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Continued leadership in tough times HOME RETAIL GROUP PLC Annual Report and Financial Statements 2010

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Hear more about our business, with

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our illustrated review, available online

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REVIEW OF THE BUSINESS GOVERNANCE 57 Consolidated statement of changes in equity

4 Who we are and what we do 34 Board of Directors and 58 Consolidated statement of cash fl ows

6 Group performance Operating Board 59 Analysis of net cash/(debt)

8 Chairman’s statement 36 Directors’ report 60 Notes to the fi nancial statements

9 Chief Executive’s statement 38 Corporate governance report 98 Independent auditors’ report – Parent

11 Our product markets 43 Directors’ remuneration report 99 Parent Company balance sheet

14 Argos business review 52 Statement of directors’ 100 Parent Company statement of changes in equity

18 Homebase business review responsibilities 100 Parent Company statement of cash fl ows

22 Financial Services business review 101 Notes to the Parent Company

24 Responsible retailing FINANCIAL STATEMENTS fi nancial statements

26 Financial summary 53 Independent auditors’ report – Group 105 Group fi ve-year summary

28 Group fi nancial review 54 Consolidated income statement

32 Principal risks and uncertainties 55 Consolidated statement of MORE INFORMATION

comprehensive income 107 Shareholder information

56 Consolidated balance sheet 109 Index

REVIEW OF THE BUSINESS

Continued leadership in tough times —— The year beingreported has provided further challenges in our markets, andthe next year is likely to remain tough. However, we have beenadjusting all aspects of our operations to deliver further successin a diffi cult environment. This continues to leave our business fundamentally well positioned, and we will use our strengths to bebest placed to meet customer needs when they shop for home andgeneral merchandise goods.

Our Argos and Homebase leading retail brands, the shared

infrastructure and sourcing scale that supports them, and the

dedication of our colleagues throughout the business all help to drive

our competitive advantage. Economic factors mean that sales and

profits will still be under pressure in the short term. But our strengths

will continue to provide opportunities for market outperformance.

Terry Duddy

Chief Executive

Home Retail Group Annual Report 2010 3


Who we are and what we do —— We are the UK’s leading home and general merchandise retailer.

Argos and Homebase are two of the UK’s leading retail

brands, with large customer bases across the UK and Ireland.

Between them, our retail brands have more than 60 years

of market heritage and consumer awareness. Argos was

founded in 1973 and Homebase in 1981. They have been

shaping modern retailing ever since.

� Argos, the UK’s largest general merchandise retailer, has

an unrivalled blend of choice, value and convenience to meet

customer needs.

� Homebase is the UK’s second largest home improvement

retailer, and offers a growing range of home enhancement

products and services in a differentiated store environment.

52,000Our colleagues are the

foundation of our business

success.

135million The number of Argos customer

transactions last year.

19,300The number of products in the

latest Argos Spring/Summer

catalogue.

30,000The product range available

at Homebase.

4 Home Retail Group Annual Report 2010


MARKET POSITION As the leader in UK home and general merchandise retailing,

but with only a 10% share of the market, we still have signifi cant

room for growth.

£58 bn UK home and general merchandise market

10% Our share of this market

WIDE COVERAGE We have 1,094 stores in the UK and Ireland across the Argos

and Homebase formats.

1,094stores

GEOGRAPHICAL BREAKDOWN – ARGOS

27 Northern Ireland

39 Republic of Ireland

43 Wales

68 Scotland

568 England

STORE NUMBERS (year-on-year change)

349 Homebase (+4)

745 Argos (+15)

GEOGRAPHICAL BREAKDOWN – HOMEBASE

9 Northern Ireland

15 Republic of Ireland 15 Wales 33 Scotland

277 England

SALES MIX

HOMEBASE GROUPARGOS

4% Electrical goods 15% Toys, jewellery, sports

and leisure equipment

21% Toys, jewellery, sports

23% Gardening/seasonals and leisure equipment

26% Home enhancement 35% Home enhancement 40% Electrical goods

53% Electrical goods 45% Home enhancement,

DIY/decorating and

gardening/seasonals

38% DIY/decorating



Group performance —— By adapting and being fl exible,operating profits have reduced by only 4% despite somesignificant challenges in our markets. Growing market shares,remaining highly price competitive, reducing costs, generatingcash and further strengthening our operations are thefundamental successes achieved in this tough environment.

Operating highlights

� Strength of the operating model and excellent cost management have helped

to offset challenges due to the market environment

� Successful Spring 2009 at Homebase, combined with a strong operational

performance and tight cost control

� Continued development and investment in the overall customer offers at Argos

and Homebase to meet changing consumer needs

� Growth in market shares in virtually all of Argos and Homebase’s major product

categories including consumer electronics, toys, kitchens and outdoor living

� Leadership in multi-channel convenience, driven by continuing strong growth

in Check & Reserve

� Focus on absolute cash gross margin to substantially offset the cost of goods

pressures while remaining highly price competitive

Financial highlights

� Sales up 2% to £6,023m; cash gross margin down 3% to £2,276m

� Operating and distribution costs reduced by £64m or 3% to £1,986m, as increases

attributable to volume growth and inflation were more than offset by cost actions

� Benchmark operating profi t1 down 4% to £290m, with a decline of £37m or 12%

at Argos and an increase of £26m or 177% at Homebase

� Net interest income reduced by £25m to £5m, with an improved net cash position

more than offset by lower interest rates

� Benchmark profit before tax2 down 11% to £293m

� Basic benchmark earnings per share3 down 10% to 23.4p

� Reported profit before tax of £293m; reported basic earnings per share of 24.3p

� Cash generation of £130m; closing net cash position of £414m

� Share buy-back announced; up to £150m to be returned over the next 12 months

� Final dividend of 10.0p recommended; full-year dividend held at 14.7p

NOTES: REFER TO PAGE 26 FOR FINANCIAL DEFINITIONS



Group key performance indicators

Financial Services

Homebase SALES (£M)

Argos Group sales increased by 2.1% to +2.1%

5,851 5,985 5,897 6,023 £6,023m. Argos accounts for 72% of 5,510 Group sales, and grew by +1.5% or

+1.7% £65m in the year. Homebase accounts

for 26% of Group sales, and grew by +3.9% +3.9% or £59m in the year. Financial

Services accounts for the remaining

2% of Group sales, and grew by +1.7%

in the year.

+1.5%

Defi nition: Income received for goods and services.

Source: 06 07 08 09 10 Audited fi nancial statements.

BENCHMARK PRE-TAX RETURN

ON INVESTED CAPITAL

Benchmark operating profit plus share

12.7% of post-tax results of joint ventures 11.9% 12.2% 12.1%

and associates was £287.7m, down

£10.3m or 3% while year-end invested 10.5% capital reduced by 2%. This resulted

in a pre-tax ROIC of 12.1%.

Defi nition: Benchmark pre-tax return on invested capital (benchmark pre-tax ROIC) is defined as benchmark operating profi t plus share of post-tax results of joint ventures and associates, divided by year-end net assets excluding retirement benefi t balances, tax balances, derivative fi nancial instruments and financing net cash/debt.

