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| Chief Executive's Report |
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In the 52 weeks ended 2 February 2008, total Group revenue from continuing operations was £2,969.6 million. This represents an 8.5 per cent increase over the prior year. Each of our businesses made significant progress during the year and overall the strategic positioning of the Group has been strengthened. At a sales level, this was particularly evident in our Entertainment Wholesale distribution business, where third party sales increased by 36.6 per cent over the prior year, as new customers and acquisitions were integrated into the business. 2 entertain, our music and video publishing joint venture with BBC Worldwide, increased its third party sales by 21.2 per cent, particularly helped by developing international sales. Sales at Woolworths fell 3.2 per cent like-for-like, reflecting our key focus of not chasing unprofitable sales and returning the Retail business to profit. This goal was achieved and was a key driver in delivering improved year-on-year Group profits.
Adjusted profit (which is before tax, exceptional items, adjustment for fixed rental uplifts and amortisation of certain intangible assets) was £28.3 million, an increase of 29.8 per cent over the prior year. This increase was delivered despite a challenging external environment and in the midst of extensive internal change in our businesses.
Retail
The key focus of the year at Woolworths was to return the business to profitability and establish a profit base on which to build. The adjusted profit was £3.4 million compared with a loss of £12.9 million in the prior year. This turnaround came thanks to further enhancement of gross margins, rigorous control of costs, the full year benefit of asset relifing, continued exploitation of the property portfolio and active management away from loss-making sales.
Total like-for-like sales declined by 3.2 per cent largely for the following reasons:
Firstly, and most materially, just over half of the decline in like-for-like sales was due to the decision not to chase unprofitable sales, particularly of electrical and computing products. These markets are highly competitive, with the internet allowing easy price comparisons. As a consequence, gross margins are low. Add to this the high servicing costs of delivery, technical support and customer returns, and the overall net profitability can be negligible or often negative.
Secondly, Woolworths has historically been a leading beneficiary of shopping voucher redemptions bought via savings clubs. Following the bad publicity attached to the failure of Farepak in 2006, sales of vouchers fell dramatically. We believe that this reduced like-for-like sales by 1.1 per cent.
Thirdly, the decision was taken not to advertise on TV during the Christmas trading period to the same extent as prior years. While this may well have held back sales, the overall impact on Woolworths’ profit and loss account was positive.
At a category level, the strongest area of the business was computer games. Demand for new formats such as Nintendo Wii, Nintendo DS and Sony PS3 continued to outstrip supply. We anticipate that this growth will continue and will more than counter the decline in the traditional music market as was the case in 2007/8. DVD’s and Books both held up well in the year and we anticipate that this will continue in the medium term.
In our Toy business, sales were held back as spend was diverted to computer games, particularly when there was availability of Nintendo Wii and DS, which appeal to the core Toy market age group. Younger age toy categories such as pre-school were less susceptible and were our most buoyant Toy categories.
Another area of product success was the continued progress of our Ladybird clothing ranges, where total unit sales surpassed the prior year and market share continued to grow, albeit in a market experiencing price deflation.
Our Confectionery business also experienced price deflationary pressure. This was particularly so in the gift market, where products tend to be used by the supermarkets to drive value price perception. Against this backdrop, we continued to seek to differentiate the Woolworths offer and were selective with our price investment. In everyday Confectionery ranges, the launch of a full range of Woolworths Worthit! sweets has provided a point of difference from the competition and enhanced our value positioning, driving incremental volumes.
Across the entire business, the introduction of the entry price Worthit! range has been very well received by customers. Indeed, to an extent we have been victims of our own success. Rates of sale have been higher than anticipated and maintaining availability in what is typically long lead time product has sometimes been a challenge. In its peak week, Worthit! products accounted for 7.9 per cent of total sales and 11.6 per cent of total transactions. Following Christmas trading, it now is clear that Worthit! products are relevant in seasonal as well as everyday ranges. The Worthit! Christmas products such as trees, decorations and cards all sold out early in the season. During the year 1,417 Worthit! lines were launched and we continue to refine and develop the product and its sourcing. In 2008, a new range of approximately 2,200 products branded “Woolworths” will be launched to provide the logical “sell up” alternative to Worthit! This is designed to increase sales, drive up basket spend and improve overall margins.
