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REVIEW OF THE BUSINESS

Who we are and what we do —— We are the UK’s leading home and general merchandise retailer.

Argos and Homebase are two of the UK’s leading retail

brands, with large customer bases across the UK and Ireland.

Between them, our retail brands have more than 60 years

of market heritage and consumer awareness. Argos was

founded in 1973 and Homebase in 1981. They have been

shaping modern retailing ever since.

� Argos, the UK’s largest general merchandise retailer, has

an unrivalled blend of choice, value and convenience to meet

customer needs.

� Homebase is the UK’s second largest home improvement

retailer, and offers a growing range of home enhancement

products and services in a differentiated store environment.

52,000Our colleagues are the

foundation of our business

success.

135million The number of Argos customer

transactions last year.

19,300The number of products in the

latest Argos Spring/Summer

catalogue.

30,000The product range available

at Homebase.

4 Home Retail Group Annual Report 2010


MARKET POSITION As the leader in UK home and general merchandise retailing,

but with only a 10% share of the market, we still have signifi cant

room for growth.

£58 bn UK home and general merchandise market

10% Our share of this market

WIDE COVERAGE We have 1,094 stores in the UK and Ireland across the Argos

and Homebase formats.

1,094stores

GEOGRAPHICAL BREAKDOWN – ARGOS

27 Northern Ireland

39 Republic of Ireland

43 Wales

68 Scotland

568 England

STORE NUMBERS (year-on-year change)

349 Homebase (+4)

745 Argos (+15)

GEOGRAPHICAL BREAKDOWN – HOMEBASE

9 Northern Ireland

15 Republic of Ireland 15 Wales 33 Scotland

277 England

SALES MIX

HOMEBASE GROUPARGOS

4% Electrical goods 15% Toys, jewellery, sports

and leisure equipment

21% Toys, jewellery, sports

23% Gardening/seasonals and leisure equipment

26% Home enhancement 35% Home enhancement 40% Electrical goods

53% Electrical goods 45% Home enhancement,

DIY/decorating and

gardening/seasonals

38% DIY/decorating

Home Retail Group Annual Report 2010 5


Group performance —— By adapting and being fl exible,operating profits have reduced by only 4% despite somesignificant challenges in our markets. Growing market shares,remaining highly price competitive, reducing costs, generatingcash and further strengthening our operations are thefundamental successes achieved in this tough environment.

Operating highlights

� Strength of the operating model and excellent cost management have helped

to offset challenges due to the market environment

� Successful Spring 2009 at Homebase, combined with a strong operational

performance and tight cost control

� Continued development and investment in the overall customer offers at Argos

and Homebase to meet changing consumer needs

� Growth in market shares in virtually all of Argos and Homebase’s major product

categories including consumer electronics, toys, kitchens and outdoor living

� Leadership in multi-channel convenience, driven by continuing strong growth

in Check & Reserve

� Focus on absolute cash gross margin to substantially offset the cost of goods

pressures while remaining highly price competitive

Financial highlights

� Sales up 2% to £6,023m; cash gross margin down 3% to £2,276m

� Operating and distribution costs reduced by £64m or 3% to £1,986m, as increases

attributable to volume growth and inflation were more than offset by cost actions

� Benchmark operating profi t1 down 4% to £290m, with a decline of £37m or 12%

at Argos and an increase of £26m or 177% at Homebase

� Net interest income reduced by £25m to £5m, with an improved net cash position

more than offset by lower interest rates

� Benchmark profit before tax2 down 11% to £293m

� Basic benchmark earnings per share3 down 10% to 23.4p

� Reported profit before tax of £293m; reported basic earnings per share of 24.3p

� Cash generation of £130m; closing net cash position of £414m

� Share buy-back announced; up to £150m to be returned over the next 12 months

� Final dividend of 10.0p recommended; full-year dividend held at 14.7p

NOTES: REFER TO PAGE 26 FOR FINANCIAL DEFINITIONS



Group key performance indicators

Financial Services

Homebase SALES (£M)

Argos Group sales increased by 2.1% to +2.1%

5,851 5,985 5,897 6,023 £6,023m. Argos accounts for 72% of 5,510 Group sales, and grew by +1.5% or

+1.7% £65m in the year. Homebase accounts

for 26% of Group sales, and grew by +3.9% +3.9% or £59m in the year. Financial

Services accounts for the remaining

2% of Group sales, and grew by +1.7%

in the year.

+1.5%

Defi nition: Income received for goods and services.

Source: 06 07 08 09 10 Audited fi nancial statements.

BENCHMARK PRE-TAX RETURN

ON INVESTED CAPITAL

Benchmark operating profit plus share

12.7% of post-tax results of joint ventures 11.9% 12.2% 12.1%

and associates was £287.7m, down

£10.3m or 3% while year-end invested 10.5% capital reduced by 2%. This resulted

in a pre-tax ROIC of 12.1%.

Defi nition: Benchmark pre-tax return on invested capital (benchmark pre-tax ROIC) is defined as benchmark operating profi t plus share of post-tax results of joint ventures and associates, divided by year-end net assets excluding retirement benefi t balances, tax balances, derivative fi nancial instruments and financing net cash/debt.

Source: 06 07 08 09 10 Audited fi nancial statements.

Operating margin

Financial Services

Homebase

Argos

Central Activities

6.7% 6.0% 6.1%

5.1% 4.8%

398

359

332 300

290 (4%)

(7%)

+177%

(12%)

+4%

06 07 08 09 10

414

284

174

60

(200)

06 07 08 09 10

BENCHMARK OPERATING PROFIT

(£M) AND BENCHMARK OPERATING

PROFIT MARGIN (%)

Group benchmark operating profi t

decreased 4% to £290m. Argos

profit decreased by £37m, Homebase

profit grew by £26m, Financial Services

profit was maintained at £6m and

costs of Central Activities decreased

by £1m. Group benchmark operating

margin reduced to 4.8% in the year.

Defi nition: Benchmark operating profit is defi ned as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.

Source: Audited fi nancial statements.

FINANCING NET (DEBT)/CASH (£M)

The cash generation of £130m in

the year benefited from further good

working capital management and

a reduced level of capital expenditure.

Defi nition: Year-end balance sheet fi nancing net (debt)/cash.

Source: Audited fi nancial statements.

HOME RETAIL GROUP SHARE PRICE PERFORMANCE

200p

11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 27 Feb 2006 2006 2007 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2009 2009 2009 2009 2009 2009 2010

500p

400p

300p

Home Retail Group FTSE 350 General Retail FTSE 100

FOR ALL CHARTS, 06 AND 07 ARE ON A 52-WEEK PRO FORMA BASIS



Chairman’s statement —— The UK home and generalmerchandise market has experienced reduced levels ofcustomer demand and industry-wide pressures on the cost of goods over the last year. On all measures, the Grouphas produced a good result against this backdrop.

Oliver Stocken

Chairman

Maintaining the dividend, increasing

our future investment plans and the

announcement of a programme to return

capital have all been supported by another

year of strong cash generation. These points

also reflect the Board’s confidence in the

Group’s long-term prospects.

Home Retail Group has been facing the challenging

backdrop from a position of operational and

financial strength. The Group’s broad product

offerings and low average transaction values

offer measures of resilience. Our strength and

leadership in multi-channel retailing ensure the

relevance of our business model by offering true

customer convenience. Product cost pressures

have been dealt with by appropriate trading

strategies and our competitive scale advantage,

skills and infrastructure in Group-wide sourcing

operations. The drive for further cost effi ciencies

and our overall focus on cash generation has

further protected our position.

All of this has been delivered by our colleagues,

with their commitment, effort and passion for

success being a critical element of the strength

of Home Retail Group. Our achievement is very

much a team effort and I would like to thank

the Board, the management team and all our

colleagues in every part of our business.

Home Retail Group has been facingthe challenging backdrop from aposition of operational and fi nancialstrength. The Group’s broad productofferings and low average transactionvalues offer measures of resilience.

I am also very pleased to welcome Mike Darcey

to the Board. Mike is the Chief Operating Offi cer

of British Sky Broadcasting and joined us as a

non-executive director on 20 April 2010.

You will read in Terry’s statement opposite

how our approach to this last year has delivered

a good outcome. As part of this, further strong

cash generation has led to the Board’s

recommendation of a 10.0p fi nal dividend,

which represents shareholder dividend income

maintained at the level of the prior year. You

will also read how we are now able to move to

increasing our investment in the businesses,

more details of which you will find in the business

reviews on pages 14-23. The strong cash fl ow

of the Group and the Board’s confidence in the

Group’s prospects are also leading to a return

of capital, with up to £150m of shares expected

to be purchased over the next 12 months; the

background and detail to this are covered in the

Group financial review on page 28.

Finally, I would note that our dedication to

responsible retailing is unwavering, with further

progress on waste and recycling, supplier

management and the charitable giving of our

colleagues, customers and the Company, all

covered in the corporate responsibility review

on page 24, and in our online review,

www.thebasisofgoodbusiness.com.

Oliver Stocken

Chairman



Chief Executive’s statement —— The results for both Argos and Homebase exceeded initial expectations as wetraded through the year.

We have achieved further market share gains,

demonstrated our commitment to remaining

highly price competitive and controlled costs

extremely tightly to support both operating

profit and cash generation. Our approach

over the last year has also prepared us for the

year ahead, which is likely to remain diffi cult

for UK retail. By continuing to invest and

constantly develop our multi-channel

leadership and differentiated formats, we

will retain our competitive advantage and

therefore remain well placed for the future.

The Group has achieved a good outcome in a

challenging year, delivered by our appropriate

approach on an operational, fi nancial and

strategic basis. Going forward, we will be

increasing our investment in the businesses, and

given the Group’s strong cash generation, we will

also be returning capital to our shareholders by

way of a share buy-back programme. Home

Retail Group, as the UK’s leading home and

general merchandise retailer, will continue to

demonstrate clearly its competitive advantage

and its strong fi nancial position.

Good outcome in a challenging year

Household spending and consumer confi dence

have been severely hit. Hard goods and those

products more closely linked to the housing

market have suffered the most. In the year to

February 2010, market data indicates that retail

sales declined by 3.7% in ‘household goods

stores’ (the ONS measure that estimates retail

sales across furniture, homewares, electricals

and DIY-related categories). The aggregate

value of the product markets in which the

Group operates declined by approximately

3%, to £58bn. Home Retail Group’s total sales

increased by £125m or 2.1% over the same

period. Importantly, Argos and Homebase

have held or increased market share in virtually

all of their individual product markets.