Source: 06 07 08 09 10 Audited fi nancial statements.

Operating margin

Financial Services

Homebase

Argos

Central Activities

6.7% 6.0% 6.1%

5.1% 4.8%

398

359

332 300

290 (4%)

(7%)

+177%

(12%)

+4%

06 07 08 09 10

414

284

174

60

(200)

06 07 08 09 10

BENCHMARK OPERATING PROFIT

(£M) AND BENCHMARK OPERATING

PROFIT MARGIN (%)

Group benchmark operating profi t

decreased 4% to £290m. Argos

profit decreased by £37m, Homebase

profit grew by £26m, Financial Services

profit was maintained at £6m and

costs of Central Activities decreased

by £1m. Group benchmark operating

margin reduced to 4.8% in the year.

Defi nition: Benchmark operating profit is defi ned as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.

Source: Audited fi nancial statements.

FINANCING NET (DEBT)/CASH (£M)

The cash generation of £130m in

the year benefited from further good

working capital management and

a reduced level of capital expenditure.

Defi nition: Year-end balance sheet fi nancing net (debt)/cash.

Source: Audited fi nancial statements.

HOME RETAIL GROUP SHARE PRICE PERFORMANCE

200p

11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 27 Feb 2006 2006 2007 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2009 2009 2009 2009 2009 2009 2010

500p

400p

300p

Home Retail Group FTSE 350 General Retail FTSE 100

FOR ALL CHARTS, 06 AND 07 ARE ON A 52-WEEK PRO FORMA BASIS



Chairman’s statement —— The UK home and generalmerchandise market has experienced reduced levels ofcustomer demand and industry-wide pressures on the cost of goods over the last year. On all measures, the Grouphas produced a good result against this backdrop.

Oliver Stocken

Chairman

Maintaining the dividend, increasing

our future investment plans and the

announcement of a programme to return

capital have all been supported by another

year of strong cash generation. These points

also reflect the Board’s confidence in the

Group’s long-term prospects.

Home Retail Group has been facing the challenging

backdrop from a position of operational and

financial strength. The Group’s broad product

offerings and low average transaction values

offer measures of resilience. Our strength and

leadership in multi-channel retailing ensure the

relevance of our business model by offering true

customer convenience. Product cost pressures

have been dealt with by appropriate trading

strategies and our competitive scale advantage,

skills and infrastructure in Group-wide sourcing

operations. The drive for further cost effi ciencies

and our overall focus on cash generation has

further protected our position.

All of this has been delivered by our colleagues,

with their commitment, effort and passion for

success being a critical element of the strength

of Home Retail Group. Our achievement is very

much a team effort and I would like to thank

the Board, the management team and all our

colleagues in every part of our business.

Home Retail Group has been facingthe challenging backdrop from aposition of operational and fi nancialstrength. The Group’s broad productofferings and low average transactionvalues offer measures of resilience.

I am also very pleased to welcome Mike Darcey

to the Board. Mike is the Chief Operating Offi cer

of British Sky Broadcasting and joined us as a

non-executive director on 20 April 2010.

You will read in Terry’s statement opposite

how our approach to this last year has delivered

a good outcome. As part of this, further strong

cash generation has led to the Board’s

recommendation of a 10.0p fi nal dividend,

which represents shareholder dividend income

maintained at the level of the prior year. You

will also read how we are now able to move to

increasing our investment in the businesses,

more details of which you will find in the business

reviews on pages 14-23. The strong cash fl ow

of the Group and the Board’s confidence in the

Group’s prospects are also leading to a return

of capital, with up to £150m of shares expected

to be purchased over the next 12 months; the

background and detail to this are covered in the

Group financial review on page 28.

Finally, I would note that our dedication to

responsible retailing is unwavering, with further

progress on waste and recycling, supplier

management and the charitable giving of our

colleagues, customers and the Company, all

covered in the corporate responsibility review

on page 24, and in our online review,

www.thebasisofgoodbusiness.com.

Oliver Stocken

Chairman



Chief Executive’s statement —— The results for both Argos and Homebase exceeded initial expectations as wetraded through the year.

We have achieved further market share gains,

demonstrated our commitment to remaining

highly price competitive and controlled costs

extremely tightly to support both operating

profit and cash generation. Our approach

over the last year has also prepared us for the

year ahead, which is likely to remain diffi cult

for UK retail. By continuing to invest and

constantly develop our multi-channel

leadership and differentiated formats, we

will retain our competitive advantage and

therefore remain well placed for the future.

The Group has achieved a good outcome in a

challenging year, delivered by our appropriate

approach on an operational, fi nancial and

strategic basis. Going forward, we will be

increasing our investment in the businesses, and

given the Group’s strong cash generation, we will

also be returning capital to our shareholders by

way of a share buy-back programme. Home

Retail Group, as the UK’s leading home and

general merchandise retailer, will continue to

demonstrate clearly its competitive advantage

and its strong fi nancial position.

Good outcome in a challenging year

Household spending and consumer confi dence

have been severely hit. Hard goods and those

products more closely linked to the housing

market have suffered the most. In the year to

February 2010, market data indicates that retail

sales declined by 3.7% in ‘household goods

stores’ (the ONS measure that estimates retail

sales across furniture, homewares, electricals

and DIY-related categories). The aggregate

value of the product markets in which the

Group operates declined by approximately

3%, to £58bn. Home Retail Group’s total sales

increased by £125m or 2.1% over the same

period. Importantly, Argos and Homebase

have held or increased market share in virtually

all of their individual product markets.

In addition to reduced consumer spending

in our product markets, the year also brought

significant challenges in terms of product cost

pressures driven principally by the weakened

value of sterling. This inflationary pressure has

been successfully managed while remaining

highly price competitive for our customers.

To further offset these challenges, signifi cant

cost actions have been taken across the Group.

Despite cost increases attributable to volume

growth and underlying operating cost infl ation,

our cost base has been reduced by £64m, or 3%.

This is equivalent to cost productivity of

approximately £135m or 7%, and has been

achieved while measures of customer service

and operational standards have been maintained

or improved.

The net result of consumer spending and

product cost pressures, largely offset by the

excellent cost management across the Group,

was benchmark operating profit down by just

£11m, or 4%, to £290m.

Through our continued focus on cash

generation, and building upon the successful

track record since demerger, a further £130m of

net cash was generated during the year. Working

capital continued to be managed tightly, at the

same time as we have maintained or improved

measures of product availability for customers.

The closing cash position of £414m is also after

£87m of net capital expenditure that included

continued investment in growth initiatives, and

payment of a maintained £126m dividend for

our shareholders.

Approach to the last 12 months

Given the challenges and uncertainty at the

start of the financial year, cautious planning

assumptions were used by the businesses in

order to set targets for both stock levels and

costs. This did not constrain the outcome for the

year; both Argos and Homebase demonstrated

the flexibility of their operating models to

meet the better than expected demand. The

significant cost actions over the last 12 months

to volume-adjust or gain further effi ciencies

throughout the cost base have also improved

the flexibility of our businesses for the future.