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Transport |
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2008 |
2007 |
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| Vehicle kilometres (millions) |
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25.9 |
27.2 |
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| Fuel consumption (million litres) |
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7.7 |
8.0 |
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Vehicle mileage has reduced by 4.8 per cent year-on-year, with a corresponding reduction in fuel consumption of 3.8 per cent. This has been achieved via a new routing and scheduling system for deliveries from Distribution Centres to Stores, improved flexibility in Store delivery windows and increased use of double deck trailers. |
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Service centre |
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2008 |
2007 |
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| Calls received (000’s) |
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826 |
846 |
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| Service level |
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93% |
90% |
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The Woolworths Customer Support department handles customer enquiries and complaints for all stores and also our websites, along with orders and queries relating to our Big Red Book catalogues. The number of contacts decreased in 07/08, due to the use of pro-active SMS messaging, whilst the level of service increased by 3.3 per cent year-on-year. |
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Self-audit
Compliance points score (out of 100) |
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2008 |
2007 |
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| Compliance score |
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77.1 |
77.4 |
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The store self-audit is a scheme to check that our stores are compliant with Company procedures and also external factors such as trading standards and health and safety issues. Store standards are broadly consistent year-on-year, with a slight decline in average store score of 0.4 per cent. |
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Mystery shopper
Service standards (out of 100) |
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2008 |
2007 |
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| Mystery shopper score (Xmas cycle) |
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76.6 |
76.4 |
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All stores receive regular visits from “mystery shoppers”. This allows us to gain a true reflection of how our stores are performing and to benchmark our service standards. The Christmas cycle is a key review to ensure that stores are ready for the busy Christmas trading period. This shows a slight improvement year-on-year, demonstrating continued advancement of customer service. |
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Multichannel
Following initial rapid growth and the establishment of a multichannel sales base in 2007/8 we chose to move away from electricals restricting headline sales growth to 5.2 per cent. We traded toward higher margin categories and reduced unit despatch costs by utilising the Woolworths distribution network instead of couriers. Feedback on the Big Red Book catalogues continues to be very positive with customers enjoying its manageable and focused Kids based offer. This channel of business provides significant opportunity for the future, both in terms of sales growth and a step change in profitability as fulfilment is further integrated into the Woolworths network over the next two to three years.
Evolving the supply chain
We continued to make progress in enhancing our supply chain capability, in terms of both the warehouse and transportation network, as well as increasing the sophistication of the IT systems that drive replenishment. Over the Christmas trading period, inventory levels were kept very tight to ensure sell through of seasonal ranges and thereby reduce exposure to unplanned mark down. As at the end of the first week of the January sales, inventory in Woolworths was some £61 million lower than the prior year and was of a superior quality.
Improving stock control was a contributory factor in enhancing margin, alongside increased direct supply of product from the Far East, where shipments grew by 12 per cent. The lower cost prices achieved from greater use of direct supply allowed us to improve our price competitiveness.
Overall margin increased by 101 basis points.
We believe that significant opportunity remains to enhance the profitability of the business through a combination of increased direct sourcing, greater efficiency in the distribution network and still further sophistication of the IT systems that handle replenishment. The business is targetting a further 40 basis point improvement in margin and a reduction of £8 million in costs in the coming year.
Capital Expenditure and Store Portfolio Management
During the year some £33.3 million of capital expenditure was invested including the acquisition of four store freeholds, repairs, renewals and enhancements to the physical estate, opening five new stores and refurbishing 10 older stores. Trading from the newly opened stores has been encouraging.
A programme of low cost refurbishments in 77 stores has provided good levels of return.
Given the size and nature of the property portfolio, it is appropriate that it is actively managed and we have achieved property profits from a number of transactions including disposals, sublets, store cut downs or store swaps with other retailers.
Retail Summary
The prime objective for the year was to enhance profitability. This was achieved as we continued to improve cost performance, worked hard to deliver profitable sales and continued to focus on enhancing both the service and product offer for our customers. We now have a base on which to build for the coming years.
Entertainment Wholesale and Publishing
Entertainment Wholesale (EUK / Bertrams / THE)
This was a pivotal year for the longer term development of the Entertainment Wholesale business. Having made two acquisitions in the prior year and won two new major accounts, there was a significant operational challenge for the business to integrate the acquisitions, cease supply of CD’s, DVD’s and computer games to Tesco and commence trading with the new customers.
During the year, key activities undertaken by the Entertainment Wholesale division include:
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The integration of Bertrams following its acquisition in January 2007 |
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Securing clearance from the Competition Commission following its investigation into the Bertrams acquisition |
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The commencement of supply to Zavvi (formerly Virgin Megastores) |
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The commencement of supply to Asda |
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The closure of one warehouse and physical relocation of supply to other EUK sites |
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Cessation of supply of CD’s, DVD’s and computer games to Tesco |
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Against this dynamic background, the business delivered sales growth of 36.6 per cent, taking total third party sales to £1,176.6 million. An important part of our development strategy was to increase exposure to both the books and computer games markets. This is important in the longer term as both markets are inherently attractive in terms of size and growth prospects. They also have less immediate threat from digital formats when compared to the music and DVD markets which historically have made up the bulk of EUK’s sales.