In addition to reduced consumer spending

in our product markets, the year also brought

significant challenges in terms of product cost

pressures driven principally by the weakened

value of sterling. This inflationary pressure has

been successfully managed while remaining

highly price competitive for our customers.

To further offset these challenges, signifi cant

cost actions have been taken across the Group.

Despite cost increases attributable to volume

growth and underlying operating cost infl ation,

our cost base has been reduced by £64m, or 3%.

This is equivalent to cost productivity of

approximately £135m or 7%, and has been

achieved while measures of customer service

and operational standards have been maintained

or improved.

The net result of consumer spending and

product cost pressures, largely offset by the

excellent cost management across the Group,

was benchmark operating profit down by just

£11m, or 4%, to £290m.

Through our continued focus on cash

generation, and building upon the successful

track record since demerger, a further £130m of

net cash was generated during the year. Working

capital continued to be managed tightly, at the

same time as we have maintained or improved

measures of product availability for customers.

The closing cash position of £414m is also after

£87m of net capital expenditure that included

continued investment in growth initiatives, and

payment of a maintained £126m dividend for

our shareholders.

Approach to the last 12 months

Given the challenges and uncertainty at the

start of the financial year, cautious planning

assumptions were used by the businesses in

order to set targets for both stock levels and

costs. This did not constrain the outcome for the

year; both Argos and Homebase demonstrated

the flexibility of their operating models to

meet the better than expected demand. The

significant cost actions over the last 12 months

to volume-adjust or gain further effi ciencies

throughout the cost base have also improved

the flexibility of our businesses for the future.

The Group has remained absolutely

committed to delivering customer value during

the consumer slowdown. All UK retailers in our

product markets have been impacted by the

weakness of sterling, but the Group targeted a

level of customer price inflation that aimed to

pass on the impact of cost of goods infl ation in

absolute terms. This cash gross margin approach

resulted in our businesses remaining highly price

competitive, although the gross margin rate

reduced as a consequence.

Given customer trends through the

downturn, Argos and Homebase have been

further adapting the customer offer in terms of

product development and range architecture,

Terry Duddy

Chief Executive

Hear Terry talking about the

Group’s performance in

our illustrated review,

available online at

www.homeretailgroup.com/

reports/



Chief Executive’s statement continued

pricing and promotional activity, and the wider

customer service proposition. For example,

we strengthened own brand ranges, added more

products to save consumers money on their

household bills, and made further improvements

to our multi-channel convenience. Argos and

Homebase also continue to benefit from their

widespread customer appeal, broad product

offerings and relatively high purchase frequency.

Increasing our investment plans

Looking forward, capital expenditure will increase

in the next financial year to £125-150m from

£87m in the year just ended. While we will open

fewer new stores, we see signifi cant opportunities

for further multi-channel, customer offer and

format developments; these include expanded

online product ranges and new tools and services

on the Argos and Homebase websites, as well as

the Argos brand refresh and store refurbishment

programmes. These opportunities will ensure

our businesses are well invested and positioned

to continue leading the way in delivering the

most appropriate home and general merchandise

shopping experience of the future.

Share buy-back programme

As a separately listed company, Home Retail

Group has demonstrated four successive years

of strong cash generation and has returned

approximately £500m to shareholders by way of

dividends over this period. While the Board intends

to maintain a prudent approach to balance sheet

management, the strong cash position has created

the opportunity to continue investing in value-

enhancing growth opportunities while also

returning capital to shareholders. Over the next

12 months up to £150m of shares are expected

to be bought back. The Board will continue to

regularly review the Group’s capital structure.

Our businesses continue to adaptwell to the consumer environment and are delivering share gains in theirmarkets. Given our strong fi nancialposition, we are investing ahead ofthe recovery in the wider economyand, more specifically, recovery inconsumer demand.

Competitive advantage and fi nancial strength

Home Retail Group is the UK’s leading home and

general merchandise retailer, with clear scale

advantage and well invested infrastructure built

up over a period of many years. We continue to

expect a return to attractive growth rates in

spending in our product markets in due course,

driven particularly by the long-term trend of

consumers investing in their home environment

and from the pace of technology and other

product development. Argos and Homebase

are further strengthening their customer

propositions ahead of the market recovery,

investing in expanding choice, developing ranges

and enhancing product presentation in store,

in catalogues and online.

Both formats are well positioned and clearly

differentiated from other retailers. Argos will

maintain its leadership as a truly multi-channel,

value-orientated format across a wide range of

product categories, distinct from the more

service-orientated models of specialists or the

more adjunct offerings of the supermarkets.

Homebase will continue to be differentiated with

a more style-led offer across a broader range of

home enhancement categories.

The Group’s scale supports our price

competitiveness relative to most other retailers

operating in the same product markets. The

Group’s skills and infrastructure, particularly in

overseas product sourcing and multi-channel

operations, will also leverage fi nancial benefi ts

and synergies which are difficult to replicate

given the investment required and period of time

over which these competitive advantages have

been established. In particular, our highly

developed sourcing operations enable the Group

to deal more competitively with cost of goods

pressures that all retailers in our product markets

experience, as well as support improvements in

our range architectures, particularly in the ability

to provide great value own brands on a directly

sourced basis.

Our businesses continue to adapt well to the

consumer environment and are delivering share

gains in their markets. Given our strong fi nancial

position, we are investing ahead of the recovery

in the wider economy and, more specifi cally,

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

Chief Executive



Our product markets —— Home Retail Group operates inthe home and general merchandise market, worth approximately£58bn in terms of UK retail sales.

We are the leader in this market, with an

approximate 10% share. The overall market

declined by around 3% in calendar year 2009.

The market can be analysed into various

product categories. A summary of these,

including where products are sold at Argos,

Homebase or both, the Group’s overall share

position, and the market size of each product

category, is as follows:

Housewares

The housewares market is relatively fragmented,

according to analysis by Verdict Research,

with the 10 largest retailers accounting for

over 40% of the market. Argos is market leader,

with Homebase adding further Group scale.

The competition base is very broad across the

department stores (John Lewis, Marks & Spencer,

House of Fraser, Debenhams and Bhs, as well as

fashion and home retailer Next), some national

specialists (IKEA, Dunelm), the supermarkets

(Tesco, Asda, Sainsbury) and some broader

generalists (Wilkinson, Matalan, TK Maxx).

Specialist independents are estimated to

account for around one-third of the market.

The housewares market in calendar year

2009 was estimated to have experienced a low

single-digit decrease in retail sales.

Furniture

The structure of the furniture market shows

fairly close resemblance to the housewares

market according to analysis by Verdict

Research, with the 10 largest retailers accounting

for approaching 40% of the market. Argos is

market leader, with Homebase again adding

further Group scale. The competition base has

a number of national specialists (DFS, IKEA,

Homestyle Group, Magnet, Furniture Village,

Dreams), with other significant players being

B&Q, M&S, John Lewis and Next.

The total furniture market in calendar year

2009 was estimated to have experienced a mid

single-digit decline in total retail sales, with

several major sub-categories declining by

double-digit rates.

Group Market

Argos Homebase position size (£bn)

Home enhancement

Housewares ✓ ✓ 1 9.0

Furniture ✓ ✓ 1 7.7

Home improvement (DIY/fi tted kitchens/bathrooms) ✓ ✓ 2 11.1

Horticulture, garden furniture and outdoor living ✓ ✓ 2 3.5

Sub total 31.3

General merchandise

Small domestic appliances ✓ ✓ 1 1.3

Consumer electronics ✓ ✓ 2 15.1

Large domestic appliances ✓ ✓ 3 3.6

Toys ✓ 1 2.3

Jewellery ✓ 1 3.6

Sports and leisure equipment ✓ 1 1.1

Sub total 27.0

Total 58.3

Note: All market positions are for calendar year 2009 and by retail sales except for jewellery, which is measured by volume. The market sizes and positions quoted above are taken from reports provided by Verdict, Mintel, NPD GfK and the EPOS tracked markets. These reports are subject to prior year restatements upon more current data becoming available.

PRODUCT MARKETS

Home improvement

The largest part of the home improvement

market is the DIY category (excluding furniture

and homewares). There are four national

specialists (B&Q, Homebase, Wickes and Focus)

accounting for 45% of the market according to

Verdict Research, with other national operators

selling products in this category being Argos,

Wilkinson, Robert Dyas, Wyevale, Topps and

Dobbies. Approximately 50% of the DIY market

is estimated to be accounted for by specialist

independents. The home improvement market

also includes the kitchens, bathrooms and

floorcoverings (excluding carpets) categories,

with additional national competitors in

these areas including Magnet, Howden,

IKEA and Homeform.

The home improvement market in

calendar year 2009 was estimated to have

experienced a low single-digit decline in total

retail sales.



Our product markets continued

Hear more about our business,

with video interviews and case

studies in our illustrated review,

available online from our

corporate website or at


reports/

Horticulture, garden furniture and

outdoor living

This market according to Verdict Research,

is mainly dominated by the four national DIY

specialists, with Argos and the two garden centre

specialists Wyevale and Dobbies also being

significant retailers of products in this category.

Approximately one-third of this market is

estimated to be accounted for by specialist

independents.

The horticulture, garden furniture and

outdoor living market in calendar year 2009

was estimated to have experienced a low

double-digit increase in total retail sales,

benefiting from significantly better weather

conditions in Spring 2009.

Small domestic appliances

This market is relatively concentrated according

to GfK, with Argos being the clear market leader

with a substantial market share. Competition is

mainly in the form of the electrical specialists

(Currys and Comet), Boots in terms of personal

care appliances, the supermarkets, and the

department stores. A relatively small proportion

of the market would be accounted for by

specialist independents.

The small domestic appliances market

in calendar year 2009 was estimated to have


retail sales, according to Verdict Research.

Consumer electronics

This market is also relatively concentrated

according to GfK, with Currys being the market

leader, followed by Argos and then Comet. Other

competition is mainly in the form of John Lewis

and other department stores, the supermarkets,

and national specialists in certain sub-categories

such as Game in video gaming and Jessops in

photography. Around one-fifth of the consumer

electronics market would be accounted for by

specialist independents, while other online

retailers represent a small but growing share

of this market.

The consumer electronics market in calendar

year 2009 was estimated to have experienced

a mid single-digit decline in total retail sales,

according to Verdict Research. This was largely

driven by the video gaming category as well as

the office and telecoms categories, with a more

marginal decline in the other major areas of

consumer electronics.

Large domestic appliances

This market is again relatively concentrated

according to GfK, with the two major electrical

specialists being then followed by Argos.

Department stores such as John Lewis, DIY and

kitchen retailers (including Homebase), and to

a lesser extent the supermarkets and home

shopping businesses, represent other signifi cant

retailers in this category. Approximately

one-third of the large domestic appliances

market would be accounted for by specialist

independents.

