Group financial review
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Capital structure
The Group finances its operations through a combination of retained profits, property leases and bank borrowings where necessary. The Group's net cash has varied throughout the year due to trading seasonality.
The Group has significant liabilities through its obligations to pay rents under operating leases. The capitalised value of these liabilities is £2,758m based upon a simple eight-times multiple of last year's operating lease charge, or £3,057m based upon discounted cash flows of the expected future operating lease charges. In common with the credit rating agencies, the Group treats its lease liabilities as debt when evaluating financial risk.
As an independent company, Home Retail Group has demonstrated two years of strong profit growth and cash generation. However, since the outlook for consumer spending looks weaker, the Board is mindful of maintaining flexibility through a prudent balance sheet approach. This will offer further resilience during any shorter-term macro-driven slowdown, while not constraining continued investment in value-enhancing longerterm growth opportunities. The Board will continue to review its capital structure to ensure that it remains appropriate.
Retirement benefit assets
The Group provides a number of post-employment benefit arrangements covering both funded defined benefit and defined contribution schemes. Pension arrangements are operated principally through the Home Retail Group Pension Scheme, a defined benefit scheme, together with the Home Retail Group Stakeholder Pension Scheme, a defined contribution scheme. The IAS 19 surplus as at 1 March 2008 for the UK defined benefit scheme was £83.7m (2007: £9.3m).
Liquidity and funding
The Group maintains liquidity by arranging funding ahead of requirements and maintaining sufficient un-drawn committed facilities to meet short-term needs. At 1 March 2008, the Group had un-drawn committed borrowing facilities available of £700m, which expire in 2012. These facilities are in place to enable the Group to finance its working capital requirements and for general corporate purposes.
Treasury policy and risk management
The Group's treasury function seeks to reduce exposures to foreign exchange, interest rate and other financial risks, and to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. Its policies and procedures are subject to review and approval by the Board.
Counterparty credit risk management
The Group's exposure to credit risk is managed by dealing only with banks and financial institutions with strong credit ratings and within limits set for each organisation. Dealing activity is closely controlled and counterparty positions are monitored daily.
Interest rate risk management
The Group's principal objective is to manage the trade-off between the effective rate of interest and the impact of interest rate volatility. Exposure would be managed by the use of fixed and floating rate facilities and by the use of interest rate swaps to adjust the balance of fixed and floating rates.
Currency risk management
The Group's key objective is to reduce the effect of exchange rate volatility on profits. Transactional currency exposures that could significantly impact the income statement are hedged using forward purchases of foreign currencies.
Share price and total shareholder return
The Group's share price ranged from a low of 259.0p to a high of 497.5p during the financial year. On 29 February 2008, the closing mid market price was 259.0p, giving a market capitalisation of £2.3bn at the year-end.
Total shareholder return (the change in the value of a share including reinvested dividends) has been a decline of 36.4% over the year. This compares to a decline of 36.0% in the total shareholder return for the FTSE 350 General Retail sector. The wider FTSE 100 saw a more limited decline of 0.4% over the same period.
Accounting standards and use of non-GAAP measures
The Group has prepared its consolidated financial statements under International Financial Reporting Standards for the 52 weeks ended 1 March 2008. The basis of preparation is outlined in note 2 to the consolidated financial statements.
The Group has identified certain measures that it believes provide additional useful information on the underlying performance of the Group. These measures are applied consistently but as they are not defined under GAAP they may not be directly comparable with other companies' adjusted measures. The non-GAAP measures are outlined in note 3 to the consolidated financial statements.
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