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Group financial review

Sales and operating profit

Sales for the Group grew 2.3% to £5,984.8m (2007 pro forma: £5,851.4m) and benchmark operating profit grew 11% to £398.0m (2007 pro forma: £359.4m). Group benchmark operating margin was 6.7% (2007 pro forma: 6.1%). The drivers of this performance have been analysed as part of the preceding business reviews.

Net interest income

Net interest income was £33.3m (2007 pro forma: £16.6m). Third-party net interest income of £13.7m (2007 pro forma: expense of £1.2m) was earned on the Group’s improved average net cash position. A particularly favourable environment for deposit rates was also a driver. A further credit of £19.6m (2007 pro forma: £17.8m) reflects the financing costs charged within Financial Services’ benchmark operating profit.

In the prior year, interest costs attributable to the GUS capital structure prior to the demerger were £46.1m and have been excluded from 2007 pro forma benchmark PBT.

Share of post-tax results of joint ventures and associates

These amounted to an income of £1.6m (2007: £0.7m). Within this, there was a £2.8m gain on disposal of the Group’s 33% holding in AAGUS, a consumer finance company in The Netherlands. The residual loss reflects the Group’s share of the initial start-up costs incurred by the financial services joint venture with Barclays Bank PLC.

Exceptional items

An exceptional pre-tax income of £0.8m was recorded for the year. This represents the release of a £20.2m accrual in respect of previous GUS-related long-term incentive schemes that were settled in June 2007, offset by Homebase store impairment charges of £10.3m (2007: £4.1m) and costs relating to the post-acquisition integration of certain Focus DIY stores of £9.1m.

In the prior year, exceptional pre-tax items also included demerger–related costs of £11.3m and a charge in relation to the waiver of a loan note due from Experian of £7.3m. Within the prior year’s net financing costs, £6.9m of exceptional income related to the gain made on transfer of an interest swap associated with a financing facility novated from GUS plc on demerger.

Costs related to demerger incentive schemes

These amounted to £11.7m (2007: £5.8m). As previously announced, these costs are expected to amount to a maximum of £40m, to be charged to the income statement over the three-year period commencing from the date of the demerger in October 2006, and are excluded from benchmark PBT.

Financing fair value remeasurements

Changes in the fair value of certain financial instruments are recognised in the income statement within net financing costs. These amounted to charges of £9.0m (2007: £0.1m). The increase is principally the result of currency translation differences on overseas subsidiary balances, with an equal and opposite adjustment being recognised as a movement in reserves.

Financing impact on retirement benefit balances

The credit through net financing costs in respect of the excess of expected return on retirement benefit assets over the interest expense on retirement benefit liabilities amounted to £13.0m (2007 pro forma: £12.3m). The current service cost, which Home Retail Group believes to be a fairer reflection of the cost of providing retirement benefits, is already reflected in benchmark operating profit.

Profit before tax

Benchmark profit before tax grew 15% to £432.9m (2007 pro forma: £376.7m). Reported profit before tax was £426.0m (2007: £296.9m).

Taxation

Taxation attributable to benchmark PBT was £138.5m (2007 pro forma: £122.1m), representing an effective tax rate (excluding joint ventures and associates) of 32.1% (2007 pro forma: 32.5%). The improvement in the effective rate largely reflects a growth in profits while the absolute level of disallowable expenditure for tax purposes has remained broadly level.

Taxation attributable to exceptional items amounted to a charge of £1.0m (2007: £5.3m). In the year being reported there was also an exceptional corporation tax credit of £12.6m arising from the settlement of a number of historic tax computations, together with an exceptional deferred tax charge of £5.9m relating to the re-estimation of qualifying assets. Total exceptional tax in the year therefore amounted to a credit of £5.7m.

The reported effective tax rate was 30.8% (2007: 36.9%), representing a total tax expense for the period of £131.4m (2007: £109.5m).