The large domestic appliances market in

calendar year 2009 was estimated to have

experienced a low single-digit increase in total

retail sales, according to EPOS tracked markets.

Toys

The toy market is relatively concentrated

according to analysis by NPD, with the eight

largest retailers accounting for over 60% of

the market. Argos is the market leader, with

Toys ‘R’ Us as the other major national specialist,

following the demise of Woolworths. The Early

Learning Centre, Toymaster, The Entertainer and

the Disney Store are other signifi cant specialists,

with the supermarkets also being prominent

toy retailers.

The toy market in calendar year 2009 was

estimated to have experienced a mid single-digit

decline in total retail sales.



Jewellery

Market competitor analysis on the jewellery

market is based on volume sold rather than

total retail sales value. According to research

by Keynote, this is a highly concentrated market

with Argos being the market leader by volume,

followed by H. Samuel. Other major retailers

of jewellery volumes include fashion jewellery

shops, department stores, and specialist

jewellers selling a greater proportion of precious

metal jewellery such as Ernest Jones/Leslie Davis

and Goldsmiths.

The jewellery market in calendar year 2009

was estimated to have experienced a low

single-digit decline in total retail sales according

to Keynote.

Sports and leisure equipment

This market is relatively fragmented according

to analysis by Verdict Research, with Argos being

the market leader. Other sellers of equipment

include the predominantly sports clothing

retailers (Sports Direct, JJB Sports, JD Sports), the

department stores, and retailers such as Halfords

and Blacks in sub-categories such as cycles and

camping. The majority of the market is estimated

to be made up of specialist independents.

The sports and leisure equipment market

in calendar year 2009 was estimated to have


retail sales.

Expected future development

of the competitive landscape

We expect our product markets to remain

highly competitive in the future. Supermarkets

have been growing share in certain parts of the

non-food, non-clothing market, building on

their regular footfall and the increased space

given to these ranges. Online retailers, such as

amazon.co.uk, currently represent a small but

growing share of certain product categories.

However, in categories undergoing a

sharper slowdown in consumer spending, many

specialist retailers, often with some signifi cant

market shares, have experienced fi nancial

difficulties. In most categories, the independent

specialists have faced even greater pressures on

the ability to weather the challenging economic

environment.

Although retail conditions are likely to remain

tough in the near term, the longer-term outlook

for market growth remains positive. A return to

long-term growth in the general merchandise

and home enhancement markets would be

expected on account of population growth and

an increasing number of households, a reversion

back to the general trend of rising overall

household disposable income, technology

changes and other new product developments,

as well as the need to replace many existing

household items.

Home Retail Group’s key strengths mean

we are well equipped for the future. Our strong

retail brands, multi-channel offering, extensive

product choice and competitive pricing, together

with a strong financial position, mean we are

relatively well placed to trade through the

downturn and benefit from renewed consumer

confidence later in the cycle. While we have

leading positions in multiple product markets,

there remains substantial headroom for growth

in many categories. The more fragmented

markets provide growth opportunities, and

we expect to take market share from weaker

competitors and to benefit from any capacity

withdrawal that ensues.

Our businesses are well established but

continue to evolve to meet changing customer

preferences. Our product range is constantly

expanding. Our supply chain is highly effi cient

and cost effective. With all the key determinants

for success in place, we expect to emerge in the

long run as a stronger competitor in a more

consolidated market.

Our businesses are well established but continue to evolve to meet changingcustomer preferences. Our productrange is constantly expanding. Oursupply chain is highly effi cient and cost effective. With all the key determinantsfor success in place, we expect to emergein the long run as a stronger competitorin a more consolidated market.



Argos business review —— As the UK’s leading generalmerchandise retailer, Argos provides a highly successful andunique offer of choice, value and convenience.

White goods are amongst the

10,000 further lines available

online at www.argos.co.uk

The Argos Value range has

been further expanded to over

350 products.

Operational review

Expanding choice

At 19,300 lines, the latest edition of the Argos

catalogue has expanded by around 500 lines

or 3%. Most of the increase has been from

stocked-in lines, thereby improving the customer

choice for immediate availability.

Of the current catalogue’s 15,000 lines that

are available in stores, 3,700 are ‘Extra’ products

which are fully stocked-in at 339 stores or 45%

of the store portfolio, while a further 118 stores

carry part of this additional range. Future systems

developments will remove the distinction

between ‘Core’ and ‘Extra’ ranges, allowing any

of the 15,000 products to be stocked-in at any

store, based upon demand levels.

The internet is expanding choice beyond the

19,300 lines in the catalogue, with 10,000 further

lines currently on trial at www.argos.co.uk. Major

areas of range extension include: technology

categories such as video games, offi ce supplies,

photography and consumer electronics

accessories; white goods; beds; toys and nursery;

and sports and leisure equipment. There has

been particular success in white goods, where

a further 2,000 lines extend signifi cantly the

main Argos catalogue offer. Additional trials of

extended ranges will continue to establish the

full opportunity, and will also begin to explore

the development of an ordered-in capability for

the customer to benefit from the convenience

of store-based collection.

Improving ranges

The ‘Argos Value’ range has been further

extended to over 350 products, supporting

Argos’ strong value credentials. Following an

excellent response, the number of ‘WOW’

deals has also increased to over 500 and covers

a broader range of categories. Store displays of

both ‘Argos Value’ and ‘WOW’ products were

increased throughout the chain.

The acquisition of the Alba and Bush brands

in late 2008 has enabled Argos to successfully

reposition its own brand ranges in consumer

electronics – particularly TVs – as well as

expanding their use into areas such as white

goods. Developing our portfolio of own brands in

these areas, together with stronger relationships

with third-party brands, has helped to

significantly improve the range hierarchy.

The Chad Valley toy brand, acquired in early

2009, was applied to around 120 products in its

first catalogue for Christmas 2009. There was

a broadly even split between its use on lines

previously available at Woolworths, lines

previously unbranded at Argos, and lines that

were new to the market. Chad Valley has already

become Argos’ leading toy brand, and in the

latest catalogue it has been applied to 200

products and includes extending its use to a

broader range of toy categories.

The electricals and toys categories are

amongst those where Argos has continued to

gain market share, with the repositioning of

own brands a key driver of this. Range hierarchies

are being strengthened further across all other

categories. The acquired Hygena and Schreiber

brands are now being used on furniture ranges

in the latest catalogue. Argos will continue to

develop its other brands, which include

Beanstalk, Challenge, Cookworks and Pro

Fitness. Argos is also expanding its use of

licensing, exclusive product lines or celebrity

brand endorsements, with examples of these

expansion plans including Qualcast, Disney,

Regatta, Mamas & Papas and Davina McCall

fi tness.

Value commitment

Argos has maintained its commitment to being

highly price competitive. During the year, there

was retail price inflation in its product markets

as a result of product cost pressures driven

principally by adverse currency movements.

Argos remains a leading value retailer, supported

by the Group’s sourcing scale and infrastructure

advantages, together with the benefit of Argos’

low cost operating model.

An overall competitive position continues

to be maintained, measured using weekly

internet price comparisons against competitors

on approximately 10,000 products. A price

position better than the competition is

maintained on the approximate 1,000 lines that

drive the greatest sales volumes; these ‘key value

indicators’ (KVIs) include the Argos Value,

‘WOW’, lowest price point and best selling lines

such as popular branded consumer electronics

and domestic appliances. Argos’ success at

continuing to be advantaged on price versus

the market is reflected in further market share

growth; this includes significant share gains in

product categories that are amongst the most

easily price-compared by customers such as

televisions, computing and white goods.


Argos key performance indicators

SALES (£M)

Sales in the 52 weeks to 27 February

2010 increased by 1.5% in total. There 4,347

4,164 4,321 4,282 was further strong growth in televisions

and personal computers, offsetting

weakness in the video gaming market.

Toy sales grew strongly. Challenging

market conditions continued in

home-related areas such as furniture,

but the rate of decline moderated over

the year.

3,859

Definition: Income received from goods and services.

Source: 06 07 08 09 10 Audited financial statements.

New space SALES TRENDS (% CHANGE)

Like-for-like Like-for-like sales declined by 2.1%,

reflecting a trading environment+7.9

+6.1 that continued to be challenging.

The contribution to sales from net

new space was 3.6%.

+3.8 (0.9) +1.5+7.5 +5.5

+3.1 +3.9 +3.6

+0.7

(

+0.7

4.8)4.8

(1( .4)

+2.4

.4) (2.1)(2.

( )

1

+2.4

1)

Definition: Annual percentage change in sales. Like-for-like sales are calculated on stores that have been open for more than a year. Net new space contribution to sales changes reflects stores that have opened and closed.

Source: Audited financial statements/measured

06 07 08 09 10 internally.

8.7% BENCHMARK OPERATING PROFIT 7.7% 7.8% 7.1% (£M) AND MARGIN (%)

6.1% Benchmark operating profit for the 376 52 weeks to 27 February 2010 was

£266m, a 12% decline on last year’s 325 profits of £304m.

304297

266

Definition: Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.




Argos Extra NUMBER OF STORES

During the year, 20 stores were opened

730 745 and five were closed, increasing the Standard

707 store portfolio to 745. These stores680

655

189 238 278 314

429 416429466 442 416466 442

now stock-in for immediate collection

up to 15,000 product lines.

406

339

406 Definition: Total number of stores at year-end. Argos Extra fully-stocked in stores are those that carry the full range of Argos Extra product lines.

Source: 06 07 08 09 10 Measured internally.

NUMBER OF LINES IN THE19,300 18,900 CATALOGUE (SPRING/SUMMER)

18,500 The current Spring/Summer catalogue 17,100

has been expanded to a record 19,30016,700 lines. This is around 3% more lines

than last year. The catalogue, now in

its 73rd edition, remains central to the

Argos proposition.

Definition: Total number of lines in the Spring/Summer Argos catalogue.


Home delivery (store) SALES ACROSS MORE THAN Home delivery (phone)

ONE CHANNEL (%)Check & Reserve (phone)

Multi-channel sales grew to £1.9bnHome delivery (internet)

or 43% of Argos’ sales. The internetCheck & Reserve (internet) 43 represented 32% of Argos’ sales; over

40 two-thirds of this or 22% of Argos’ 37 7.7 total sales were customers using

35 online Check & Reserve for store

32 1.6 collection, with this channel growing 2.2 9.5

by 36% for a second year in a row.

22.2

Definition: Percentage of sales across more than one channel. There are three ordering channels: the internet, phone or store and two fulfilment channels, store or home delivery.