The Group has remained absolutely

committed to delivering customer value during

the consumer slowdown. All UK retailers in our

product markets have been impacted by the

weakness of sterling, but the Group targeted a

level of customer price inflation that aimed to

pass on the impact of cost of goods infl ation in

absolute terms. This cash gross margin approach

resulted in our businesses remaining highly price

competitive, although the gross margin rate

reduced as a consequence.

Given customer trends through the

downturn, Argos and Homebase have been

further adapting the customer offer in terms of

product development and range architecture,

Terry Duddy

Chief Executive

Hear Terry talking about the

Group’s performance in

our illustrated review,

available online at

www.homeretailgroup.com/

reports/



Chief Executive’s statement continued

pricing and promotional activity, and the wider

customer service proposition. For example,

we strengthened own brand ranges, added more

products to save consumers money on their

household bills, and made further improvements

to our multi-channel convenience. Argos and

Homebase also continue to benefit from their

widespread customer appeal, broad product

offerings and relatively high purchase frequency.

Increasing our investment plans

Looking forward, capital expenditure will increase

in the next financial year to £125-150m from

£87m in the year just ended. While we will open

fewer new stores, we see signifi cant opportunities

for further multi-channel, customer offer and

format developments; these include expanded

online product ranges and new tools and services

on the Argos and Homebase websites, as well as

the Argos brand refresh and store refurbishment

programmes. These opportunities will ensure

our businesses are well invested and positioned

to continue leading the way in delivering the

most appropriate home and general merchandise

shopping experience of the future.

Share buy-back programme

As a separately listed company, Home Retail

Group has demonstrated four successive years

of strong cash generation and has returned

approximately £500m to shareholders by way of

dividends over this period. While the Board intends

to maintain a prudent approach to balance sheet

management, the strong cash position has created

the opportunity to continue investing in value-

enhancing growth opportunities while also

returning capital to shareholders. Over the next

12 months up to £150m of shares are expected

to be bought back. The Board will continue to

regularly review the Group’s capital structure.

Our businesses continue to adaptwell to the consumer environment and are delivering share gains in theirmarkets. Given our strong fi nancialposition, we are investing ahead ofthe recovery in the wider economyand, more specifically, recovery inconsumer demand.

Competitive advantage and fi nancial strength

Home Retail Group is the UK’s leading home and

general merchandise retailer, with clear scale

advantage and well invested infrastructure built

up over a period of many years. We continue to

expect a return to attractive growth rates in

spending in our product markets in due course,

driven particularly by the long-term trend of

consumers investing in their home environment

and from the pace of technology and other

product development. Argos and Homebase

are further strengthening their customer

propositions ahead of the market recovery,

investing in expanding choice, developing ranges

and enhancing product presentation in store,

in catalogues and online.

Both formats are well positioned and clearly

differentiated from other retailers. Argos will

maintain its leadership as a truly multi-channel,

value-orientated format across a wide range of

product categories, distinct from the more

service-orientated models of specialists or the

more adjunct offerings of the supermarkets.

Homebase will continue to be differentiated with

a more style-led offer across a broader range of

home enhancement categories.

The Group’s scale supports our price

competitiveness relative to most other retailers

operating in the same product markets. The

Group’s skills and infrastructure, particularly in

overseas product sourcing and multi-channel

operations, will also leverage fi nancial benefi ts

and synergies which are difficult to replicate

given the investment required and period of time

over which these competitive advantages have

been established. In particular, our highly

developed sourcing operations enable the Group

to deal more competitively with cost of goods

pressures that all retailers in our product markets

experience, as well as support improvements in

our range architectures, particularly in the ability

to provide great value own brands on a directly

sourced basis.

Our businesses continue to adapt well to the

consumer environment and are delivering share

gains in their markets. Given our strong fi nancial

position, we are investing ahead of the recovery

in the wider economy and, more specifi cally,

recovery in consumer demand. We therefore

remain confident in the Group’s ability to deliver

growth in shareholder value over the long term

by maintaining our clear competitive advantage

as the UK’s leading home and general

merchandise retailer.

Terry Duddy

Chief Executive



Our product markets —— Home Retail Group operates inthe home and general merchandise market, worth approximately£58bn in terms of UK retail sales.

We are the leader in this market, with an

approximate 10% share. The overall market

declined by around 3% in calendar year 2009.

The market can be analysed into various

product categories. A summary of these,

including where products are sold at Argos,

Homebase or both, the Group’s overall share

position, and the market size of each product

category, is as follows:

Housewares

The housewares market is relatively fragmented,

according to analysis by Verdict Research,

with the 10 largest retailers accounting for

over 40% of the market. Argos is market leader,

with Homebase adding further Group scale.

The competition base is very broad across the

department stores (John Lewis, Marks & Spencer,

House of Fraser, Debenhams and Bhs, as well as

fashion and home retailer Next), some national

specialists (IKEA, Dunelm), the supermarkets

(Tesco, Asda, Sainsbury) and some broader

generalists (Wilkinson, Matalan, TK Maxx).

Specialist independents are estimated to

account for around one-third of the market.

The housewares market in calendar year

2009 was estimated to have experienced a low

single-digit decrease in retail sales.

Furniture

The structure of the furniture market shows

fairly close resemblance to the housewares

market according to analysis by Verdict

Research, with the 10 largest retailers accounting

for approaching 40% of the market. Argos is

market leader, with Homebase again adding

further Group scale. The competition base has

a number of national specialists (DFS, IKEA,

Homestyle Group, Magnet, Furniture Village,

Dreams), with other significant players being

B&Q, M&S, John Lewis and Next.

The total furniture market in calendar year

2009 was estimated to have experienced a mid

single-digit decline in total retail sales, with

several major sub-categories declining by

double-digit rates.

Group Market

Argos Homebase position size (£bn)

Home enhancement

Housewares ✓ ✓ 1 9.0

Furniture ✓ ✓ 1 7.7

Home improvement (DIY/fi tted kitchens/bathrooms) ✓ ✓ 2 11.1

Horticulture, garden furniture and outdoor living ✓ ✓ 2 3.5

Sub total 31.3

General merchandise

Small domestic appliances ✓ ✓ 1 1.3

Consumer electronics ✓ ✓ 2 15.1

Large domestic appliances ✓ ✓ 3 3.6

Toys ✓ 1 2.3

Jewellery ✓ 1 3.6

Sports and leisure equipment ✓ 1 1.1

Sub total 27.0

Total 58.3

Note: All market positions are for calendar year 2009 and by retail sales except for jewellery, which is measured by volume. The market sizes and positions quoted above are taken from reports provided by Verdict, Mintel, NPD GfK and the EPOS tracked markets. These reports are subject to prior year restatements upon more current data becoming available.

