Prior year review of 53 weeks ended 3 February 2007
The prior year review for the 53 weeks ended 3 February 2007 has been restated into US dollars, having been originally published in pounds sterling.
Total Group sales rose to $3,559.2 million (2005/06: $3,154.1million), up by 12.8% on a reported basis and 11.5% at constant exchange rates (see page 41). On a 52 week basis Group like for like sales were up by 5.4% and net new store space contributed 4.5%. The 53rd week contributed 1.6% to sales in 2006/07 (see table below).
Group operating margin decreased to 11.7% (2005/06: 11.9%), reflecting a decline in the operating margin of the US division and an increase in that of the UK division (see below). The 53rd week contributed some $3.4 million to operating profit in 2006/07. Group operating profit increased to $416.2 million (2005/06: $374.7 million), up by 11.1% on a reported basis and 10.1% at constant exchange rates (see page 41), as total sales growth more than compensated for the decline in operating margin.
Net financing costs amounted to $15.4 million (2005/06: $14.0 million), the increase being primarily due to the transition from a securitised borrowing facility to the new private placement note facility and incremental borrowing as a result of the share buyback programme offset by the movement in the US dollar/pound sterling exchange rate.
Group profit before tax increased to $400.8 million (2005/06: $360.7 million), up by 11.1% on a reported basis and 10.1% at constant exchange rates (see page 41). The 53rd week contributed some $3.4 million to profit before tax in 2006/07. Profit for the financial period increased by 13.0% to $266.0 million (2005/06: $235.4 million), an increase of 11.9% at constant exchange rates (see page 41). Basic earnings per share was 15.4 cents (2005/06: 13.6 cents), up by 13.2% on a reported basis and 12.4% at constant exchange rates (view reconciliation).
Sales
| US % | UK % | Group % | |
|---|---|---|---|
| Like for like on a 52 week basis | 7.0 | 1.1 | 5.4 |
| Change in net new store space | 6.2 | 0.1 | 4.5 |
| Exchange translation | - | 4.6 | 1.3 |
| Impact of 53rd week | 1.7 | 1.5 | 1.6 |
| Total sales growth | 14.9 | 7.3 | 12.8 |
US
Like for like sales for the US division increased by 7.0% on a 52 week basis, and total US dollar sales by 14.9%. The US division had a consistent performance throughout the year. The contribution from new store space was 6.2% and the impact of the 53rd week was 1.7% (see table above). Total reported sales grew by 14.9%.
UK
The UK business saw sales stabilise in 2006/07 after a sharp deterioration in 2005/06. The strategy of increasing diamond participation continued to drive improvements in performance indicators such as average selling price, with the volume of transactions reduced. On a 52 week basis like for like sales increased by 1.1%, the impact of changes in net new store space was 0.1%, the impact of exchange rate movements was 4.6% and the 53rd week 1.5% (see table above). Total sales increased by 7.3%.
Operating profit
| US % | UK % | Group % | |
|---|---|---|---|
| 2005/06 margin | 13.0 | 10.5 | 11.9 |
| Gross margin | (0.7) | 0.3 | (0.5) |
| Expenses | 0.7 | 0.4 | 0.7 |
| New store space | (0.5) | - | (0.3) |
| Impact of 53rd week | (0.2) | 0.2 | (0.1) |
| 2006/07 margin | 12.3 | 11.4 | 11.7 |
US
The operating margin in the US division was 12.3% (2005/06: 13.0%). Leverage of 70 basis points from like for like sales growth partly offset the impact of additional immature space of 50 basis points as well as the adverse movement in gross margin percentage of 70 basis points and the impact of the 53rd week of 20 basis points (see table above). Administrative expenses (see definition page 87) increased reflecting the resources required to support the growth of the division. The ratio of net bad debt to sales improved a little to 2.8% (2005/06: 3.0%). Operating profit was $326.7 million (2005/06: $300.7 million), up by 8.6%. The commencement of television advertising for Valentine’s Day 2007 in the last week of 2006/07, with the related sales benefit occurring in 2007/08, meant that the 53rd week did not contribute to operating profit.
UK
The division’s gross margin increased by 30 basis points, the benefit from advantageous hedging positions and selective price increases more than offsetting higher commodity costs. The actions taken to reduce costs in 2005/06 benefited the business throughout 2006/07 and resulted in a 40 basis point improvement in operating margin (see table above). Administrative costs in the UK were little changed due to cost savings implemented at the start of the year. The operating margin at 11.4% was up on last year (2005/06: 10.5%). Operating profit rose by 17.0% to $103.4 million (2005/06: $88.4 million) on a reported basis and 12.0% at constant exchange rates. The impact of the 53rd week on operating profit was about $3.4 million.
Group costs
Group central costs amounted to $13.9 million (2005/06: $14.4 million, including a property provision of $1.3 million).
Taxation
The charge of $134.8 million (2005/06: $125.3 million) represents an effective tax rate of 33.6% (2005/06: 34.7%). The rate is lower than previously indicated due to the tax treatment of share options and the favourable resolution of certain prior year tax positions during the year. It is anticipated that, subject to the outcome of various uncertain tax positions, the Group’s effective tax rate in 2007/08 may increase to a level of up to 37%, this being an approximation to the underlying effective tax rate for the Group.
Return on capital employed
The Group’s ROCE was 22.8% (2005/06: 22.4%). In the US the ROCE was 21.5% (2005/06: 22.4%) reflecting the additional investment in an 11% increase in net new store space. In the UK there was an increase to 32.7% reflecting high leverage of capital employed (2005/06: 26.6%). US capital employed included in-house credit card debtors of $779.3 million at 3 February 2007 ($677.4 million at 28 January 2006).
Depreciation, amortisation and capital expenditure
Depreciation and amortisation charges were $98.4 million (2005/06: $83.2 million), $61.3 million (2005/06: $51.3 million) in the US and $37.1 million (2005/06: $31.9 million) in the UK. Capital expenditure in the US was $101.1 million (2005/06: $88.4 million) and in the UK was $23.3 million (2005/06: $48.2 million). The additional capital expenditure in the US is primarily due to the increase in the rate of new store space growth. The decrease in the UK reflected a lower level of expenditure in line with the fluctuations in the number of stores due to be refurbished. Capital expenditure in 2007/08 is expected to be in the range of $167.5 million to $187.2 million reflecting a further increase in the number of new stores opened in the US and a planned increase in relocations and new store openings in the UK.
Dividends
In November 2006 an interim dividend of 0.4434p per share was paid (2005/06: 0.4125p). The Board is recommending to shareholders a final dividend of 6.317 cents (2005/06: 2.8875p) per share for 2006/07, which, subject to shareholder approval, is to be paid on 6 July 2007 to those shareholders on the register of members at close of business on 1 June 2007. Based on the exchange rate on 17 April 2007, this represents an increase in the total dividend for the year of 9.1%. 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 pm on the record date of 1 June 2007. A letter sent on 18 April 2007 to shareholders on the register asked whether they wished to receive this and future dividends in US dollars or pounds sterling.
Future distribution policy will continue to take account of earnings, cash flow, gearing, and the needs of the business.
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 3 February 2007, after taking into account the subsequently recommended final dividend of 6.317 cents per share (2005/06: 2.8875p per share), the holding company had distributable reserves of $199.0 million (28 January 2006: $152.3 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.