Argos business review continued

Driving further cost effi ciencies

At the end of the previous fi nancial year,

organisational changes were undertaken

to further improve operational effi ciency.

The number of head office roles reduced by

approximately 10%, and a restructuring of

certain levels of store management resulted in

a reduction of store-based full-time equivalent

roles. Other cost efficiencies have been made

across all parts of the business, including bringing

‘in-house’ the transport of stock from ports,

further savings in the catalogue production

process and reducing the level of distribution

annexation. Total operating and distribution

costs were reduced by around £15m, with cost

actions more than offsetting volume-related

growth and underlying infl ation.

Brand refresh and store

refurbishment programme

Since the brand was last updated around

10 years ago, Argos has become the leading

integrated multi-channel retailer, expanded

through Argos Extra and internet-only ranges,

and developed a series of more up-to-date

store formats. A programme to refresh the

brand began during the year. Initial stages have

been completed, which has seen the new brand

identity applied across the latest catalogue,

the website and all other marketing materials.

In the next financial year, approximately

130 stores will be refurbished to reflect the new

brand identity as well as the latest shopping

process improvements and product displays.

This will include new versions of catalogue

browsers, stock checker units, kiosks and call

forward technology, as well as updated jewellery

displays and other improvements to the

Multi-channel sales grew to £1.9bnor 43% of Argos’ sales. Th e internetrepresented 32% of Argos’ sales;over two-thirds of this or 22% of Argos’ total sales were customersusing online Check & Reserve forstore collection.

customer areas. Approximately 500 stores,

or two-thirds of the store estate, are expected

to be refurbished over the next three years.

Refurbishment costs are expected to average

approximately £100k per store, with the cost

in the first year being approximately £15m and

totalling £70m over the complete programme.

Multi-channel leadership

Multi-channel sales grew to £1.9bn or 43% of

Argos’ sales. The internet represented 32%

of Argos’ sales; over two-thirds of this or 22% of

Argos’ total sales were customers using online

Check & Reserve for store collection, with this

channel growing by 36% for a second year in

a row. After Amazon, Argos continues to be the

largest internet retailer in the UK, with over

300 million website visits driving £1.4bn of

sales in the last year.

Around 20% or over £800m of Argos’

sales continue to be home delivered, with over

40% of home delivery sales being orders placed

by customers while in store. Of the 10 million

products delivered last year, 4 million were larger

items delivered via Argos’ in-house and market-

leading ‘two-man’ home delivery service.

Argos has continued to develop its multi

channel leadership over the last year and has

strong plans in place to continue its position of

competitive advantage.

Enhanced tools to assist customer choice

The expansion of online customer ratings and

product reviews has been a key development

during the year. There are currently over 500,000

reviews and around 75% of products that carry

a customer rating.

In the next financial year, more product

comparison tools with enhanced data and

selection criteria will be launched. Richer content

will be available on key ranges including new

product image technology, videos and ‘How to’

guides. Further improved navigation tools will be

launched, and ‘Ask & Answer’ facilities will be

extended. An Apple iPhone application will be

launched soon.



More convenience for store-based collection

During the year, 20 stores were opened and fi ve

were closed, increasing the store portfolio to 745.

More products stocked into store for customers’

immediate collection have been facilitated by

better stocking policies and achieving further

benefits from the previously completed systems

developments which manage stock ordering

and replenishment.

Additional improvements to stockroom

processes are being driven through the ‘voice

put-away’ process. This technology helps to

automatically guide stockroom assistants to the

correct location, with key benefits being quicker

processing and further enhanced stock fi le

accuracy, thereby improving availability and

customer satisfaction. Having been extended to

130 stores during the year, ‘voice put-away’ will

now be rolled-out across the rest of the portfolio

over the next two years.

In the next financial year, there will be around

15 to 20 openings, while 5 to 10 older stores are

likely to be closed; there will also be a number of

stores that are relocated to better sites. While

the availability of suitable new out-of-town

property developments is constraining store

openings in the short term, Argos’ store chain

analysis over the long term continues to support

further years of growth.

For the rapidly growing number of customers

who reserve online for store-based collection,

there will be improved stock-finding tools which

automatically check more stores and provide

alternative channel options and products more

effectively. Improved online and kiosk payment

methods are also being developed.

Financial review

Sales in the 52 weeks to 27 February 2010

increased by 1.5% in total; the contribution

to sales from net new space was 3.6%, while

like-for-like sales declined by 2.1%. There was

further strong growth in televisions and personal

computers, offsetting weakness in the video

gaming market. Toy sales grew strongly.

Challenging market conditions continued in

home-related areas such as furniture, but the

rate of decline moderated over the year.

The gross margin rate was down by

approximately 175 basis points. Around

100 basis points represented the net impact

of product cost pressures mainly attributable

to adverse currency movements, which were

partially offset by supply chain gains, shipping

cost savings and a level of customer price

inflation. Around 50 basis points resulted

from the sales mix shift towards lower margin

consumer electronics categories and away from

higher margin home-related areas, although this

trend slightly reversed in the final quarter of the

year. The remaining 25 basis points refl ected

some increased promotional activity over the

peak Christmas trading period.

Total operating and distribution costs were

reduced by around £15m or 1%. Total sales

increased by 1.5%, equivalent to a potential cost

increase of around £20m, and underlying cost

inflation was around 2% or £25m. There was

therefore around 5% or £60m of cost

productivity as a result of continued excellent

cost management.

Benchmark operating profit for the 52 weeks

to 27 February 2010 was £266.2m, a £37.4m

or 12% decrease on the previous fi nancial

year’s £303.6m.

Hear more about Argos

in our illustrated review,

available online at


reports/

52 WEEKS TO 27 FEBRUARY 2010 28 FEBRUARY 2009

Sales (£m) 4,346.8 4,281.9

Benchmark operating profi t (£m) 266.2 303.6

Benchmark operating margin 6.1% 7.1%

Like-for-like change in sales

New space contribution to sales change

Total sales change

Gross margin movement

Benchmark operating profi t change

Number of stores at year-end

Of which Argos Extra fully stocked-in

(2.1%)

3.6%

1.5%

Down c.175bps

(12%)

745

339

(4.8%)

3.9%

(0.9%)

Down c.100bps

(19%)

730

314



Homebase business review —— Homebase continues to be well positioned as a leading home enhancement retailer.

A new ‘Homebase Value’

range of over 300 products

has been launched.

Homebase had another year

of strong growth in ‘big ticket’

categories, particularly kitchens.

Operational review

Capitalising on a more favourable

trading environment

Market conditions during the year were

challenging in most areas of home and general

merchandise. However, Homebase has delivered

its strongest sales performance for fi ve years,

as it capitalised on a more favourable trading

environment in some of its product markets,

resulting in further market share gains.

In its peak trading period, the Spring 2009

weather conditions were signifi cantly more

favourable than the previous year. This, together

with excellent product ranging, maintaining high

operational standards and appropriately driving

additional demand through promotional and

clearance activity, led to a strong performance

in seasonal-related categories including

horticulture, garden maintenance, and other

outdoor living categories such as furniture

and barbecues.

Homebase had another year of strong

growth in ‘big ticket’ categories, particularly

kitchens. While the year benefited from the

withdrawal of some competitors, Homebase

continued to gain from its own initiatives

including the previous national rollout of kitchen

installations, new product ranges and refreshed

store displays.

Range and service development

Homebase continues to develop its point of

differentiation as a more style-led offer across

home enhancement. Strong performances in

the showroom and homewares areas provide

evidence of this successful positioning.

Homebase also continues to protect and

develop its core DIY and decorating offer with

sales in these areas broadly flat in the year,

an improvement on trends in previous years.

This performance has been supported in part by

a more competitive pricing position and better

customer perception of value. There have also

been improved ranges and product availability

to complete key DIY tasks, greater prominence

of advertising and promotions for these areas,

and a launch of related ‘How to’ guides.

Homebase is looking to replicate the success

of its kitchen installation service. Bathroom

installations, previously trialled in 60 stores,

were extended to a further 100 stores in time

for the New Year peak trading period, with

strong results being achieved to date. Similarly,

the fitted bedroom furniture trial has recently

been extended to 100 stores; this product range

also now benefits from the addition of the

Schreiber brand.

Among a number of initiatives to improve

sales and profit densities, new ranges and display

techniques for flooring and tiling will be rolled

out to around 160 stores. This expansion

typically takes space from underperforming

and low density wallpaper ranges. Trials will

also test flooring and tiling installation services.

Improvements to price and value

Homebase has achieved both an improved

competitive pricing position and customer

perception of value through a number of

initiatives. During the year, there was retail price

inflation in Homebase’s product markets as a

result of product cost pressures driven principally

by adverse currency movements. Homebase, like

Argos, targeted a level of customer price infl ation

that aimed to pass on the impact of cost of goods

inflation in absolute terms.

Homebase has specifically matched the

market price on over 1,000 ‘key value indicator’

and ‘entry price point’ lines. Over 400 ‘Bulk Buy’

deals have also been implemented, with these

multi-buy offers often representing market-

leading deals. A new ‘Homebase Value’ brand of

over 300 products has been launched, covering

everyday essentials across all categories, with

150 items priced under £5. Similar to Argos,

Homebase also now undertakes frequent

automated price comparisons on 6,000 lines

against main competitors. This data is supporting

more effective management of everyday

competitive pricing. Stronger promotional

campaigns, capitalising on consumer behaviour

in the current economic times, have also driven

improved customer satisfaction scores on

price and value measures improving by 30%,

as well as successfully driving incremental

cash profi t.

Multi-channel development

During the year, Homebase achieved its target

of over 30,000 product lines being browseable

via www.homebase.co.uk. Some 10,000 of these

are transactional, double the level a year earlier.

The ‘Stock Check’ service was rolled out to all UK

stores early in 2009 and customer use has been

growing strongly. Towards the end of the year,

the Stock Check & Reserve service was rolled

out to all stores. Customer response to these

developments and other improvements in web

content has resulted in signifi cant increases

in website customer satisfaction ratings.



Homebase key performance indicators

SALES (£M)

Sales in the 52 weeks to 27 February

1,559 1,594 1,569 1,572 2010 increased by 3.9% in total. 1,513 There was strong growth in

seasonally-related categories during

Homebase’s peak trading period,

given Spring 2009 benefited from

better year-on-year weather

conditions. The year saw further

good growth in big ticket categories,

particularly kitchens. Sales for the

remaining categories overall were

marginally up.

Definition: Income received for goods and services.