PRODUCT MARKETS

Home improvement

The largest part of the home improvement

market is the DIY category (excluding furniture

and homewares). There are four national

specialists (B&Q, Homebase, Wickes and Focus)

accounting for 45% of the market according to

Verdict Research, with other national operators

selling products in this category being Argos,

Wilkinson, Robert Dyas, Wyevale, Topps and

Dobbies. Approximately 50% of the DIY market

is estimated to be accounted for by specialist

independents. The home improvement market

also includes the kitchens, bathrooms and

floorcoverings (excluding carpets) categories,

with additional national competitors in

these areas including Magnet, Howden,

IKEA and Homeform.

The home improvement market in

calendar year 2009 was estimated to have

experienced a low single-digit decline in total

retail sales.



Our product markets continued

Hear more about our business,

with video interviews and case

studies in our illustrated review,

available online from our

corporate website or at


reports/

Horticulture, garden furniture and

outdoor living

This market according to Verdict Research,

is mainly dominated by the four national DIY

specialists, with Argos and the two garden centre

specialists Wyevale and Dobbies also being

significant retailers of products in this category.

Approximately one-third of this market is

estimated to be accounted for by specialist

independents.

The horticulture, garden furniture and

outdoor living market in calendar year 2009

was estimated to have experienced a low

double-digit increase in total retail sales,

benefiting from significantly better weather

conditions in Spring 2009.

Small domestic appliances

This market is relatively concentrated according

to GfK, with Argos being the clear market leader

with a substantial market share. Competition is

mainly in the form of the electrical specialists

(Currys and Comet), Boots in terms of personal

care appliances, the supermarkets, and the

department stores. A relatively small proportion

of the market would be accounted for by

specialist independents.

The small domestic appliances market

in calendar year 2009 was estimated to have


retail sales, according to Verdict Research.

Consumer electronics

This market is also relatively concentrated

according to GfK, with Currys being the market

leader, followed by Argos and then Comet. Other

competition is mainly in the form of John Lewis

and other department stores, the supermarkets,

and national specialists in certain sub-categories

such as Game in video gaming and Jessops in

photography. Around one-fifth of the consumer

electronics market would be accounted for by

specialist independents, while other online

retailers represent a small but growing share

of this market.

The consumer electronics market in calendar

year 2009 was estimated to have experienced

a mid single-digit decline in total retail sales,

according to Verdict Research. This was largely

driven by the video gaming category as well as

the office and telecoms categories, with a more

marginal decline in the other major areas of

consumer electronics.

Large domestic appliances

This market is again relatively concentrated

according to GfK, with the two major electrical

specialists being then followed by Argos.

Department stores such as John Lewis, DIY and

kitchen retailers (including Homebase), and to

a lesser extent the supermarkets and home

shopping businesses, represent other signifi cant

retailers in this category. Approximately

one-third of the large domestic appliances

market would be accounted for by specialist

independents.

The large domestic appliances market in

calendar year 2009 was estimated to have

experienced a low single-digit increase in total

retail sales, according to EPOS tracked markets.

Toys

The toy market is relatively concentrated

according to analysis by NPD, with the eight

largest retailers accounting for over 60% of

the market. Argos is the market leader, with

Toys ‘R’ Us as the other major national specialist,

following the demise of Woolworths. The Early

Learning Centre, Toymaster, The Entertainer and

the Disney Store are other signifi cant specialists,

with the supermarkets also being prominent

toy retailers.

The toy market in calendar year 2009 was

estimated to have experienced a mid single-digit

decline in total retail sales.



Jewellery

Market competitor analysis on the jewellery

market is based on volume sold rather than

total retail sales value. According to research

by Keynote, this is a highly concentrated market

with Argos being the market leader by volume,

followed by H. Samuel. Other major retailers

of jewellery volumes include fashion jewellery

shops, department stores, and specialist

jewellers selling a greater proportion of precious

metal jewellery such as Ernest Jones/Leslie Davis

and Goldsmiths.

The jewellery market in calendar year 2009

was estimated to have experienced a low

single-digit decline in total retail sales according

to Keynote.

Sports and leisure equipment

This market is relatively fragmented according

to analysis by Verdict Research, with Argos being

the market leader. Other sellers of equipment

include the predominantly sports clothing

retailers (Sports Direct, JJB Sports, JD Sports), the

department stores, and retailers such as Halfords

and Blacks in sub-categories such as cycles and

camping. The majority of the market is estimated

to be made up of specialist independents.

The sports and leisure equipment market

in calendar year 2009 was estimated to have


retail sales.

Expected future development

of the competitive landscape

We expect our product markets to remain

highly competitive in the future. Supermarkets

have been growing share in certain parts of the

non-food, non-clothing market, building on

their regular footfall and the increased space

given to these ranges. Online retailers, such as

amazon.co.uk, currently represent a small but

growing share of certain product categories.

However, in categories undergoing a

sharper slowdown in consumer spending, many

specialist retailers, often with some signifi cant

market shares, have experienced fi nancial

difficulties. In most categories, the independent

specialists have faced even greater pressures on

the ability to weather the challenging economic

environment.

Although retail conditions are likely to remain

tough in the near term, the longer-term outlook

for market growth remains positive. A return to

long-term growth in the general merchandise

and home enhancement markets would be

expected on account of population growth and

an increasing number of households, a reversion

back to the general trend of rising overall

household disposable income, technology

changes and other new product developments,

as well as the need to replace many existing

household items.

Home Retail Group’s key strengths mean

we are well equipped for the future. Our strong

retail brands, multi-channel offering, extensive

product choice and competitive pricing, together

with a strong financial position, mean we are

relatively well placed to trade through the

downturn and benefit from renewed consumer

confidence later in the cycle. While we have

leading positions in multiple product markets,

there remains substantial headroom for growth

in many categories. The more fragmented

markets provide growth opportunities, and

we expect to take market share from weaker

competitors and to benefit from any capacity

withdrawal that ensues.

Our businesses are well established but

continue to evolve to meet changing customer

preferences. Our product range is constantly

expanding. Our supply chain is highly effi cient

and cost effective. With all the key determinants

for success in place, we expect to emerge in the

long run as a stronger competitor in a more

consolidated market.

Our businesses are well established but continue to evolve to meet changingcustomer preferences. Our productrange is constantly expanding. Oursupply chain is highly effi cient and cost effective. With all the key determinantsfor success in place, we expect to emergein the long run as a stronger competitorin a more consolidated market.



Argos business review —— As the UK’s leading generalmerchandise retailer, Argos provides a highly successful andunique offer of choice, value and convenience.

White goods are amongst the

10,000 further lines available

online at www.argos.co.uk

The Argos Value range has

been further expanded to over

350 products.

Operational review

Expanding choice

At 19,300 lines, the latest edition of the Argos

catalogue has expanded by around 500 lines

or 3%. Most of the increase has been from

stocked-in lines, thereby improving the customer

choice for immediate availability.

Of the current catalogue’s 15,000 lines that

are available in stores, 3,700 are ‘Extra’ products

which are fully stocked-in at 339 stores or 45%

of the store portfolio, while a further 118 stores

carry part of this additional range. Future systems

developments will remove the distinction

between ‘Core’ and ‘Extra’ ranges, allowing any

of the 15,000 products to be stocked-in at any

store, based upon demand levels.

