HIGHLIGHTS

Group turnover* up 7.9% to £3,691.9m
Group operating profit* up 41.1% to £305.8m
Group profit before tax and exceptional items* up 29.8% to £287.0m Earnings per share up 60% to 8.5 pence per share
Interim dividend of 4.0 pence per share, up 8.1%

* from continuing operations

Commenting on the results, Luc Vandevelde, Chairman said:

"I am pleased with the performance over the half year, which shows we are continuing to deliver on our promises.

We are now in a position where we have achieved four consecutive quarters of positive growth. This has translated into good half year results, which is a further indication that we have moved from securing, to sustaining the recovery. In light of this, I am pleased to declare an interim dividend of
4.0 pence per share, an increase of 8.1% on last year.

Looking forward, we are now focused on gaining market share in the core areas, particularly Clothing and Food and on building the foundations for future growth. However, we recognise that we are aiming to achieve this in a market we expect to become less buoyant. At the same time, we are coming up against challenging year-on-year comparisons.

As we go into the crucial Christmas period, we remain confident that we will continue to give our customers reasons to keep coming to us and buying more, by offering appealing products at great value within an improved store environment."  

Roger Holmes, Chief Executive said:

"The improvements we have made to date in Clothing, Food, Home and in our stores have been appreciated by our customers and are reflected in
our performance. We are now delivering gains in market share across all three areas.

In Clothing, we have continued to improve the appeal, quality and fit of our merchandise as well as segmenting our ranges more clearly. The focus on key product areas together with recently developed categories, including per una and Blue Harbour, has been well received by our customers. The Clothing buying margin continues to benefit from the changes we made to the sourcing of merchandise. Opportunities remain to improve flexibility and speed to market.

In Food, a good sales performance has been driven by the high quality of our products and continued innovation. We are reaching more customers, opening three Simply Food stores in the period and are on track to deliver our target of 20 stores this year.

We have renewed a further 63 stores in the period. We now have 80% of UK Retail selling space in the renewed format, creating a brighter and more modern environment for our customers.

In Financial Services, we have taken the first steps to reinvigorate our Chargecard business with the recent launch of a pilot in South Wales for a combined credit and loyalty card.

Looking ahead, we remain dedicated to continuing the improvement in the shopping experience for our customers."

OPERATING REVIEW

Group Summary

Retailing

UK Retail

Turnover (excluding VAT) was up 9.5% on last year at £3,193.7m. Including VAT, turnover was up 10.0% on last year, 8.8% on a like-for-like basis. The quarterly sales performance for the first half of the year is set out below:

Volumes for Clothing have increased by approximately 10%, with the balance of the sales increase being attributable to higher average selling prices, largely reflecting the mix of products sold. In Home, the increase in sales is largely volume related. Food inflation during the period was 0.5%. Total selling space remained broadly level at 12.2m sq. ft., but the weighted average footage for the period fell by 0.6%.

On a like-for-like basis, sales were as follows:

These results reflect the progress we are making to recover the performance of the Clothing business by focusing on the appeal, quality and fit of our product. All areas of adult clothing achieved double digit sales increases and gained market share, with particular highlights being ladies' casualwear, Autograph and men's casualwear, helped by the Blue Harbour ranges.

In Lingerie, the focus on product and availability has meant that we have continued to make progress against last year, strengthening our position as the market leader.

The performance of Childrenswear was poor in the first half of the year, with insufficient product appeal in girlswear and a lack of availability in underwear and schoolwear at peak times. However, the strong response to the DB07, David Beckham, range which we launched in September gives us the confidence that we can grow this business when we get the product right.

We have continued to realise the gains from the actions taken to increase overseas production and consolidate our supply base. At the half year this delivered a further 1.8 percentage point improvement in the Clothing bought-in margin. However, as a result of excess commitment, the cost of mark-downs was broadly level with the same period last year. These arose within Womenswear, where we drove for high sales growth and improved availability, and in Childrenswear due to disappointing sales.

Distribution costs, which are included in cost of sales, increased marginally less than the rate of sales growth.

In Home, the performance of furniture in the first half was strong, helped by the Bank Holiday events around the Jubilee and at the end of August. Sales also benefited from the introduction of new products across the range, particularly within home accessories and bedding.

In Foods, we have outperformed the market in the second quarter, helped by the high quality of our products, continued innovation and strong, cohesive marketing. We continue to focus on extending the reach of our product, making our food more accessible to more customers, particularly through the 'Simply Food' format. We have opened three stores in the first half, expect to open a further four by Christmas and plan to open 20 in total by the end of the financial year.

Operating costs increased by 5.4% over the same period last year. Within this, employee costs, which represent approximately half of total operating costs, increased by 4.7%. This was primarily as a result of the annual salary review of 3% and additional staffing for per una and Café Revive, which were rolled out during the second half of last year. Property, repair and renewal costs have increased by 9%, largely as a result of the sale and leaseback transaction entered into last year, which added £12.6m to rental costs in the first half. Depreciation was broadly level on the year. Other operating costs increased by 6.9%. This was largely due to increases in marketing costs, primarily due to TV advertising for Food, and IT expenditure to support business initiatives, including infrastructure costs for the relocation of the corporate head office next year.