Space SALES TRENDS (% CHANGE)

Like-for-like sales increased by 2.7%Like-for-like in the year. Homebase delivered its

(3.5) strongest sales performance for five

years, as it capitalised on a more

+6.7

+3.9 favourable trading environment in+2.20.0 some of its product markets. The

contribution to sales from net new

space was 1.2%.

(1.6)

+3.1 +2.5+3.6 +2.7

+1.2

(4.(3.1)(3. 1) (10.2)1) (1.4)

(4. (10.2)1) (1.4)

Definition: Annual percentage change in sales. Likefor-like sales are calculated on stores that have been open for more than a year; net new space contribution to sales change is calculated on stores that have opened and closed during the year.

Source: Audited financial statements/measured

06 07 08 09 10 internally.

BENCHMARK OPERATING PROFIT

(£M) AND MARGIN (%)

3.3% 3.4% Benchmark operating profit for the 2.9% 2.6% 52 weeks to 27 February 2010 was

1.0% £41m, a £26m or 177% increase on

last year’s £15m.53 51

45

41

Definition: 15 Benchmark operating profit is defined as

operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.



297

150153

144

145

165 181

150153 145

06

With mezzanine

Without mezzanine

331

310

345

09

349

10

112 109

102

06 07 08

9895

09 10

NUMBER OF STORES

A net four stores were opened during

the year; there were six openings and

two closures, taking the portfolio to

349 stores.

Definition: Total number of stores at year-end. Mezzanine stores contain a mezzanine-selling floor which is typically used to display kitchens, bathrooms and furniture.

Source: Measured internally.07 08

157 159

190188

157 159

SALES PER SQUARE FOOT (£)

Sales per square foot based on total

year-end selling space increased to

£98. The reduction in previous years

was driven by the combination of a

difficult DIY market and the impact

of expansion of store mezzanine and

garden centre space which is dilutive

to sales densities. The trend reversed

in the last year aided by the more

favourable trading environment.

Definition: Annual sales divided by year-end total selling space.

Source: Audited financial statements/measured internally.



Homebase business review continued

Hear more about Homebase

in our illustrated review,

available online at


reports/

Homebase has been developing its email

and web-based promotions to drive further

traffic and sales through its website. The email

marketing database has been extended from

0.5 million relevant customers to over 7 million

by leveraging the combination of Homebase,

Argos and Nectar information. These

developments have boosted online traffi c and

helped drive strong growth in transactional

sales during the period.

In the next financial year, the number of

transactional Homebase products will continue

to be increased, as will the use of Argos and

internet-only products. Improved search criteria

and enhanced store location choices for reserved

goods will be introduced. A new ‘Get into

Gardening’ customer community site has been

launched, offering advice and tips through

videos, forums and blogs.

New loyalty scheme

Homebase has successfully transferred its

in-house Spend & Save loyalty card programme

over to the Nectar scheme. Customer feedback

indicated that Nectar was simpler to understand

and benefited from use across multiple retailers

and service providers, while the scheme was also

superior in customer reach with around 17 million

card holders making it the biggest loyalty card

programme in Britain. The Nectar scheme also

provides an enhanced level of customer insight.

Since launch, measures of card usage and

related spend have all exceeded expectations.

Six million of the Nectar card holders have

already shopped at Homebase.

In the next financial year, there will be

more Nectar-specific promotional events,

and increased use of Nectar to drive category

During the year, Homebaseachieved its target of over 30,000product lines being browseable viawww.homebase.co.uk. Some 10,000 of these are transactional, double the level a year earlier.

or specific product promotions. Longer term,

further use will be made of the Nectar

capabilities to develop customer segmentation

and more targeted marketing programmes.

Store portfolio development

A net four stores were opened during the year;

there were six openings and two closures, taking

the portfolio to 349 stores. No openings are

planned in the next financial year. In the

approximate 20% of the portfolio that has seen

little or no investment for many years, the low

cost refit trial was implemented in a further

10 stores during the year. Sales uplifts across

these refits have been achieving the targeted

15% level, and a further 10 stores are expected

to be refitted in the next financial year. Small

numbers of store closures, relocations or

downsizes will continue as part of our ongoing

management of the portfolio.

Cost base management

Significant cost actions were taken at Homebase

in the second half of the previous fi nancial year.

Despite better than expected demand in the year

just ended, distribution and operating costs were

held at the budgeted levels in absolute terms,

without detrimental impact on customer service

or operational standards. As a result, total

operating and distribution costs were reduced

by around £50m or 6% in the period, with cost

actions more than offsetting volume-related

growth and underlying infl ation.

Store payroll costs had been reduced from

the second half of the previous fi nancial year

through the realignment of shift patterns and

task allocations. At the end of that year, further

organisational changes were undertaken to

improve operational efficiency and cost

productivity. These included head offi ce function

roles being reduced by approximately 15% and

a restructuring of store supervisory positions

which reduced store-based full time equivalent

roles by approximately 5%. In addition to

lowering costs, these actions have given the

business a more efficient and effective structure,

while protecting customer service, availability

and essential processes. Homebase’s already

strong colleague engagement scores improved

slightly during the year.



Financial review

Sales in the 52 weeks to 27 February 2010

increased by 3.9% in total; the contribution

to sales from net new space was 1.2%, while

like-for-like sales increased by 2.7%. There was

strong growth in seasonally-related categories

during Homebase’s peak trading period, given

Spring 2009 benefited from better year-on-year

weather conditions. The year saw further good

growth in big ticket categories, particularly

kitchens. Sales for the remaining categories

overall were marginally up.

The gross margin rate was down by

approximately 350 basis points. Around 175

basis points represented the net impact of

product cost pressures mainly attributed to

adverse currency movements, which were

partially offset by supply chain gains, shipping

cost savings and a level of customer price

inflation. Around 150 basis points resulted from

increased promotional activity and clearance of

previously over-wintered seasonal stocks, which

drove successfully both sales and cash gross

margin, but which reduced the gross margin rate.

The remaining 25 basis point reduction refl ected

the sales mix impact given the strong sales of

seasonally-related categories as well as big

ticket products.

Total operating and distribution costs were

reduced by around £50m or 6%. Total sales

increased by 3.9%, equivalent to a potential

cost increase of around £30m, and underlying

cost inflation was around 1% or £10m.

Depreciation was around £10m lower as

a result of the impairment of store-related

assets in the previous financial year. There was

therefore around 10% or £80m of underlying

cost productivity as a result of successful cost

reduction and containment initiatives.

Benchmark operating profit for the 52 weeks

to 27 February 2010 was £41.2m, a £26.3m

or 177% increase on the previous fi nancial

year’s £14.9m.

Homebase has successfully transferredits in-house Spend & Save loyaltycard programme over to the Nectarscheme. Customer feedback indicated that Nectar was simpler to understandand benefited from use across multipleretailers and service providers.


Sales (£m) 1,571.9 1,513.2


Benchmark operating margin 2.6% 1.0%

Like-for-like change in sales 2.7% (10.2%)

New space contribution to sales change 1.2% 6.7%

Total sales change 3.9% (3.5%)

Gross margin movement Down c.350bps Up c.25bps

Benchmark operating profi t change 177% (67%)

Number of stores at year-end 349 345

Of which contain a mezzanine fl oor 190 188

Store selling space at year-end (million sq ft) 16.1 15.9

Of which – garden centre area 3.7 3.6

– mezzanine fl oor area 1.9 1.9



Financial Services business review —— Financial Services works in conjunction with Argos and Homebase to provide theircustomers with the most appropriate credit offers to driveproduct sales, and to maximise the total profit from thetransaction for Home Retail Group.

Operational review

The in-house store card operations drove

£579m of Group retail credit sales, up 1% on the

previous year. The proportion of promotional

credit sales continued to represent 77% of all

sales placed on the store cards; the offer of ‘buy

now, pay later’ products remains a key enabler

of sales in ‘big ticket’ categories. In addition to

credit sales placed on the Group’s own store

cards, credit offers for purchases at Homebase

of typically over £3,000 are provided through

product loans from Barclays Partner Finance.

Including these product loans, total sales

penetration was 9.6%.

At the start of the year being reported,

the account management system was migrated

to a new platform. This has helped to lower

processing costs, while further initiatives to

lower costs and improve customer convenience

included increased contact centre automation

and a trial for automated applications in-store,

facilitated through the previously rolled-out

new Argos till systems. A new online account

management tool for customers has also

recently been launched.

52 WEEKS TO

Sales (£m)

Benchmark operating profit before fi nancing costs

Financing costs

Financial review

Total gross receivables grew by £6m year-on

year, with a £9m increase in the store card and

a £3m reduction from the final run-off of the

personal loan receivables.

Delinquency rates continued to rise in line

with our expectations. However, the year-on

year increase peaked around the half-year, with

the differential subsequently easing. As a result,

the bad debt charge increased by £9m in the

first half and by £13m for the full year. Financing

costs reduced by £10m in the period refl ecting

a substantially lower funding cost rate being

applied, since this non-cash internal recharge

is based upon UK base rates. A corresponding

impact is recognised in Group net interest

income. All other costs were tightly controlled

and were marginally down year-on-year.

The benchmark operating result of £5.7m

for the year reflects the financial return on the

revolving (i.e. interest-bearing) element of

receivables, as promotional credit products

are recharged to Argos and Homebase at cost.

The cost advantage of this internal arrangement

versus third-party promotional credit provision

is therefore a benefit within the Argos and

Homebase benchmark operating profi ts.

27 FEBRUARY 2010 28 FEBRUARY 2009

104.0 102.3

9.2 19.7

(3.5) (13.6)


AS AT 27 FEBRUARY 2010 28 FEBRUARY 2009

Store card gross receivables

Personal loan gross receivables

497

–

488

3

Total gross receivables

Provision

497

(68)

491

(67)

The in-house store card

operations drove £579m

of Group retail credit sales

Net receivables at year-end (£m) 429 424

Provision % of gross receivables 13.6% 13.6%

Store card credit sales 579 573



Financial Services key performance indicators

NUMBER OF ACTIVE STORE

CARD HOLDERS (’000s)

1,200 The total number of active accounts 1,1681,125 grew to 1.2 million. The cards offer

1,044 1,068 a revolving credit facility together

with a range of 3, 6, 9 and 12 month

‘buy now pay later’ plans. The offer

is also fully multi-channel, with the

availability of credit online being

a feature on both www.argos.co.uk

and www.homebase.co.uk.

Defi nition: Total number of store card accounts that have had monetary activity, either making a sale transaction, a payment or having an outstanding balance in the last six months.