The internet is expanding choice beyond the

19,300 lines in the catalogue, with 10,000 further

lines currently on trial at www.argos.co.uk. Major

areas of range extension include: technology

categories such as video games, offi ce supplies,

photography and consumer electronics

accessories; white goods; beds; toys and nursery;

and sports and leisure equipment. There has

been particular success in white goods, where

a further 2,000 lines extend signifi cantly the

main Argos catalogue offer. Additional trials of

extended ranges will continue to establish the

full opportunity, and will also begin to explore

the development of an ordered-in capability for

the customer to benefit from the convenience

of store-based collection.

Improving ranges

The ‘Argos Value’ range has been further

extended to over 350 products, supporting

Argos’ strong value credentials. Following an

excellent response, the number of ‘WOW’

deals has also increased to over 500 and covers

a broader range of categories. Store displays of

both ‘Argos Value’ and ‘WOW’ products were

increased throughout the chain.

The acquisition of the Alba and Bush brands

in late 2008 has enabled Argos to successfully

reposition its own brand ranges in consumer

electronics – particularly TVs – as well as

expanding their use into areas such as white

goods. Developing our portfolio of own brands in

these areas, together with stronger relationships

with third-party brands, has helped to

significantly improve the range hierarchy.

The Chad Valley toy brand, acquired in early

2009, was applied to around 120 products in its

first catalogue for Christmas 2009. There was

a broadly even split between its use on lines

previously available at Woolworths, lines

previously unbranded at Argos, and lines that

were new to the market. Chad Valley has already

become Argos’ leading toy brand, and in the

latest catalogue it has been applied to 200

products and includes extending its use to a

broader range of toy categories.

The electricals and toys categories are

amongst those where Argos has continued to

gain market share, with the repositioning of

own brands a key driver of this. Range hierarchies

are being strengthened further across all other

categories. The acquired Hygena and Schreiber

brands are now being used on furniture ranges

in the latest catalogue. Argos will continue to

develop its other brands, which include

Beanstalk, Challenge, Cookworks and Pro

Fitness. Argos is also expanding its use of

licensing, exclusive product lines or celebrity

brand endorsements, with examples of these

expansion plans including Qualcast, Disney,

Regatta, Mamas & Papas and Davina McCall

fi tness.

Value commitment

Argos has maintained its commitment to being

highly price competitive. During the year, there

was retail price inflation in its product markets

as a result of product cost pressures driven

principally by adverse currency movements.

Argos remains a leading value retailer, supported

by the Group’s sourcing scale and infrastructure

advantages, together with the benefit of Argos’

low cost operating model.

An overall competitive position continues

to be maintained, measured using weekly

internet price comparisons against competitors

on approximately 10,000 products. A price

position better than the competition is

maintained on the approximate 1,000 lines that

drive the greatest sales volumes; these ‘key value

indicators’ (KVIs) include the Argos Value,

‘WOW’, lowest price point and best selling lines

such as popular branded consumer electronics

and domestic appliances. Argos’ success at

continuing to be advantaged on price versus

the market is reflected in further market share

growth; this includes significant share gains in

product categories that are amongst the most

easily price-compared by customers such as

televisions, computing and white goods.


Argos key performance indicators

SALES (£M)

Sales in the 52 weeks to 27 February

2010 increased by 1.5% in total. There 4,347

4,164 4,321 4,282 was further strong growth in televisions

and personal computers, offsetting

weakness in the video gaming market.

Toy sales grew strongly. Challenging

market conditions continued in

home-related areas such as furniture,

but the rate of decline moderated over

the year.

3,859

Definition: Income received from goods and services.

Source: 06 07 08 09 10 Audited financial statements.

New space SALES TRENDS (% CHANGE)

Like-for-like Like-for-like sales declined by 2.1%,

reflecting a trading environment+7.9

+6.1 that continued to be challenging.

The contribution to sales from net

new space was 3.6%.

+3.8 (0.9) +1.5+7.5 +5.5

+3.1 +3.9 +3.6

+0.7

(

+0.7

4.8)4.8

(1( .4)

+2.4

.4) (2.1)(2.

( )

1

+2.4

1)

Definition: Annual percentage change in sales. Like-for-like sales are calculated on stores that have been open for more than a year. Net new space contribution to sales changes reflects stores that have opened and closed.

Source: Audited financial statements/measured

06 07 08 09 10 internally.

8.7% BENCHMARK OPERATING PROFIT 7.7% 7.8% 7.1% (£M) AND MARGIN (%)

6.1% Benchmark operating profit for the 376 52 weeks to 27 February 2010 was

£266m, a 12% decline on last year’s 325 profits of £304m.

304297

266

Definition: Benchmark operating profit is defined as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.




Argos Extra NUMBER OF STORES

During the year, 20 stores were opened

730 745 and five were closed, increasing the Standard

707 store portfolio to 745. These stores680

655

189 238 278 314

429 416429466 442 416466 442

now stock-in for immediate collection

up to 15,000 product lines.

406

339

406 Definition: Total number of stores at year-end. Argos Extra fully-stocked in stores are those that carry the full range of Argos Extra product lines.

Source: 06 07 08 09 10 Measured internally.

NUMBER OF LINES IN THE19,300 18,900 CATALOGUE (SPRING/SUMMER)

18,500 The current Spring/Summer catalogue 17,100

has been expanded to a record 19,30016,700 lines. This is around 3% more lines

than last year. The catalogue, now in

its 73rd edition, remains central to the

Argos proposition.

Definition: Total number of lines in the Spring/Summer Argos catalogue.


Home delivery (store) SALES ACROSS MORE THAN Home delivery (phone)

ONE CHANNEL (%)Check & Reserve (phone)

Multi-channel sales grew to £1.9bnHome delivery (internet)

or 43% of Argos’ sales. The internetCheck & Reserve (internet) 43 represented 32% of Argos’ sales; over

40 two-thirds of this or 22% of Argos’ 37 7.7 total sales were customers using

35 online Check & Reserve for store

32 1.6 collection, with this channel growing 2.2 9.5

by 36% for a second year in a row.

22.2

Definition: Percentage of sales across more than one channel. There are three ordering channels: the internet, phone or store and two fulfilment channels, store or home delivery.




Argos business review continued

Driving further cost effi ciencies

At the end of the previous fi nancial year,

organisational changes were undertaken

to further improve operational effi ciency.

The number of head office roles reduced by

approximately 10%, and a restructuring of

certain levels of store management resulted in

a reduction of store-based full-time equivalent

roles. Other cost efficiencies have been made

across all parts of the business, including bringing

‘in-house’ the transport of stock from ports,

further savings in the catalogue production

process and reducing the level of distribution

annexation. Total operating and distribution

costs were reduced by around £15m, with cost

actions more than offsetting volume-related

growth and underlying infl ation.

