2007/08 was a 52 week year and the comparable period was the 53 weeks to 3 February 2007. To demonstrate better the underlying trends within the business, percentage changes of sales at constant exchange rates and like for like sales, use the 52 weeks to 3 February 2007 as the comparable period. Total Group sales rose to $3,665.3 million (2006/07: $3,559.2 million), up by 3.0% on a reported basis and 3.2% on a 52 week constant exchange rate basis (see Impact of constant exchange rates). Group like for like sales were down by 0.7% and net new store space contributed 3.9%.
Group operating margin decreased to 9.6% (2006/07: 11.7%), reflecting a decline in the US division and an increased operating margin in the UK division after adjusting for the impact of the 53rd week in 2006/07, (see table opposite). Group operating profit fell to $351.3 million (2006/07: $416.2 million), down by 15.6% on a reported basis and by 15.9% on a 52 week constant exchange rate basis (see Impact of constant exchange rates ).
Net financing costs amounted to $17.8 million (2006/07: $15.4 million), the increase being primarily due to incremental borrowing as a result of the share buyback programme commenced in 2006/07 and which was completed in the first quarter of 2008/09.
Group profit before tax decreased to $333.5 million (2006/07: $400.8 million), down by 16.8% on a reported basis and by 17.4% on a 52 week constant exchange rate basis (see Impact of constant exchange rates). The 53rd week contributed some $3.2 million to profit before tax in 2006/07. Profit for the financial period fell by 19.1% to $215.2 million (2006/07: $266.0 million), a decrease of 19.7% on a 52 week constant exchange rate basis (see Impact of constant exchange rates). Basic earnings per share was 12.6 cents (2006/07: 15.4 cents), down by 18.2% on a reported basis and by 18.7% on a constant exchange rate basis (see Impact of constant exchange rates).
|Components of 2007/08 sales growth||US %||UK %||Group %|
|Like for like on a 52 week basis||(1.7)||2.0||(0.7)|
|Change in net new store space||5.8||(1.1)||3.9|
|Total sales growth on a 52 week basis||4.1||7.4||4.9|
|Impact of 53rd week in 2006/07||(2.1)||(1.6)||(1.9)|
|Total sales growth as reported||2.0||5.8||3.0|
Like for like sales growth slowed in the first nine months of 2007/08 to 2.7%, with the gift giving events of Valentine’s Day and Mother’s Day being disappointing. The very important fourth quarter was particularly difficult with like for like sales declining by 8.6%, resulting in a full year decline of 1.7%. The contribution from new store space was 5.8% and the 53rd week in 2006/07 was adverse by 2.1%. Total sales as reported rose by 2.0% (see table above).
Like for like sales growth was 2.0%, an encouraging performance in an increasingly challenging marketplace. As in the US, performance in the first nine months of 2007/08 was stronger at 4.7%, but became more difficult in the fourth quarter with like for like sales declining by 1.7%. The impact of changes in net new store space was a decrease of 1.1%, foreign exchange movements increased reported sales by 6.5% and the 53rd week in 2006/07 was adverse by 1.6% (see table above). Total sales as reported increased by 5.8%.
|Operating margin movement||US %||UK %||Group %|
|Impact of 53rd week||0.2||(0.2)||0.1|
|New store space||(0.6)||–||(0.4)|
The operating margin in the US division was 9.7% (2006/07: 12.3%). This reflected deleverage of 190 basis points due to the like for like sales decline, the impact of additional immature space of 60 basis points, an adverse movement in gross margin percentage of 30 basis points and the impact in 2006/07 of the 53rd week of 20 basis points (see table above). Administrative expenses (see definition Cost of sales and administrative expenses ) increased reflecting the resources required to support the growth of the division. The ratio of net bad debt to sales deteriorated to 3.4% (2006/07: 2.8%) but was largely offset by additional income on the receivables portfolio due to the lower monthly collection rate. Operating profit was $262.2 million (2006/07: $326.7 million), down by 19.6% on a 52 week basis (see Impact of constant exchange rates ) and 19.7% as reported.
