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Wednesday 23 March 2005 |
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Woolworths Group plc:
Preliminary Results Announcement 2005 |
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Operating Review |
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RETAIL |
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Total Group retail like-for-like sales fell by 1.7 per cent with Woolworths Mainchain down by 1.3 per cent,
Woolworths big W down 3.5 per cent and MVC decreasing by 4.8 per cent. As a result, operating profit
from Retail operations fell from £46.2 million to £40.7 million. |
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Woolworths Mainchain |
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Despite the disappointing second half to the year, much was accomplished in the Mainchain during
2004 to improve the gross margin, strengthen the infrastructure and develop the retail proposition.
These initiatives remain fundamental to our strategy and provide a firm foundation on which to build in
2005. |
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The underperformance of the Mainchain in October and November impacted our overall result for the
second half. The market dynamics worked against our decision to move Christmas set up to before the
October half-term. Space allocated to Toys and Gifts was increased but delivered sales below that of
the displaced ranges, and the material weakness in the Toy market in particular exacerbated the effect.
Although performance in December and into early January improved, with positive like-for-like sales of
0.9 per cent for the six weeks to 15 January 2005, this was insufficient to make up for the earlier
performance. On a positive note, despite the shortfall against sales targets, we were able to keep stock
under control, evidencing that the business is now much better controlled than in prior years. |
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For the third successive year the underlying gross margin improved, growing by 40 basis points and
building on the 90 basis points improvement over the last two years. This was achieved through better
sourcing, product development and continuous improvement to the ranges. |
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We were particularly encouraged by the increased sales in Electrical, Communications and Kids Dress
Up which were categories in which we have focused on delivering ranges to support our Kids &
Celebrations strategy. Progress was also made in Confectionery, Gifting and Events where we
concentrated on differentiating our offer from that of the competition. In Clothing we moved the traded
margin forward as we developed sources of supply that allowed us to react in season. The
Entertainment market continued to be highly competitive. Shortages of games hardware coupled with a
disappointing performance from new DVD releases over the final quarter led to disappointing sales. |
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We continued to make progress in improving the operational efficiency of the business, with the rollout
of the Kingstore till system completed as planned in October 2004, under budget and without disruption.
These new tills not only speed up transaction times for our customers but also give our store colleagues
better visibility of stock levels in store. This helped contribute to a further increase in single sku in-store
availability which rose 1.4 per cent during the year to 93.3 per cent. Costs, both in store and at head
office have also been controlled tightly with the year-on-year increases running well below the rate of
inflation. |
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10/10 |
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Our 10/10-store refurbishment programme continued with a total of 48 stores refitted and a further two
new stores opened. On average, relative to the Mainchain, refitted stores have delivered 6 per cent
sales growth in year one, 2 per cent in year two, coupled with an increase of 20 basis points in the gross
margin in the first year. |
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Although rollout uplifts are below those seen in the earlier refits, a detailed analysis has helped us gain a
better understanding of the performance drivers, and these findings will be factored into our plans for the
year ahead. Most notably, we have found that the size of store and position relative to the local market
are important variables in driving the sales line, and the performance of Clothing and Home are
important factors in the margin performance. |
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In the year ahead we plan to be refitting a further 50 stores. The pre-opening costs associated with the
48 refits in 2004/5 amounted to £3.3 million and are expected to continue at this level in 2005/6. |
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Woolworths out-of-town |
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In March 2004, we announced that we would not continue to rollout Woolworths big W. Instead, a site-by-
site review of the estate would be undertaken to assess the merits of either an outright disposal or
reducing the size of the units to a level that would be sustainable for a Woolworths out-of-town concept.