Brand refresh and store

refurbishment programme

Since the brand was last updated around

10 years ago, Argos has become the leading

integrated multi-channel retailer, expanded

through Argos Extra and internet-only ranges,

and developed a series of more up-to-date

store formats. A programme to refresh the

brand began during the year. Initial stages have

been completed, which has seen the new brand

identity applied across the latest catalogue,

the website and all other marketing materials.

In the next financial year, approximately

130 stores will be refurbished to reflect the new

brand identity as well as the latest shopping

process improvements and product displays.

This will include new versions of catalogue

browsers, stock checker units, kiosks and call

forward technology, as well as updated jewellery

displays and other improvements to the

Multi-channel sales grew to £1.9bnor 43% of Argos’ sales. Th e internetrepresented 32% of Argos’ sales;over two-thirds of this or 22% of Argos’ total sales were customersusing online Check & Reserve forstore collection.

customer areas. Approximately 500 stores,

or two-thirds of the store estate, are expected

to be refurbished over the next three years.

Refurbishment costs are expected to average

approximately £100k per store, with the cost

in the first year being approximately £15m and

totalling £70m over the complete programme.

Multi-channel leadership

Multi-channel sales grew to £1.9bn or 43% of

Argos’ sales. The internet represented 32%

of Argos’ sales; over two-thirds of this or 22% of

Argos’ total sales were customers using online

Check & Reserve for store collection, with this

channel growing by 36% for a second year in

a row. After Amazon, Argos continues to be the

largest internet retailer in the UK, with over

300 million website visits driving £1.4bn of

sales in the last year.

Around 20% or over £800m of Argos’

sales continue to be home delivered, with over

40% of home delivery sales being orders placed

by customers while in store. Of the 10 million

products delivered last year, 4 million were larger

items delivered via Argos’ in-house and market-

leading ‘two-man’ home delivery service.

Argos has continued to develop its multi

channel leadership over the last year and has

strong plans in place to continue its position of

competitive advantage.

Enhanced tools to assist customer choice

The expansion of online customer ratings and

product reviews has been a key development

during the year. There are currently over 500,000

reviews and around 75% of products that carry

a customer rating.

In the next financial year, more product

comparison tools with enhanced data and

selection criteria will be launched. Richer content

will be available on key ranges including new

product image technology, videos and ‘How to’

guides. Further improved navigation tools will be

launched, and ‘Ask & Answer’ facilities will be

extended. An Apple iPhone application will be

launched soon.



More convenience for store-based collection

During the year, 20 stores were opened and fi ve

were closed, increasing the store portfolio to 745.

More products stocked into store for customers’

immediate collection have been facilitated by

better stocking policies and achieving further

benefits from the previously completed systems

developments which manage stock ordering

and replenishment.

Additional improvements to stockroom

processes are being driven through the ‘voice

put-away’ process. This technology helps to

automatically guide stockroom assistants to the

correct location, with key benefits being quicker

processing and further enhanced stock fi le

accuracy, thereby improving availability and

customer satisfaction. Having been extended to

130 stores during the year, ‘voice put-away’ will

now be rolled-out across the rest of the portfolio

over the next two years.

In the next financial year, there will be around

15 to 20 openings, while 5 to 10 older stores are

likely to be closed; there will also be a number of

stores that are relocated to better sites. While

the availability of suitable new out-of-town

property developments is constraining store

openings in the short term, Argos’ store chain

analysis over the long term continues to support

further years of growth.

For the rapidly growing number of customers

who reserve online for store-based collection,

there will be improved stock-finding tools which

automatically check more stores and provide

alternative channel options and products more

effectively. Improved online and kiosk payment

methods are also being developed.

Financial review

Sales in the 52 weeks to 27 February 2010

increased by 1.5% in total; the contribution

to sales from net new space was 3.6%, while

like-for-like sales declined by 2.1%. There was

further strong growth in televisions and personal

computers, offsetting weakness in the video

gaming market. Toy sales grew strongly.

Challenging market conditions continued in

home-related areas such as furniture, but the

rate of decline moderated over the year.

The gross margin rate was down by

approximately 175 basis points. Around

100 basis points represented the net impact

of product cost pressures mainly attributable

to adverse currency movements, which were

partially offset by supply chain gains, shipping

cost savings and a level of customer price

inflation. Around 50 basis points resulted

from the sales mix shift towards lower margin

consumer electronics categories and away from

higher margin home-related areas, although this

trend slightly reversed in the final quarter of the

year. The remaining 25 basis points refl ected

some increased promotional activity over the

peak Christmas trading period.

Total operating and distribution costs were

reduced by around £15m or 1%. Total sales

increased by 1.5%, equivalent to a potential cost

increase of around £20m, and underlying cost

inflation was around 2% or £25m. There was

therefore around 5% or £60m of cost

productivity as a result of continued excellent

cost management.

Benchmark operating profit for the 52 weeks

to 27 February 2010 was £266.2m, a £37.4m

or 12% decrease on the previous fi nancial

year’s £303.6m.

Hear more about Argos

in our illustrated review,

available online at


reports/

52 WEEKS TO 27 FEBRUARY 2010 28 FEBRUARY 2009

Sales (£m) 4,346.8 4,281.9

Benchmark operating profi t (£m) 266.2 303.6

Benchmark operating margin 6.1% 7.1%

Like-for-like change in sales

New space contribution to sales change

Total sales change

Gross margin movement

Benchmark operating profi t change

Number of stores at year-end

Of which Argos Extra fully stocked-in

(2.1%)

3.6%

1.5%

Down c.175bps

(12%)

745

339

(4.8%)

3.9%

(0.9%)

Down c.100bps

(19%)

730

314



Homebase business review —— Homebase continues to be well positioned as a leading home enhancement retailer.

A new ‘Homebase Value’

range of over 300 products

has been launched.

Homebase had another year

of strong growth in ‘big ticket’

categories, particularly kitchens.

Operational review

Capitalising on a more favourable

trading environment

Market conditions during the year were

challenging in most areas of home and general

merchandise. However, Homebase has delivered

its strongest sales performance for fi ve years,

as it capitalised on a more favourable trading

environment in some of its product markets,

resulting in further market share gains.

In its peak trading period, the Spring 2009

weather conditions were signifi cantly more

favourable than the previous year. This, together

with excellent product ranging, maintaining high

operational standards and appropriately driving

additional demand through promotional and

clearance activity, led to a strong performance

in seasonal-related categories including

horticulture, garden maintenance, and other

outdoor living categories such as furniture

and barbecues.

Homebase had another year of strong

growth in ‘big ticket’ categories, particularly

kitchens. While the year benefited from the

withdrawal of some competitors, Homebase

continued to gain from its own initiatives

including the previous national rollout of kitchen

installations, new product ranges and refreshed

store displays.

Range and service development

Homebase continues to develop its point of

differentiation as a more style-led offer across

home enhancement. Strong performances in

the showroom and homewares areas provide

evidence of this successful positioning.

Homebase also continues to protect and

develop its core DIY and decorating offer with

sales in these areas broadly flat in the year,

an improvement on trends in previous years.