The operating margin in the UK division was 11% (2006/07: 11.4%). The division’s gross margin was down by 60 basis points, primarily caused by changes in mix due to the strong performance of the watch category, some impact from commodity costs and an increasing proportion of sales from Ernest Jones. A tight control of costs was maintained and resulted in a 40 basis point benefit to operating margin but the benefit to 2006/07 of the 53rd week had an adverse impact of 20 basis points (see table on Operating profit ). Operating profit increased 1.6% to $105.1 million (2006/07: $103.4 million). The benefit of the 53rd week on operating profit was about $3.3 million and on a 52 week constant exchange rate basis operating profit was little changed. Administrative costs in the UK increased on a reported basis due to the movement in the US$/pound sterling exchange rate but were little changed as a percentage of sales.
Group central costs amounted to $16.0 million (2006/07: $13.9 million) reflecting the impact of exchange translation movements and higher professional fees.
The charge of $118.3 million (2006/07: $134.8 million) represents an effective tax rate of 35.5% (2006/07: 33.6%). The rate is lower than indicated in the third quarter results due to the change in the mix of profit between the US and UK businesses and a more favourable resolution of certain prior year tax positions. It is anticipated that, subject to the outcome of various uncertain tax positions, the Group’s effective tax rate in 2008/09 will be at a similar level to the reported rate in 2007/08.
The Group’s ROCE was 16.8% (2006/07: 22.8%). In the US the ROCE was 14.9% (2006/07: 21.5%) reflecting lower operating profits and the additional investment in a 10% increase in net new store space. US capital employed included in-house credit card debtors of $840.2 million at 2 February 2008 ($778.9 million at 3 February 2007). In the UK there was a decrease to 29.9% (2006/07: 32.7%).
Depreciation and amortisation charges were $114.1 million (2006/07: $98.4 million), representing $72.1 million (2006/07: $61.3 million) in the US and $42.0 million (2006/07: $37.1 million) in the UK. Capital expenditure in the US was $111.1 million (2006/07: $101.1 million) and in the UK was $29.3 million (2006/07: $23.3 million). Capital expenditure in the US is primarily due to the rate of new store space growth while that of the UK reflected the number of stores refurbished and the phased replacement of the EPOS System. Capital expenditure in 2008/09 is expected to be about $140 million as a result of an anticipated decrease in the rate of space growth in the US and a planned increase in refurbishments in the UK.
The Group has historically used constant exchange rates to compare period to period changes in certain financial data. This is referred to as “at constant exchange rates” throughout this Annual Report & Accounts. The Group considers this to be a useful measure for analysing and explaining changes and trends in the Group’s results. The impact of the recalculation of sales, operating profit, profit before tax, profit for the financial period and earnings per share at constant exchange rates and the impact of the 53rd week in 2006/07, including a reconciliation to the Group’s GAAP results, is analysed below.
In November 2007 an interim dividend of 0.96 cents per share was paid (2006/07: 0.4434p). The Board is recommending to shareholders a final dividend of 6.317 cents (2006/07: 6.317 cents) per share for 2007/08, which, subject to shareholder approval, is to be paid on 3 July 2008 to those shareholders on the register of members at close of business on 23 May 2008. This represents an increase in the total dividend for the year of 1.6% converting the interim dividend paid in 2006 at the US dollar pound sterling rate from Reuters at 4.00 p.m. on 3 November 2006. The US dollar to pound sterling rate used to convert the 6.317 cents dividend per share for payment to shareholders who elect to receive a pound sterling dividend, will be the rate as derived from Reuters at 4.00 p.m. on the record date of 23 May 2008.
Given the substantial increase in economic and financial sector uncertainties, the Board will continue to evaluate the dividend policy in the light of the needs of the business, taking into consideration the significant competitive advantages of a strong balance sheet and financial flexibility. Account will also be taken of the primary stock market listing of the Company.
Under English law, dividends can only be paid out of profits available for distribution (generally defined as accumulated realised profits less accumulated realised losses, less unrealised losses) and not out of share capital or share premiums (generally equivalent in US terms to paid-in surplus). At 2 February 2008, after taking into account the subsequently recommended final dividend of 6.317 cents per share (2006/07: 6.317 cents per share), the holding company had distributable reserves of $283.2 million (3 February 2007: $199.0 million).
In order to make further distributions in excess of this figure, the holding company would first need to receive dividends from its subsidiaries. In addition to restrictions imposed at the time of the 1997 capital reduction on the distribution of dividends received from subsidiaries, the payments of dividends from other tax jurisdictions may not be tax efficient. Furthermore, there may be other reasons why dividends may not be paid by subsidiaries to the holding company.