark EPS is 3.0p (2013: 2.5p), with diluted benchmark EPS of 2.9p (2013: 2.4p).  Reported basic EPS is 1.2p (2013: 1.6p), with reported diluted EPS being 1.2p (2013: 1.5p).

Dividends

At this stage of the financial year, as we approach Argos' peak trading period, the Board announces an interim dividend of 1.0p.  This is consistent with the announcement at the 30 April 2014 full year results presentation that to reflect the weighting of the Group's earnings profile to the second half of the financial year, the interim dividend would be held at 1.0p, with any changes to the full year dividend being made to the final dividend.  The dividend will be paid on 22 January 2015 to shareholders on the register at the close of business on 13 November 2014. 

Balance sheet

Net assets as at 30 August 2014 were £2,619m, equivalent to 348p (2013: 340p) per share excluding shares held in the Group share trust.  Invested capital as at 30 August 2014 was £2,353m, a reduction of £69m versus the balance sheet as at 1 March 2014.  This reduction in invested capital was principally driven by an increase in trade and other payables partly associated with the increased level of inventories, with the balance relating to the beneficial phasing of certain trade and other payables payments that are normally seen in the first half of the year and, as has been the case in previous financial years, it is anticipated that a significant element of this beneficial phasing will unwind in the second half of the current financial year.

The reduction in net assets of £55m versus the balance sheet as at 1 March 2014 was principally driven by the reduction in invested capital, together with an increase in post-employment benefit obligations, partially offset by increases in both forward foreign exchange contracts and net tax assets.

Cash flow and net cash position

Cash flows from operating activities were £146.9m (2013: £120.9m).  This £26.0m increase was principally attributable to an increase in the cash inflow from trade working capital, partly offset by an increase in the cash outflow in respect of restructuring charges related to the Argos Transformation Plan and a number of other restructuring actions.

Net capital expenditure was £71.7m (2013: £74.8m), representing the continued higher level of investment across the Group in the strategic initiatives of both retail businesses.  Tax paid was £6.0m (2013: £11.1m).  The reduction to £nil in other investments (2013: £10.9m) is a reflection of the non-repeat of cash received in the prior year relating to the disposal of the Group's 33% shareholding in Ogalas Limited, which trades as 'home store + more' in the Republic of Ireland.

Dividends paid to shareholders amounted to £17.8m (2013: £16.0m).  A payment of £50.0m (2013: £14.1m) was made to the Home Retail Group Employee Share Trust to fund the purchase of 26.8m shares.  The shares are in addition to those already held by the Trust and are needed to satisfy obligations arising from employee share schemes, a significant proportion of which relate to the save-as-you-earn plans offered to the Group's c.50,000 colleagues.  This payment was partially offset by a small cash receipt in respect of the exercise of a small number of share options. 

The Group increased its net cash position to £333.1m with a net cash generation of £2.1m in the first half of the year.

Group pension arrangements

The Group's pension arrangements are operated principally through the Home Retail Group Pension Scheme, a defined benefit scheme, which was closed to future accrual with effect from 31 January 2013, together with the Home Retail Group Personal Pension Plan, a defined contribution scheme. 

The IAS 19 valuation as at 30 August 2014 for the Group's defined benefit pension scheme was a net deficit of £104.9m (1 March 2014: £76.6m).  The increase in the deficit is principally driven by the reduction in the discount rate assumption to 3.9% (1 March 2014: 4.4%).

Group financing arrangements

The Group finances its operations through a combination of cash, property leases and committed bank facilities.  The Group's net cash balances averaged approximately £440m (2013: approximately £460m) over the period.  

The Group has a £165m committed unsecured borrowing facility, which is currently undrawn and which expires in March 2016.  In addition, as at 30 August 2014 the Group's Financial Services business held a net loan book balance of £516m (2013: £470m), against which there is no third party debt.

The Group has additional liabilities through its obligations to pay rents under operating leases; the operating lease charge for the last 12 months amounted to £342m (2013: £352m).  Total lease commitments stood at £2,502m at 30 August 2014 (2013: £2,803m), which is a £1,828m, or 42%, reduction from the peak total lease commitments of £4,330m held at 1 March 2008.  Based upon the discounted cash flows of these expected future operating lease charges, the capitalised value of these liabilities is £1,994m (2013: £2,173m) utilising a discount rate of 4.6% (2013: 5.0%).

Accounting standards and use of non-GAAP measures

The Group has prepared its consolidated financial statements based on International Financial Reporting Standards for the 26 weeks ended 30 August 2014.  The basis of preparation is outlined in Note 1 to the Financial Information on page 23.

The Group has identified certain measures that it believes provide additional useful information on the underlying performance of the Group.  These measures are applied consistently but as they are not defined under GAAP they may not be directly comparable with other companies' adjusted measures.  The non-GAAP measures are outlined in Note 2 to the Financial Information on page 23.

Principal risks and uncertainties

The Group set out in its 2014 Annual Report and Financial Statements the principal risks and uncertainties which could impact its performance; these remain unchanged since its publication.  The Group operates a structured risk management process which identifies and evaluates risks and uncertainties and reviews mitigating activity.

On a short-term forward-looking basis over the remainder of the financial year, the main areas of potential risk and uncertainty centre on the impact on sales volumes and thereby profitability in relation to economic conditions and overall consumer demand.  Other potential risks and uncertainties around sales and/or profit growth include the cost of goods and services to the Group, competitor activity, seasonal weather patterns, failure to deliver the strategy, reliance on key personnel, failure to meet customer expectations, currency exposures, product supply and other operational processes, infrastructure development, product safety, the regulatory environment and business interruption.  These risks, together with examples of mitigating activity, are set out in more detail in the 2014 Annual Report and Financial Statements on pages 24 and 25.

Appendix 1.  Trading statement comparables