We have renewed 63 stores during the period, including the addition of a further 29 Coffee shops, at a total cost of approximately £32m. This includes £7m of revenue costs which have been expensed. We have plans to renew a further 41 stores before Christmas at a cost of approximately £26m (including business unit schemes). In total, by Christmas we will have 236 stores trading in the modernised format, representing approximately 89% of UK Retail selling space.

UK capital expenditure for the period was approximately £165m. In addition to the expenditure on store renewal, this also includes £25m on new space, £27m on new selling initiatives and £48m on replacement capital expenditure.

International Retail

The results from continuing operations include sales and operating profits from Kings Super Markets as the planned disposal has not yet been completed, due to the buyer's financing taking longer than anticipated.

Turnover for the period in the retained businesses (Republic of Ireland, franchises and Hong Kong) increased by 8.8%.

Operating profit for the retained businesses increased by 12.2% to £14.7m, compared to £13.1m for the same period last year. Within this, the Republic of Ireland performed ahead of last year and we have also seen an improvement in the performance of our franchise business. In Hong Kong, actions taken last year to decrease footage in selected locations and reduce costs, together with a new pricing strategy, are beginning to deliver results.

Financial Services

Operating profit from Financial Services increased by £6.5m to £50.5m. The results of the captive insurance company were again affected by negative investment returns due to falls in the underlying markets. However, the Financial Services retailing activities increased operating profits by 16.2% to £48.1m. This was a result of improving returns from the core lending products and a programme of cost reduction which has generated savings of £6m compared with last year.

The proportion of retail sales made on the Chargecard has reduced slightly to approximately 18% for the period to September and the number of active accounts has decreased year-on-year by approximately 7%. However, with the average outstanding balance per customer continuing to rise, average customer borrowings have been higher than the same period last year leading to an overall increase in net income.

In September, we mailed Chargecard customers in South Wales with details of the new credit card and loyalty scheme. During the coming months this pilot will provide valuable learning prior to planned rollout next year. Total revenue costs incurred for the pilot so far this year amount to £9m. Total project costs for this financial year are expected to be £25m and not the £35m previously indicated.

In personal lending, competitive forces remain strong and outstanding balances are down 6% year-on-year. Within this, incremental interest bearing personal loan advances for the first six months are in line with last year, but have been offset by a reduction in the amount of replacement business.

The introduction of a revised bad debt policy resulted in a one-off increase in bad debt charge in the second half of last year. As expected, the application of the new policy and the revised procedures associated with it, has resulted in a total bad debt charge in the first half which is broadly in line with historic levels.

In other areas, the amount of new unit trust investment has more than doubled year-on-year. However, the number of new policies in other product areas has fallen. During the period we withdrew the group stakeholder pension and mortgage protection products.

Discontinued operations

Last year, we closed the Continental European operations and sold Brooks Brothers. The results of these businesses up until the dates of closure or disposal are reported under discontinued operations.

Net interest expense

Net interest expense was £18.8m compared to net interest income of £4.4m for the same period last year. This arises as a result of the increase in debt following the capital restructuring of the Group at the end of last year. The average rate of interest on borrowings during the period was 5.8%.

Taxation

The tax charge reflects an effective tax rate of approximately 30% compared to 31.6% for the same period last year. This rate reflects the fact that the majority of our profits are subject to tax at the UK corporation tax rate of 30% and the minimal impact of timing and permanent differences.

Capital structure

During the period, 16,130,353 ordinary shares (representing 0.7% of the issued share capital) were purchased in the market at a total cost of £53.4m at an average price of 330.9p.

On 25 September 181,478,363 B shares were redeemed at par at a total cost of £127.0m. Following this redemption, 212,725,066 B shares remain in issue. The next opportunity for redemption is in March 2003.

At the end of the period, net debt was £2.0bn giving rise to retail gearing of 24.6%, with total gearing at 44.7%.

Earnings per share

Adjusted earnings per share has increased by over 60% to 8.5 pence per share. Approximately three quarters of this increase is due to the improved operating performance, with the balance attributable to the impact of the capital restructuring carried out at the end of last year.

Cash flow

The Group generated an operating cash inflow for the period of £422.5m. Within this, the cash inflow from retailing activities was £283.9m (last half year £296.7m) and the cash inflow from financial services activities was £138.6m (last half year £100.5m). Retail operating cash flow has declined due to an £87.0m increase in stock levels since the year end.

During the period, the Group acquired tangible fixed assets totalling £165.6m (last half year £146.9m). After taking into account the timing of payments, the cash outflow for capital expenditure was £129.9m (last half year £75.1m). Proceeds in the period are largely due to the sale of part of our Manchester store.

The cash outflow from acquisitions and disposals of £29.4m includes a repayment of £30.2m to the purchaser of Brooks Brothers for the difference between working capital at the date of the agreement and the date of completion, which was anticipated and provided for last year.

The overall cash inflow before funding of £38.9m has been partly used to fund the redemption of B shares in September, and the purchase of ordinary shares.

Updated guidance

• We anticipate Clothing mark-downs for the full year to be broadly level with last year.
• The combined credit and loyalty card will add approximately £25m to operating costs this year compared to the original estimate of £35m due to the phasing of the work on the infrastructure.
• The impact of a national rollout of the combined credit and loyalty card would be to reduce profits by around £60m for the financial year 2003/04, compared to the £25m this year. This is a provisional number and we will update it as we obtain further details from the pilot.
• Download Interim Financial Statements and Notes

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