GROUP RETAIL CREDIT SALES (£M) GROUP CREDIT PENETRATION (%)

579 9.6%573 9.5%566

522 8.6%

8.0%

441 7.1%

06 07 08 09 10 06 07 08 09 10


GROSS STORE CARD

RECEIVABLES (£M)

497 There was a £9m increase in gross 488482 store card receivables in the year

448 driven by the continued success in

the range of credit products offered. 378

Defi nition: Total balances outstanding on customer store card accounts.


The in-house store card operations drove £579m of Group retail sales,

up 1% on the previous year. In addition to credit sales placed on the Group’s

own store cards, credit offers for purchases at Homebase of typically over

£3,000 are provided through product loans from Barclays Partner Finance.

Including these product loans, total sales penetration was marginally higher

at 9.6%.

Defi nition: Group retail credit sales refl ect transactions placed on the Argos and Homebase store cards.

Group credit penetration is Group retail credit sales together with product loans from Barclays Partner Finance, divided by total UK retail sales.

All calculations are inclusive of VAT.



Responsible retailing —— Taking a responsible approachto the environment and the communities in which we operate iscentral to building a sustainable and profitable business. We knowthis as ‘the basis of good business’.

Hear more about our

corporate responsibility

activities in our illustrated

review, available online at


reports/ or, for a full report

go to www.thebasisofgood

business.com

We have again been awarded

gold status for our overall

corporate responsibility

performance

This year we have been

upgraded from silver to

gold making us retail sector

sustainability leaders

It plays a key part in making sure our business is a place where our colleagues

enjoy working and our customers enjoy shopping.

The way we do it

Five principles embed our approach into the way we do business every day.

Keeping clean and green: reducing the impact our operations have on

the environment

Shopping for tomorrow: helping our customers live more sustainable lives

Sourcing with care: sourcing the best products whilst minimising our social

and environmental impact

Building a great place to work: making this a business our colleagues are

proud to work for

Being a good neighbour: supporting the communities where we live and work

Performance highlights

� 78% of waste from the business recycled

� 1,340 tonnes reduction in product packaging

� 55% of customers buying large appliances sent back their packaging for recycling

� 53% fewer carrier bags given to customers (vs 2005)

� 4% reduction in carbon footprint

� 99% of direct-source and direct-import factories completed ethical audits

� 90% of timber-based products sourced from certified or known and legal sources

� All print publications printed on paper from certified sources or recycled paper

� 75% of colleagues responded as engaged in colleague opinion survey (2008/09: 70%)

� Up to two days’ paid leave for every colleague to volunteer in their communities

� £1.9m raised by colleagues and customers for charitable causes

COMMUNITY INVESTMENT £’000

Cash donations 408

Volunteering 123

Gifts in kind 198

Management resource 156

Company donations 885

Monies raised by colleagues/partners

Payroll giving 402

In-store fundraising 1,445

Tick to give 66

Donations from others 1,913

Total 2,798


86.7

06


Responsible retailing key performance indicators

26%

74%

26%

BUILDING ENERGY USE PER SQ FT

(kWh/SQ FT)

Total energy used per square foot

has remained flat, a satisfactory51 performance given the very cold winter.

45

42

38 38

06 07 08 09 10

100%

Waste sent to landfill

Waste recycled

84.3

40%

60%

40%

75.4 70.5

53%

47%

53% 72%

28%

72%

07 08 09

Recycled sources

FSC or PEFC sources

Other paper used

129 128

12%12% 13%13%

87%

13%13%

38%

49%49%

74%

14%14%

07 08 09

61.5

22%

78%78%

10

122

84%

16%

84%

16%

10

WASTE MANAGEMENT (K TONNES)

Total Group waste fell 18% from

70,000 to 61,000 tonnes, and our

recycling rate climbed from 72% to

78%. As a result, only 13,000 tonnes

went to landfill, a 32% reduction

on last year.

CATALOGUES AND PUBLICATIONS:

TOTAL PAPER USED AND

PERCENTAGE SUSTAINABLY

SOURCED (K TONNES)

We have reduced our paper use by 5%.

All print publications are now printed

on paper from certified sources or on

recycled paper.

PACKAGING PER £1,000 SALES (KG)

Packaging per £1,000 sales has

reduced by 9% thanks to our17.717.4 packaging reduction programme.

16.2 16.1

14.6

06 07 08 09 10

CARBON FOOTPRINT (K TONNES)Company car fleet CO2

Increases in electricity purchased Commercial fleet CO2 from combined heat and power Building CO2 plants and a reduction in fuel used by

our commercial fleet has led to a 4% 330 326 reduction in the carbon footprint of

293 283 our operations.

313

72% 67% 67% 67%

26% 30%26% 30% 30%30%30% 30%

2% 3% 3%

3% 2%

06 07 08 09 10

922

856

310

165 132

06 07 08 09 10

ETHICAL SOURCING (NUMBER OF

FACTORIES AUDITED IN THE YEAR)

Ninety-nine per cent of direct-source

and direct-import factories (1,632

factories) have completed ethical

audits against our own standard or

other accredited standard*.

Nine hundred and twenty-two have

completed their audit this year**.

*ICTI, WRAP, BSCi, SMETA or SA8000

**New factories complete an audit when they commence supply and all factories participate in revalidation audits within agreed timescales.


68%

30%30%

111 118

06


Financial summary

Sales up £125m or 2% to £6,023m, refl ecting

growth of 1.5% at Argos and 3.9% at Homebase.

Like-for-like sales were down 2.1% at Argos and

up 2.7% at Homebase, while the net new space

contribution was 3.6% at Argos and 1.2% at

Homebase.

Cash gross margin down £74m or 3%

to £2,276m, representing a 200 basis point

decline in the Group gross margin rate. Argos’

gross margin rate declined by approximately

175 basis points, driven principally by the net

impact of adverse currency movements and

the sales mix. Homebase’s gross margin rate

declined by approximately 350 basis points,

driven principally by the net impact of adverse

currency movements and increased promotional

and clearance activity.

Operating and distribution costs reduced by

£64m or 3% to £1,986m, with costs reduced

by £15m at Argos and by £50m at Homebase.

This resulted in exceptionally strong cost

productivity of around 5% at Argos and 10%

at Homebase.

Benchmark operating profit down £11m

or 4% to £290m, comprising a £37m or 12%

decline at Argos, and a £26m or 177% increase

at Homebase.

Benchmark PBT down £35m or 11% to

£293m, which includes £25m lower net interest

income as further strong cash generation was

more than offset by the effective interest rate

falling substantially to approximately 1% versus

5% in the prior year.

An effective tax rate of 31.0% based on

benchmark PBT, reduced from 31.4% for

the previous financial year reflecting a lower

proportion of disallowable expenditure.

Basic benchmark EPS down 10% to 23.4p.

Total dividend for the year maintained

at 14.7p, with a final dividend of 10.0p

recommended by the Board.

Net cash of £414m at 27 February 2010,

with the cash generation of £130m in the year

benefiting from further good working capital

management and a reduced level of capital

expenditure.

Share buy-back announced, with up to £150m

to be returned over the next 12 months.

Financial defi nitions

1. Benchmark operating profit is defi ned

as operating profit before amortisation of

acquisition intangibles, store impairment and

onerous lease charges or releases, exceptional

items and costs related to demerger incentive

schemes.

2. Benchmark profit before tax (benchmark

PBT) is defined as profit before amortisation of

acquisition intangibles, store impairment and

onerous lease charges or releases, exceptional

items, costs related to demerger incentive

schemes, financing fair value remeasurements,

financing impact on retirement benefi t

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 Home

Retail Group’s share trusts net of vested but

unexercised options and share awards).


102.3


Financial summary


£m

Argos 4,346.8 4,281.9

Homebase 1,571.9 1,513.2

Financial Services 104.0

Sales 6,022.7 5,897.4

Cost of goods (3,746.9) (3,547.4)

Gross margin 2,275.8 2,350.0

Operating and distribution costs (1,986.1) (2,049.6)

Argos 266.2 303.6

Homebase 41.2 14.9

Financial Services 5.7 6.1

Central Activities (23.4) (24.2)

Benchmark operating profi t 289.7 300.4

Net interest income (see below) 5.2 29.7

Share of post-tax results of joint ventures and associates (2.0) (2.4)

Benchmark PBT 292.9 327.7

Exceptional items included in operating profi t – (694.0)

Costs related to demerger incentive schemes (7.7) (8.4)

Financing fair value remeasurements 2.7 (28.9)

Financing impact on retirement benefi t obligations (0.7) 11.2

Discount unwind on non-benchmark items (6.7) (1.8)

Onerous lease provision releases 12.5 –

Profit/(loss) before tax 293.0 (394.2)

Taxation (83.2) (18.9)

of which: taxation attributable to benchmark PBT (91.4) (103.5)

Profit/(loss) for the year 209.8 (413.1)

Basic benchmark EPS 23.4p 25.9p

Basic EPS 24.3p (47.7p)

Number of shares for basic EPS 862.9m 866.6m

Net interest reconciliation:

Third-party net interest income 4.4 18.6

Financing costs charged to Financial Services 3.5 13.6

Discount unwind on benchmark items (2.7) (2.5)

Net interest income 5.2 29.7

Financing fair value remeasurements 2.7 (28.9)

Financing impact on retirement benefi t obligations (0.7) 11.2

Discount unwind on non-benchmark items (6.7) (1.8)

Income statement net fi nancing income 0.5 10.2

The above table has been prepared in accordance with note 2 to the consolidated financial statements on page [60].



Group fi nancial review

Sales and benchmark operating profi t

Group sales were 2% higher at £6,022.7m (2009:

£5,897.4m) while Group benchmark operating

profit declined 4% to £289.7m (2009: £300.4m).

Within this, the drivers of the Argos, Homebase

and Financial Services performance are analysed

as part of the preceding business reviews.

Central Activities represents the cost of

central corporate functions and the investment

costs of new development opportunities.

Costs for the year were 3% lower at £23.4m

(2009: £24.2m), which included savings from

organisational changes made at the end of the

previous financial year to streamline head offi ce

functions. The HomeStore&More trial expanded

with a fourth store and the testing of an adjacent

bedroom furniture format at one of the earlier

stores. The trial stores will continue to assess

the potential opportunity for this new format

development.

Net interest income

Net interest income was £5.2m (2009: £29.7m).

Within this, third-party interest income for the

period reduced to £4.4m (2009: £18.6m). While

the Group’s net cash position increased, the

effective interest rate earned reduced to

approximately 1% from 5%.

Financing costs charged within Financial

Services’ benchmark operating profit saw the

corresponding credit within net interest income

reduce to £3.5m (2009: £13.6m). This non-cash

internal recharge is based upon UK base rates,

and therefore reduced substantially.