We have also sought to diversify the customer base in a progressive manner. We are now pleased to service a broad spectrum of customers who supply the consumer through a variety of traditional and non traditional channels.
As a consequence of this considerable change programme, EUK, THE and Bertrams incurred additional costs, some of which were exceptional and others that resulted from the inefficiency associated with change. These costs held back profitability but by their nature will not reoccur in the coming year and accordingly we expect to make progress in 2008/9.
Having traded through its peak season, the enlarged business is now well placed going forward. Without the distraction of business integration, we will be able to focus on developing our customers’ businesses, enhancing and differentiating our service proposition and driving efficiency across our operations. |
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EUK and Bertrams now have a wide spread of customers, covering multiple and independent specialists, general retailers, the growing supermarket channel and increasingly a range of online retailers.
Another business stream that has developed well during the year is the supply to the public library network through Bertram Library Services. Total sales increased by 6.7 per cent during the year.
It is inevitable that over time some of the markets which our Entertainment Wholesale businesses serve will move from physical to digital delivery. In readiness for this we continued to develop our digital capabilities. Having already established a successful presence in digital music, supporting EUK’s retail customers and a network of digital jukeboxes, the key activity during the year was to build the capability to offer new digital markets such as movie and computer game downloads, alongside mobile phone content. Trialling this new service offer began in early 2008.
2 entertain
2 entertain had an exceptionally good year. Total sales grew by 23.5 per cent, climbing to £240.7 million. Dividends received from the joint venture increased by 59.5 per cent to £18.5 million. There were many successful product releases during the year but undoubtedly the most significant was the release of “Planet Earth” in the US which caught the imagination of the American consumer, yielding excellent sales of both the high definition and normal resolution product. In the relatively new high definition market, “Planet Earth” is the highest grossing release to date.
In the UK, the best selling products were “Clarkson – Supercar Showdown” and the “Top Gear Interactive DVD”. Total DVD sales in the UK were marginally below the overall market as there was no “runaway” success from the release schedule, notwithstanding a broad spread of solidly performing titles.
The success of “Planet Earth” has helped develop the international component of the business. International sales accounted for 46 per cent of total sales. After North America, the next largest sales region is Australia / Far East, where programmes like “Dr Who” and “Little Britain” continue to grow their franchise.
Demon Music Group, the recorded music publishing subsidiary of 2 entertain, had a very successful year, especially when set against the rapidly declining traditional music market. Demon’s core business is in producing budget and mid-range compilations and it continues to capitalise on its strong relationships with key retailers. New product ranges like “100 Hits”, “The Red Box” and “Music Club Deluxe” sold well and ensured that, despite lower sales value than the previous year, strong volume sales and product mix drove a favourable margin.
Banana Split Productions, the in-house production arm of 2 entertain, traded solidly across the year and continues to occupy a niche position as a low cost producer of video based content.
Entertainment Wholesale and Publishing Summary
Our Entertainment Wholesale business had a transformational year. We are now positioned as a market leader in the supply of books and entertainment product. A strong platform has been established which in the short term we shall exploit by returning efficiency to the business, and longer term look to move into adjacent markets as a route for growth.
2 entertain continued to develop during the year and whilst the success of “Planet Earth” contributed significantly, the overall business continued to build underlying profitability.
Outlook
We are cautious about consumer spending going forward and are therefore not planning for the Woolworths business to grow its sales line. This is a sensibly prudent approach to sales, notwithstanding the clear opportunities which exist from increased exploitation of our multichannel capability and further development of our in-house brands. A key focus of the retail business will be further margin development set alongside a significant rebasing of cost levels from business simplification. The key enabler for business simplification is a reduced exposure to larger, over-spaced stores. We will now actively restrict the maximum traded store footprint within the estate, which will have a marked impact on both central and store costs.
At 2 entertain the key driver of success will be the quality of the release schedule. Our unique and extensive relationships with key content providers puts 2 entertain in a good position to develop the business further.
For the Entertainment Wholesale division, we anticipate overall a comparatively benign market across the core categories, with growth in computer games more than offsetting the decline in music. The key opportunity for EUK/Bertrams lies in enhancing operational efficiency now that the integration of acquisitions and new customers is complete. In this more stable position, many of the friction costs experienced in this year will not be present, which will enhance profitability.
Overall, across the Group we believe we enter 2008/9 with the businesses strengthened relative to the prior year and well set up for the challenge ahead.
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Trevor Bish-Jones
Chief Executive
2 April 2008 |
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