This performance has been supported in part by

a more competitive pricing position and better

customer perception of value. There have also

been improved ranges and product availability

to complete key DIY tasks, greater prominence

of advertising and promotions for these areas,

and a launch of related ‘How to’ guides.

Homebase is looking to replicate the success

of its kitchen installation service. Bathroom

installations, previously trialled in 60 stores,

were extended to a further 100 stores in time

for the New Year peak trading period, with

strong results being achieved to date. Similarly,

the fitted bedroom furniture trial has recently

been extended to 100 stores; this product range

also now benefits from the addition of the

Schreiber brand.

Among a number of initiatives to improve

sales and profit densities, new ranges and display

techniques for flooring and tiling will be rolled

out to around 160 stores. This expansion

typically takes space from underperforming

and low density wallpaper ranges. Trials will

also test flooring and tiling installation services.

Improvements to price and value

Homebase has achieved both an improved

competitive pricing position and customer

perception of value through a number of

initiatives. During the year, there was retail price

inflation in Homebase’s product markets as a

result of product cost pressures driven principally

by adverse currency movements. Homebase, like

Argos, targeted a level of customer price infl ation

that aimed to pass on the impact of cost of goods

inflation in absolute terms.

Homebase has specifically matched the

market price on over 1,000 ‘key value indicator’

and ‘entry price point’ lines. Over 400 ‘Bulk Buy’

deals have also been implemented, with these

multi-buy offers often representing market-

leading deals. A new ‘Homebase Value’ brand of

over 300 products has been launched, covering

everyday essentials across all categories, with

150 items priced under £5. Similar to Argos,

Homebase also now undertakes frequent

automated price comparisons on 6,000 lines

against main competitors. This data is supporting

more effective management of everyday

competitive pricing. Stronger promotional

campaigns, capitalising on consumer behaviour

in the current economic times, have also driven

improved customer satisfaction scores on

price and value measures improving by 30%,

as well as successfully driving incremental

cash profi t.

Multi-channel development

During the year, Homebase achieved its target

of over 30,000 product lines being browseable

via www.homebase.co.uk. Some 10,000 of these

are transactional, double the level a year earlier.

The ‘Stock Check’ service was rolled out to all UK

stores early in 2009 and customer use has been

growing strongly. Towards the end of the year,

the Stock Check & Reserve service was rolled

out to all stores. Customer response to these

developments and other improvements in web

content has resulted in signifi cant increases

in website customer satisfaction ratings.



Homebase key performance indicators

SALES (£M)

Sales in the 52 weeks to 27 February

1,559 1,594 1,569 1,572 2010 increased by 3.9% in total. 1,513 There was strong growth in

seasonally-related categories during

Homebase’s peak trading period,

given Spring 2009 benefited from

better year-on-year weather

conditions. The year saw further

good growth in big ticket categories,

particularly kitchens. Sales for the

remaining categories overall were

marginally up.

Definition: Income received for goods and services.


Space SALES TRENDS (% CHANGE)

Like-for-like sales increased by 2.7%Like-for-like in the year. Homebase delivered its

(3.5) strongest sales performance for five

years, as it capitalised on a more

+6.7

+3.9 favourable trading environment in+2.20.0 some of its product markets. The

contribution to sales from net new

space was 1.2%.

(1.6)

+3.1 +2.5+3.6 +2.7

+1.2

(4.(3.1)(3. 1) (10.2)1) (1.4)

(4. (10.2)1) (1.4)

Definition: Annual percentage change in sales. Likefor-like sales are calculated on stores that have been open for more than a year; net new space contribution to sales change is calculated on stores that have opened and closed during the year.

Source: Audited financial statements/measured

06 07 08 09 10 internally.

BENCHMARK OPERATING PROFIT

(£M) AND MARGIN (%)

3.3% 3.4% Benchmark operating profit for the 2.9% 2.6% 52 weeks to 27 February 2010 was

1.0% £41m, a £26m or 177% increase on

last year’s £15m.53 51

45

41

Definition: 15 Benchmark operating profit is defined as

operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases, exceptional items and costs related to demerger incentive schemes.



297

150153

144

145

165 181

150153 145

06

With mezzanine

Without mezzanine

331

310

345

09

349

10

112 109

102

06 07 08

9895

09 10

NUMBER OF STORES

A net four stores were opened during

the year; there were six openings and

two closures, taking the portfolio to

349 stores.

Definition: Total number of stores at year-end. Mezzanine stores contain a mezzanine-selling floor which is typically used to display kitchens, bathrooms and furniture.

Source: Measured internally.07 08

157 159

190188

157 159

SALES PER SQUARE FOOT (£)

Sales per square foot based on total

year-end selling space increased to

£98. The reduction in previous years

was driven by the combination of a

difficult DIY market and the impact

of expansion of store mezzanine and

garden centre space which is dilutive

to sales densities. The trend reversed

in the last year aided by the more

favourable trading environment.

Definition: Annual sales divided by year-end total selling space.

Source: Audited financial statements/measured internally.



Homebase business review continued

Hear more about Homebase

in our illustrated review,

available online at


reports/

Homebase has been developing its email

and web-based promotions to drive further

traffic and sales through its website. The email

marketing database has been extended from

0.5 million relevant customers to over 7 million

by leveraging the combination of Homebase,

Argos and Nectar information. These

developments have boosted online traffi c and

helped drive strong growth in transactional

sales during the period.

In the next financial year, the number of

transactional Homebase products will continue

to be increased, as will the use of Argos and

internet-only products. Improved search criteria

and enhanced store location choices for reserved

goods will be introduced. A new ‘Get into

Gardening’ customer community site has been

launched, offering advice and tips through

videos, forums and blogs.

New loyalty scheme

Homebase has successfully transferred its

in-house Spend & Save loyalty card programme

over to the Nectar scheme. Customer feedback

indicated that Nectar was simpler to understand

and benefited from use across multiple retailers

and service providers, while the scheme was also

superior in customer reach with around 17 million

card holders making it the biggest loyalty card

programme in Britain. The Nectar scheme also

provides an enhanced level of customer insight.

Since launch, measures of card usage and

related spend have all exceeded expectations.

Six million of the Nectar card holders have

already shopped at Homebase.

In the next financial year, there will be

more Nectar-specific promotional events,

and increased use of Nectar to drive category

During the year, Homebaseachieved its target of over 30,000product lines being browseable viawww.homebase.co.uk. Some 10,000 of these are transactional, double the level a year earlier.

or specific product promotions. Longer term,

further use will be made of the Nectar

capabilities to develop customer segmentation

and more targeted marketing programmes.

Store portfolio development

A net four stores were opened during the year;

there were six openings and two closures, taking

the portfolio to 349 stores. No openings are

planned in the next financial year. In the

approximate 20% of the portfolio that has seen

little or no investment for many years, the low

cost refit trial was implemented in a further

10 stores during the year. Sales uplifts across

these refits have been achieving the targeted

15% level, and a further 10 stores are expected

to be refitted in the next financial year. Small

numbers of store closures, relocations or

downsizes will continue as part of our ongoing

management of the portfolio.