The charge within net interest income in

relation to the discount unwind on benchmark

items was £2.7m (2009: £2.5m). This arises from

the accounting treatment whereby provisions

for expected future liabilities are required to be

discounted back to current value. As settlement

of the liability moves closer to the present day,

additional non-cash charges to unwind the

discount are incurred; this will result in the

absolute level of provision eventually matching

the liability in the accounting period that it

becomes due.

Share of post-tax results of joint

ventures and associates

These amounted to a loss of £2.0m (2009:

£2.4m). The loss is due principally to costs

incurred by the joint venture with Barclays

Bank PLC in regard to the Argos credit card.

Benchmark profit before tax

Benchmark profit before tax for the year

declined 11% to £292.9m (2009: £327.7m).

Costs related to demerger

incentive schemes

These amounted to £7.7m (2009: £8.4m),

with the final charge being unchanged from

that reported in the first half of the year. It was

originally announced that these costs could

amount to a maximum of £45m, to be charged

to the income statement over the three-year

period from the October 2006 demerger, and

are excluded from benchmark profit before tax.

The actual cumulative cost has totalled £34m.

Financing fair value remeasurements

Certain foreign exchange movements as well

as changes in the fair value of certain fi nancial

instruments are recognised in the income

statement within net financing income. These

amounted to a net gain of £2.7m (2009: loss

of £28.9m), which arises principally as a result

of translation differences on subsidiary cash

balances. The gain reflects the strengthening

of sterling against other currencies during the

year. Equal and opposite adjustments to these

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 retirement

benefi t obligations

The charge through net financing income in

respect of the expected return on retirement

benefit assets net of the interest expense on

retirement benefit liabilities was £0.7m (2009:

credit £11.2m). The current service cost, which

the Group considers a fairer reflection of the

cost of providing retirement benefits, is already

reflected in benchmark operating profi t.

Discount unwind on non-benchmark items

An expense of £6.7m (2009: £1.8m) within net

financing income relates to the discount unwind

on onerous lease provisions. As these provisions

were items previously excluded from benchmark

profit before tax, the discount unwind has also

been excluded from benchmark profit before tax.

As set out within the net interest income review

on the left, these non-cash charges arise from

the accounting treatment whereby provisions

for expected future liabilities are discounted back

to current value.

Onerous lease provision releases

A credit of £12.5m (2009: nil) was recorded in

the year, relating to onerous lease provisions no

longer required. As the provision charges were

items previously excluded from benchmark

profit before tax, the provision releases will also

be excluded from benchmark profit before tax.

Profit before tax

The reported profit before tax for the year was

£293.0m (2009: loss of £394.2m).

Taxation

Taxation attributable to benchmark profi t before

tax was £91.4m (2009: £103.5m), representing

an effective tax rate (excluding joint ventures

and associates) of 31.0% (2009: 31.4%). The

reduction in the effective rate largely refl ects

a lower amount of disallowable expenditure.

Taxation attributable to non-benchmark

items amounted to a credit of £8.2m (2009:

£84.6m). This includes a credit of £7.6m (2009:

£23.5m) being prior year non-benchmark items.

The total tax expense for the year was therefore

£83.2m (2009: £18.9m).

Number of shares and earnings per share

The number of shares for the purpose of

calculating basic earnings per share (EPS) is

862.9m (2009: 866.6m), representing the

weighted average number of issued ordinary

shares of 877.4m, less an adjustment of 14.5m

(2009: 10.8m) representing shares held in

Group share trusts net of vested but unexercised

options and share awards.

The calculation of diluted EPS refl ects

the potential dilutive effect of employee share

incentive schemes. This increases the number

of shares for diluted EPS purposes by 9.3m

(2009: 10.4m) to 872.2m (2009: 877.0m).

Basic benchmark EPS is 23.4p (2009: 25.9p),

with diluted benchmark EPS of 23.1p (2009:

25.6p). Reported basic EPS is 24.3p (2009: loss

of 47.7p), with reported diluted EPS being 24.1p

(2009: loss of 47.7p).


300.4


Dividends

Home Retail Group’s dividend policy remains

to target dividend cover over the medium term

of around two times, based on full-year basic

benchmark EPS.

While earnings have reduced by 10%, the

Group’s cash generation has continued to be

strong. A final dividend maintained at 10.0p is

therefore being recommended by the Board,

holding the dividend for the year at 14.7p. Based

on basic benchmark EPS of 23.4p (2009: 25.9p),

dividend cover is 1.59 times (2009: 1.76 times).

The final dividend, subject to approval by

shareholders at the AGM, will be paid on 21 July

2010 to shareholders on the register at the close

of business on 21 May 2010.

Cash flow and net cash position

Cash flows from operating activities were

£461.0m (2009: £468.4m). Strong working

capital management resulted in an infl ow of

£69.6m (2009: outflow of £10.2m); this infl ow

included the benefit of some timing differences

which are expected to unwind in the new fi nancial

year. The working capital inflow more than offset

the lower benchmark operating result.

Net capital expenditure was £87.4m (2009:

£132.4m), reflecting the lower number of stores

opened year-on-year. Tax paid was £107.3m

(2009: £74.7m), with the prior year benefi ting

from a tax authorities repayment in respect of

the settlement of historic tax issues. Dividends

paid to shareholders amounted to £126.3m

(2009: £127.2m), and £9.4m (2009: £21.6m)

was used to purchase shares for the Home Retail

Employee Share Trust.

The Group’s financing net cash position at

27 February 2010 was £414.0m, an increase of

£129.6m over the year. The financing net cash

position included a £50.0m term deposit which

was purchased in November 2009 and matures

in May 2010.

CASH FLOW AND NET CASH POSITION


£m

Benchmark operating profi t 289.7

Exceptional items within operating profi t – (694.0)

Onerous lease provision releases 12.5 –

Costs related to demerger incentive schemes (7.7) (8.4)

Statutory operating profit after exceptional items

Depreciation and amortisation

Movement in working capital

Financing costs charged to Financial Services

Non-cash Homebase exceptional charges

Cash flow impact of prior year restructuring charge

Other operating items

Cash flows from operating activities

Net interest

Taxation

Net capital expenditure

Brand acquisitions

Purchase of term deposit

Sale of term deposit

Other investments

294.5 (402.0)

130.1 159.4

69.6 (10.2)

3.5 13.6

– 651.2

(17.4) (3.1)

(19.3) 59.5

461.0 468.4

7.2 16.6

(107.3) (74.7)

(87.4) (132.4)

(1.9) (20.6)

(50.0) (75.0)

75.0 –

(6.7) (2.2)

Cash inflow before fi nancing activities 289.9 180.1

Dividends paid (126.3) (127.2)

Purchase of shares for Employee Share Trust (9.4) (21.6)

Other fi nancing activities 0.3 0.1

Net increase in cash and cash equivalents 154.5

Opening cash and cash equivalents 209.4 174.0

Net cash infl ow 154.5 31.4

Effect of foreign exchange rate changes 0.1 4.0

Closing cash and cash equivalents 364.0 209.4

Term deposit 50.0 75.0

Closing financing net cash 414.0


31.4

284.4


Group financial review continued

BALANCE SHEET

AS AT 27 FEBRUARY 2010 28 FEBRUARY 2009

£m

Goodwill 1,541.0 1,541.0

Other intangible assets 92.7 103.6

Property, plant and equipment 525.1 559.3

Inventories 935.4 930.3

Instalment receivables 429.4 424.5

Other assets 178.1 190.2

3,701.7 3,748.9

Trade and other payables (1,104.9) (1,063.2)

Other liabilities (219.1) (250.2)

(1,324.0) (1,313.4)

Invested capital 2,377.7 2,435.5

Retirement benefi t obligations (24.9) (46.4)

Net tax assets 52.1 32.7

Derivative fi nancial instruments 47.7 52.2

Financing net cash 414.0 284.4

Reported net assets 2,866.6 2,758.4

Pre-tax return on invested capital 12.1% 12.2%

Balance sheet

Reported net assets as at 27 February 2010

were £2,866.6m, equivalent to 332p per share

excluding shares held in the Employee Share

Trust. The year-on-year increase in net assets

was £108.2m. Within this, invested capital

reduced by £57.8m, driven by the working capital

reduction and lower capital expenditure. These

movements also contributed to the £129.6m

increase in financing net cash.

Benchmark pre-tax return on invested

capital (ROIC) is a key performance measure

for the Group. Benchmark operating profi t plus

share of post-tax results of joint ventures and

associates was £287.7m, down £10.3m or 3%,

while year-end invested capital reduced by

2%. This resulted in a pre-tax ROIC of 12.1%

(2009: 12.2%).

Liquidity and funding

The Group maintains liquidity by arranging

funding ahead of requirements and through

access to committed facilities. At 27 February

2010, the Group had £700m of undrawn

committed borrowing facilities, £685m of

which does not expire until 2013. These facilities

are in place to enable the Group to fi nance its

working capital requirements and for general

corporate purposes. The Group’s net cash

position is however expected to continue to

be sufficient to meet its financing needs in the

foreseeable future.

Group fi nancing arrangements

The Group finances its operations through a

combination of retained profits, property leases

and borrowing facilities where necessary. The

Group’s net cash balances averaged approximately

£500m over the year; the Group did not draw

upon its committed borrowing facilities at any

point during the year.

The Group has significant liabilities through

its obligations to pay rents under operating leases;

the operating lease rental expense for the year

amounted to £379.1m. The capitalised value of

these liabilities is £3,033m based upon an eight

times multiple of the year’s operating lease

charge, or £3,148m based upon discounted cash

flows of the expected future operating lease

charges. In common with credit rating agencies

and lenders, the Group treats its lease liabilities

as debt when evaluating fi nancial risk.

Capital structure management and share

buy-back programme

The Group has continued its strong track record

of cash generation. In the four years since

demerger, over £600m of net cash has been

generated. This cumulative net cash generation

has been after approximately £500m of

dividends to shareholders and approximately

£700m of capital expenditure and other

investments that have continued to position

the businesses strongly for growth. The

Group’s adjusted net debt/EBITDAR ratio,

which capitalises the lease rental expense on

an eight times multiple, was 3.4x at demerger,

strengthened to 2.9x after two years, and moved

back to 3.3x for the financial year just ended.

The Board has conducted its regular review

of the Group’s capital structure as part of the

year-end process. In doing so it has taken account

of the Group’s current cash position, its signifi cant

lease obligations, maintaining a capital structure

equivalent to a potential investment grade

rating, continuing to invest appropriately in the

business and maintaining flexibility to enable the

Group to withstand unforeseen fl uctuations in

the trading environment.