The estate was highly variable in terms of quality, size and retail planning consents. |
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As at the date of the accounts, five stores, all of which had food planning consent, have been assigned
and contracts on two further stores have been exchanged and are awaiting landlord approval. A further
two stores, where there was excess space, have been either sublet or surrendered to the landlord. This
leaves 15 stores on which we anticipate making further progress over the coming year. To date,
assignment or surrender of leases has generated £35.5 million of cash for the Group of which £9.0
million is recognised within the exceptional item in 2004/5. |
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Looking forward, after further lease assignments, we anticipate that Woolworths out-of-town will be
trading from around 17 sites. In October 2004, stores at Tamworth and Norwich were cut down and
refitted to a 40,000 square feet specification. Christmas trading was encouraging. A further two stores at
Byker and Bristol are being opened in the first quarter of 2005 and these four stores will then be used to
refine the proposition before any further investment is made in our other sites. In the meantime, the
remaining stores will be downsized to around 40,000 square feet. |
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Multichannel Retailing |
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This Christmas for the first time we offered more than 4,000 additional products through the Woolworths
website, including over 2,800 Toys and Gifts, dramatically broadening the pre-existing offer which was
largely entertainment based. It is our belief that in the long term serving customers through the
integration of our online offer with our extensive store network offers a good growth opportunity, in
particular in our smaller stores where a much broader product offering will help to generate incremental
sales. The internet-enabled Kingstore till technology will play a key part in the development of our
evolving multichannel strategy. |
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MVC |
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The performance of MVC improved during the year. Despite the fall in like-for-like sales of 4.8 per cent,
losses narrowed substantially on the back of a better margin and a tight control of costs. The Board
however has concluded that the investment required to reposition MVC is substantial and that the
preferred option is to divest the business. This will take place over the coming months. In the near term
the 14 worst performing stores will be closed leaving a core of 67 stores. |
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ENTERTAINMENT WHOLESALE AND PUBLISHING |
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This has been a year of continued progress for our Entertainment Wholesale and Publishing
businesses, comprising Entertainment UK and our new joint venture 2entertain. Operating profits from
this part of the Group rose 16.8 per cent to £49.3 million before goodwill amortisation for the joint
venture (2004: £42.2 million). |
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Entertainment UK (EUK) |
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Entertainment UK, our entertainment and books distribution business performed robustly during the
year. Overall sales increased by 10.0 per cent to £1.2 billion and within this sales to third parties
increased by 38.4 per cent. This increase was underpinned not only by the continued growth of the DVD
market but also by new business wins such as WH Smith’s music and non-core video ranges and the
addition of book distribution for Tesco. |
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In addition, in August we announced the renewal of EUK's contract to supply entertainment software to
Tesco. Under the terms of this contract both parties are committed to working together to improve
supply chain efficiencies. Undertaking any identified improvements is a condition of the contract
continuing for an initial three year term to March 2007. |
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The Entertainment market remains highly competitive, which has resulted in pressure on the gross
margin. However, this has been offset by continued warehouse efficiencies where over the last two
years cost per pick is down 7 per cent and cost per return is down 22 per cent. This has been achieved
through investment in forecasting systems and tight control of overheads and as a consequence,
despite the gross margin pressure, EUK's profit has moved forwards. |
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Looking ahead, many opportunities exist to grow this business, with potential for further supply contracts
for other retailers; the Tesco books contract gives EUK a substantial base on which to build its books
capability and the business continues to build its competency in digital downloading and online retailing. |
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2entertain |
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In September 2004 we completed the formation of a joint venture combining BBC Worldwide’s video
business with the VCI music and video publishing companies to create 2entertain Limited. Woolworths Group has a 40 per cent interest in the new business. In addition to VCI’s existing rights, 2entertain has
a first option to acquire product from BBC productions. |
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The trading performance of the business first as VCI and then as 2entertain has been strong. Over the
key Christmas trading period sales were strong with the joint venture having two of the top ten DVD
releases with “Little Britain” and "That Peter Kay Thing". |
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With the integration of the two entities going well, there is significant opportunity for it to benefit from its
new found scale and access to overseas markets. |
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OUTLOOK |
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The retail trading environment is difficult, impacting both sales and margin. February was affected by the
cold weather and the phasing of the entertainment release schedule. March has been relatively
stronger but on non-comparative Easter trading. |
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Our Entertainment Wholesale and Publishing businesses are trading in line with our expectations. |
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We will update the market on the trading in the first quarter at the AGM on 7 June 2005. |
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