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Argos
Business Reviews
To assist with analysis and comparison, the following business
reviews are based upon pro forma information. The basis of preparation
of pro forma restatements is set out in the Business Review
(Financial Summary).
Argos - operational review
As the UK’s leading general merchandise retailer,
Argos provides a highly successful and unique offer of choice,
value and convenience.
Further market share gains achieved. With
sales growing 8% to £4.2 billion, Argos continued to extend
its share of the overall home and general merchandise market.
Argos was named as the UK’s biggest furniture retailer
by Verdict Research. Once again, Argos was the number one toy
retailer in the UK for 2006, and increased its lead over the
second player according to NPD Group. Share gains also continued
within other categories, including the broad electrical goods
category.
More catalogue prices lowered. The price reduction
on reincluded lines in the Spring/Summer 2007 catalogue is approximately
3%. Argos has lowered prices on reincluded lines in every catalogue
since 1999 to constantly reinforce its value proposition for
customers.
Prices lowered further during life of catalogue.
Argos employs a dynamic pricing approach, continuing to lower
around 20% of prices during the six-month life of the catalogue.
Since the launch of the current catalogue in January, over 3,000
prices have been lowered. Prices are either lowered permanently
or through a series of promotions throughout the year with between
500 and 1,000 prices typically cut each time. In addition to
television, newspaper and online promotional messaging, every
month up to 10 million flyers or brochures are delivered to
homes to further communicate price reductions. A unique facility
also allows customers to use text messaging to check both the
latest price as well as the stock level in an individual store,
and then to reserve goods for immediate or later collection.
Widest ever customer choice. The current Argos
catalogue offers over 17,000 lines across all stores and channels.
Since national roll-out of the additional Argos Extra ranges,
awareness of the wider offering has continued to build. At the
end of the financial period, there were 238 stores that stocked-in
the additional 3,000 lines; this is an increase of nearly 50
stores compared to the same time last year and is driven by
a roughly equal mix of new stores and existing store conversions.
All the remaining stores offer customers the option to either
order-in for later collection from store or to have goods delivered
to home.
Argos ‘Home’ catalogue trial extended.
The latest edition of this separate catalogue was in 228 stores
by the end of the period. It features 348 pages and 3,200 products,
with over 100 new lines now exclusive to this catalogue. Research
has shown that the Home catalogue is helping Argos further define
itself as the clear market leader, raise awareness and increase
quality perception. The catalogue is supported in store with
a comprehensive marketing package and a virtual brochure on
the Internet.
Multi-channel leadership further strengthened.
Internet orders grew 45% to represent over 16% of total Argos
sales; online reservations for later collection in store now
represent over half of this, and grew 60% in the year. A further
8% of total sales are via telephone or text. In addition, of
the 22% of total sales that are delivered to home, around half
of these are still ordered in store. Together, this means that
over one-third of all Argos’ sales are ordered or received
by customers using more than one channel.
In the recent Hitwise UK Online Performance Awards, www.argos.co.uk
was the second most visited site within the ‘Shopping
& Classifieds’ category, behind only Amazon and therefore
ahead of all other UK retailers. Argos was also the third most
searched for brand during 2006, behind only eBay and ‘Bebo’.
Home delivery convenience enhanced. Argos
Direct is the largest two-man delivery infrastructure in the
UK, with around five million products delivered in the last
year. Using a fleet of around 800 vehicles, it now makes deliveries
in three slots across the day – morning, midday and afternoon.
This leading level of service also includes drivers calling
ahead to customers to confirm delivery. Argos’ delivery
of smaller products through the third-party provider Home Delivery
Network is also now operated on morning or afternoon delivery
slots.
Argos Direct is completing its roll out of a new warehouse
management solution. Originally implemented at the purpose-built
Faverdale distribution centre near Darlington that was opened
in 2005, the system has now been implemented in Marsh Leys,
with a final roll out to Acton Gate beginning shortly. The system
is bringing benefits in terms of enhanced operational efficiency,
improved order accuracy levels and reduced clerical work.
New stores extending customer reach. There
were 30 store openings and 5 store closures during the year,
bringing the total at the end of the year to 680 stores. Of
the 30 store openings, 3 were relocations and 10 were in new
catchments, with the remainder being additional stores in an
existing catchment. The openings included 26 Argos Extra stocked-in
stores.
Kiosks further improving customer convenience and efficiency.
Average sales participation in stores with kiosks is now approximately
12%, with some stores reaching as high as 40%. There are now
over 1,000 kiosks across just over half of the store portfolio.
In-store operational improvements. The vast
majority of stores carry the full 10,000 products that represent
the core stocked-in range. Goods that are collected in store
account for 78% of total sales. Ongoing improvements in the
unique systems, processes and layouts of stockrooms have further
enhanced customer choice, service and convenience.
Infrastructure changes for network optimisation.
In the financial year just begun, Argos will implement changes
to its infrastructure that will lead to greater network optimisation
and less complexity. The direct importing element of the Argos
Direct home delivery operation will be moved from Corby to the
purpose-built direct importing facility opened last year at
Kettering. This will enable a rented central distribution facility
at Wolverhampton to be closed, as its operations will be relocated
to the capacity released at Corby.
Argos - financial review
Sales in the 52 weeks to 3 March 2007 increased by 7.9% in
total; like-for-like sales grew 2.4%. There was exceptional
growth in TVs and video games systems throughout the year, driven
by new digital technology and gaming platforms, together with
a further boost in relation to the World Cup in the first half
of the year. This offset some continued market weakness in the
audio, DVD/VCR and compact digital camera categories. Other
areas that had good growth during the year included white goods,
bedroom furniture, in-car child safety and other nursery-related
lines.
The contribution to sales growth from net new space was 5.5%,
boosted in the first half of the year by the 33 Index stores
acquired in 2005. This factor, together with the larger total
sales base, leads to a lower expected contribution to sales
growth of between 3% and 4% going forward from continuing to
open around 30 new stores a year.
The stronger sales performance in the first half was substantially
offset by a related reduction in gross margin of approximately
100 basis points, driven by the shift in the product mix and
the popularity of Argos’ promotional offers. In the second
half of the year, gross margin was ahead by around 50 basis
points as a result of ongoing supply chain initiatives, a less
promotional stance during the key seasonal period and improved
management of stock clearance activity. The resulting gross
margin for the full year was therefore in line with the prior
year.
Benchmark operating profit for the 52 weeks to 3 March 2007
grew 9% to £325m. Growth excluding £11m of one-off
charges incurred in the first half of the previous year was
6%. Underlying operating cost inflation continued to be approximately
4%. A further 4% growth in operating costs (excluding the £11m
of one-off charges) reflects the direct costs of higher sales,
new space including the incremental operating costs of the acquired
Index stores and additional supply chain infrastructure, partially
offset by robust cost control.
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