FINANCIAL YEAR 05/06 06/07 07/08 08/09 09/10

£m

Benchmark PBT 337.1 376.7 432.9 327.7 292.9

Add: depreciation and amortisation 134.9 147.5 151.6 159.4 130.1

Add: lease rental expense 299.2 328.2 344.8 372.8 379.1

Deduct: interest income (9.5) (16.6) (33.3) (29.7) (5.2)

EBITDAR 761.7 835.8 896.0 830.2 796.9

Financing net (debt)/cash (200) 60 174 284 414

Capitalised lease rental expense (2,394) (2,626) (2,758) (2,982) (3,033)

Adjusted net debt (2,594) (2,566) (2,584) (2,698) (2,619)

Adjusted net debt/EBITDAR ratio 3.4x 3.1x 2.9x 3.2x 3.3x

As a result of the review, it is anticipated that

over the next 12 months up to £150m of capital

will be returned to shareholders through a share

buy-back programme. The programme will be

funded out of the Group’s existing cash resources.

At a share price of 300p, it would represent

approximately 6% of the Company’s 877.4m

issued ordinary shares. The Company currently

has authority to purchase up to 10% of its issued

ordinary shares, and renewal of this authority will

be sought at the Company’s AGM on 30 June 2010.

Retirement benefi t obligations

Pension arrangements are operated principally

through the Home Retail Group Pension Scheme,

a defi ned benefit scheme, together with the

Home Retail Group Stakeholder Pension

Scheme, a defined contribution scheme.

The IAS 19 valuation as at 27 February 2010

for the defi ned benefit pension plans was a net

deficit of £24.9m (28 February 2009: £46.4m).

Plan assets increased to £667.7m (28 February

2009: £504.4m), driven principally by higher

market values. The present value of plan liabilities

increased to £692.6m (28 February 2009:

£550.8m), driven principally by a reduction in

the assumed discount rate to 6.0% (28 February

2009: 6.5%).

A full actuarial valuation of the defi ned

benefit scheme is carried out every three years

by independent, qualified actuaries. The latest

full review, as at 31 March 2009, resulted in a

deficit of £102m. Increases to funding have been

agreed with the pension trustee. The cash fl ow

impact of the additional payments are £17m in

the year to 27 February 2010 (with the Group’s

net cash position at 27 February 2010 of £414m

being after this payment), reducing to £16m and

£14m in the two subsequent fi nancial years.

Counterparty credit risk management

The Group’s exposure to credit risk with regard to

treasury transactions is managed by dealing only

with major banks and financial institutions with

appropriate credit ratings and within limits set

for each organisation. Dealing activity is closely

controlled and counterparty positions are

monitored on a regular basis.

Interest rate risk management

The Group’s principal objective is to manage

the trade-off between the effective rate of

interest and the credit risk associated with

the counterparty bank or fi nancial institution.

The annual effective rate of interest earned

on the Group’s net cash balances reduced

substantially in the financial year being reported.

This reflects a period when UK base rates have

been at their lowest.

Currency risk management

The Group’s key objective is to minimise the

effect of exchange rate volatility. Transactional

currency exposures that could signifi cantly

impact the income statement are hedged using

forward purchase contracts.

Approximately 30% of the Group’s product

costs are paid for directly in US dollars. Sterling

weakened substantially against the US dollar

between August 2008 and April 2009. This had

a significant impact on the Group’s hedged rates,

and therefore the cost of goods sold.

US dollar hedged rates 08/09 09/10 change

First half 2.00 1.75 (0.25)

Second half 2.00 1.50 (0.50)

Full year 2.00 1.60 (0.40)

Share price and total shareholder return

The Group’s share price ranged from a low of

189.0p to a high of 329.7p during the fi nancial

year. On 26 February 2010, the closing mid

market price was 255.0p, giving a market

capitalisation of £2.2bn at the year-end.

Total shareholder return (the change in the

value of a share including reinvested dividends)

has been an increase of 26.9% over the year.

This compares to an increase of 47.8% for the

FTSE 350 General Retail sector and an increase

of 45.5% for the wider FTSE 100.

Accounting standards and use

of non-GAAP measures

The Group has prepared its consolidated fi nancial

statements under International Financial

Reporting Standards for the 52 weeks ended

27 February 2010. The basis of preparation is

outlined in note 2 to the consolidated fi nancial

statement on page [60].

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 defi ned under

GAAP they may not be directly comparable

with other companies’ adjusted measures.

The non-GAAP measures are outlined in note 3

to the consolidated financial statement on page

[67].



Principal risks and uncertainties —— We discuss below the principal risks and uncertainties that could impact theGroup’s performance, and our mitigating activities. For furtherinformation on how we manage risk, see the business reviewand also page 41, within the corporate governance statement.

AREA OF PRINCIPAL RISK AND UNCERTAINTY DESCRIPTION AND EXAMPLES OF MITIGATING ACTIVITY

Economic and market risks

Impact on sales, costs, profit and cash of:

� Economic conditions

� Cost of raw material products/services/utilities

� Consumer preferences

� Competitor activity

� Seasonality/weather

� UK-centric store network

� Expansion/development of store network

� Changing demographics

The economic outlook for 2010 remains uncertain. Key issues specific to the UK and Republic of Ireland

centre around the political landscape and plans to address the fi scal deficit (eg public spending cuts, tax

changes) with their resultant impact on the consumer. This economic environment, including the response

of other retailers to it, has the potential to impact on the success of the Group in terms of its performance

in respect of sales, costs, profit and cash generation.

Significant cost savings have been made over the last three years in terms of operational effectiveness

and supply chain benefits from the combined leverage of Argos and Homebase. The ongoing effi ciency

programmes will enable the Group to continue its investment in competitive pricing and the development

of the infrastructure. The Group’s operational and financial strength will continue to sustain our commercial

advantage in the market place.

The Group is committed to supporting cost-conscious customers and those looking for value across all

spectrums of the range architecture. Continued investment will further extend choice within the Argos and

Homebase Value ranges and maintain our leadership in long-term growth markets.

Other mitigating activities include:

� Empowering customer choice by strengthening range architecture

� Store format, multi-channel and customer service developments

� Price tracking and dynamic pricing to ensure competitiveness

Currency The volatility of the global economy continues to create a risk of exposure to fluctuations in currency rates

� Purchase of products whose cost base of related to overseas product purchasing.

manufacture is in currencies other than sterling,

principally the US dollar and the euro We attempt to mitigate these risks through:

� Sale of products in currencies other than sterling, � Appropriate hedging policies

principally the euro in the Republic of Ireland � Adjustments to customer pricing

� Seeking opportunities for further sourcing effi ciencies

Operations

Failure to ensure appropriate processes are in place

to manage the complexity of retail operations,

including sourcing of products and customer service

The sourcing of products from outside the UK introduces complex supply chain risks that the Group

mitigates through effective management processes to ensure that stock is in the right place at the right

time to meet customer needs. Our distribution infrastructure is continuously reviewed to drive further

stock effi ciency.

Enhancement of our award-winning multi-channel capability will ensure that customers are

empowered to choose convenience; from shopping online for home delivery to using Check & Reserve

to benefit from immediate collection from store. The use of technology to get closer to our customers

through social networking and online reviews enables customer issues to be identified and resolved quickly.

The new partnership between Homebase and Nectar, the UK’s leading coalition loyalty programme,

provides a platform for leveraging customer data to maximise sales and customer satisfaction.


� Continuously improving the efficiency of catalogue production processes

� Enhancement of the Homebase website, with 10,000 product lines now transactional

� Improving the accuracy of stock forecasts

� Extending installation services for kitchens, bathrooms and bedroom furniture

� Dedicated working parties to manage operational change



AREA OF PRINCIPAL RISK AND UNCERTAINTY DESCRIPTION AND EXAMPLES OF MITIGATING ACTIVITY

Regulatory environment

� Changes in UK and overseas legislation

and regulation, eg consumer protection,

environmental regulation

� Changes in UK fi scal/employment policy,

eg minimum wage

Good governance practices remain important to the Group. In addition to ensuring compliance with existing

requirements, we are active in monitoring potential future developments. We also lobby, often with other

retailers, to support and develop the industry and the interests of consumers. Key developments impacting

the Group are the Carbon Reduction Commitment, Payment Card Industry Data Security Standards and

potential government changes to how customers can apply for store cards.


� Membership of industry representative groups

� Direct engagement with government and regulators

� Dedicated working parties to manage operational change

Infrastructure development/projects

Delay or failure to manage and implement major

business and infrastructure projects effectively

The Group is committed to investing for growth, extending multi-channel leadership and maintaining

a robust infrastructure. Strategic projects to replace or enhance key systems and infrastructure carry

a degree of risk; however, we have dedicated project teams in place with strong governance frameworks

to manage them.


� Detailed approval and planning process prior to project commencement

� Board review of status/progress of major change programmes

� Post project implementation reviews

� Management expertise in significant infrastructure/change programmes

Product safety

Failure to manage supplier relationships and/or

ensure appropriate quality checks are in place

The safety and quality of our products is of critical importance to the Group. Suppliers are required to sign

up to the Group’s Supply Chain Principles and to specific policies regarding products and their environmental

impact. Wherever possible, Argos and Homebase teams work in conjunction with suppliers to ensure

improvement opportunities are explored.


� Rigorous quality/safety assessment programme for new products

� Ongoing monitoring of quality/safety of goods on sale

� Supplier relationship protocols

� Ongoing rotation of supplier audits

� Standardisation of terms and conditions for all suppliers

Pe

� �

ople

Reliance on key personnel

Pension obligations

The Group values its colleagues and their contribution to the success of the organisation. Internal training

schemes and the graduate recruitment programme maintain the succession pool and actively encourage

promotion from within. The Group has rolled out a new leadership model to support the development of

current and future leaders. We are committed to open communications with colleagues at all times and

monitor employee satisfaction through an annual Group-wide staff survey.


� Competitive remuneration packages

� Succession planning

� Management development and training programmes

� Regular review of pension trustee activities and plans to mitigate the fund defi cit

Business interruption

� Acts of terrorism

� Failure or unavailability of operational and/or

IT infrastructure

� Delay or interruption in service provided by

third-party suppliers

A major incident could impact the ability of the Group to continue trading. We maintain and routinely

test our business continuity plans in order to reduce the potential impact of such events. Security measures

are in place where appropriate to protect colleagues, customers and assets. We remain vigilant to the

vulnerability of suppliers and continue to work towards a sustainable outcome for all parties. The ongoing

transfer of our data systems to a purpose-built unit to enhance our continuity arrangements represents

a major risk during the year which is reduced by the robust change management controls in place.


� Business continuity and recovery planning

� IT recovery plans

� Third-party supplier management


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