Cost base management

Significant cost actions were taken at Homebase

in the second half of the previous fi nancial year.

Despite better than expected demand in the year

just ended, distribution and operating costs were

held at the budgeted levels in absolute terms,

without detrimental impact on customer service

or operational standards. As a result, total

operating and distribution costs were reduced

by around £50m or 6% in the period, with cost

actions more than offsetting volume-related

growth and underlying infl ation.

Store payroll costs had been reduced from

the second half of the previous fi nancial year

through the realignment of shift patterns and

task allocations. At the end of that year, further

organisational changes were undertaken to

improve operational efficiency and cost

productivity. These included head offi ce function

roles being reduced by approximately 15% and

a restructuring of store supervisory positions

which reduced store-based full time equivalent

roles by approximately 5%. In addition to

lowering costs, these actions have given the

business a more efficient and effective structure,

while protecting customer service, availability

and essential processes. Homebase’s already

strong colleague engagement scores improved

slightly during the year.



Financial review

Sales in the 52 weeks to 27 February 2010

increased by 3.9% in total; the contribution

to sales from net new space was 1.2%, while

like-for-like sales increased by 2.7%. There was

strong growth in seasonally-related categories

during Homebase’s peak trading period, given

Spring 2009 benefited from better year-on-year

weather conditions. The year saw further good

growth in big ticket categories, particularly

kitchens. Sales for the remaining categories

overall were marginally up.

The gross margin rate was down by

approximately 350 basis points. Around 175

basis points represented the net impact of

product cost pressures mainly attributed to

adverse currency movements, which were

partially offset by supply chain gains, shipping

cost savings and a level of customer price

inflation. Around 150 basis points resulted from

increased promotional activity and clearance of

previously over-wintered seasonal stocks, which

drove successfully both sales and cash gross

margin, but which reduced the gross margin rate.

The remaining 25 basis point reduction refl ected

the sales mix impact given the strong sales of

seasonally-related categories as well as big

ticket products.

Total operating and distribution costs were

reduced by around £50m or 6%. Total sales

increased by 3.9%, equivalent to a potential

cost increase of around £30m, and underlying

cost inflation was around 1% or £10m.

Depreciation was around £10m lower as

a result of the impairment of store-related

assets in the previous financial year. There was

therefore around 10% or £80m of underlying

cost productivity as a result of successful cost

reduction and containment initiatives.

Benchmark operating profit for the 52 weeks

to 27 February 2010 was £41.2m, a £26.3m

or 177% increase on the previous fi nancial

year’s £14.9m.

Homebase has successfully transferredits in-house Spend & Save loyaltycard programme over to the Nectarscheme. Customer feedback indicated that Nectar was simpler to understandand benefited from use across multipleretailers and service providers.


Sales (£m) 1,571.9 1,513.2


Benchmark operating margin 2.6% 1.0%

Like-for-like change in sales 2.7% (10.2%)

New space contribution to sales change 1.2% 6.7%

Total sales change 3.9% (3.5%)

Gross margin movement Down c.350bps Up c.25bps

Benchmark operating profi t change 177% (67%)

Number of stores at year-end 349 345

Of which contain a mezzanine fl oor 190 188

Store selling space at year-end (million sq ft) 16.1 15.9

Of which – garden centre area 3.7 3.6

– mezzanine fl oor area 1.9 1.9



Financial Services business review —— Financial Services works in conjunction with Argos and Homebase to provide theircustomers with the most appropriate credit offers to driveproduct sales, and to maximise the total profit from thetransaction for Home Retail Group.

Operational review

The in-house store card operations drove

£579m of Group retail credit sales, up 1% on the

previous year. The proportion of promotional

credit sales continued to represent 77% of all

sales placed on the store cards; the offer of ‘buy

now, pay later’ products remains a key enabler

of sales in ‘big ticket’ categories. In addition to

credit sales placed on the Group’s own store

cards, credit offers for purchases at Homebase

of typically over £3,000 are provided through

product loans from Barclays Partner Finance.

Including these product loans, total sales

penetration was 9.6%.

At the start of the year being reported,

the account management system was migrated

to a new platform. This has helped to lower

processing costs, while further initiatives to

lower costs and improve customer convenience

included increased contact centre automation

and a trial for automated applications in-store,

facilitated through the previously rolled-out

new Argos till systems. A new online account

management tool for customers has also

recently been launched.

52 WEEKS TO

Sales (£m)

Benchmark operating profit before fi nancing costs

Financing costs

Financial review

Total gross receivables grew by £6m year-on

year, with a £9m increase in the store card and

a £3m reduction from the final run-off of the

personal loan receivables.

Delinquency rates continued to rise in line

with our expectations. However, the year-on

year increase peaked around the half-year, with

the differential subsequently easing. As a result,

the bad debt charge increased by £9m in the

first half and by £13m for the full year. Financing

costs reduced by £10m in the period refl ecting

a substantially lower funding cost rate being

applied, since this non-cash internal recharge

is based upon UK base rates. A corresponding

impact is recognised in Group net interest

income. All other costs were tightly controlled

and were marginally down year-on-year.

The benchmark operating result of £5.7m

for the year reflects the financial return on the

revolving (i.e. interest-bearing) element of

receivables, as promotional credit products

are recharged to Argos and Homebase at cost.

The cost advantage of this internal arrangement

versus third-party promotional credit provision

is therefore a benefit within the Argos and

Homebase benchmark operating profi ts.

27 FEBRUARY 2010 28 FEBRUARY 2009

104.0 102.3

9.2 19.7

(3.5) (13.6)


AS AT 27 FEBRUARY 2010 28 FEBRUARY 2009

Store card gross receivables

Personal loan gross receivables

497

–

488

3

Total gross receivables

Provision

497

(68)

491

(67)

The in-house store card

operations drove £579m

of Group retail credit sales

Net receivables at year-end (£m) 429 424

Provision % of gross receivables 13.6% 13.6%

Store card credit sales 579 573



Financial Services key performance indicators

NUMBER OF ACTIVE STORE

CARD HOLDERS (’000s)

1,200 The total number of active accounts 1,1681,125 grew to 1.2 million. The cards offer

1,044 1,068 a revolving credit facility together

with a range of 3, 6, 9 and 12 month

‘buy now pay later’ plans. The offer

is also fully multi-channel, with the

availability of credit online being

a feature on both www.argos.co.uk

and www.homebase.co.uk.

Defi nition: Total number of store card accounts that have had monetary activity, either making a sale transaction, a payment or having an outstanding balance in the last six months.


GROUP RETAIL CREDIT SALES (£M) GROUP CREDIT PENETRATION (%)

579 9.6%573 9.5%566

522 8.6%

8.0%

441 7.1%

06 07 08 09 10 06 07 08 09 10


GROSS STORE CARD

RECEIVABLES (£M)

497 There was a £9m increase in gross 488482 store card receivables in the year

448 driven by the continued success in

the range of credit products offered. 378

Defi nition: Total balances outstanding on customer store card accounts.


The in-house store card operations drove £579m of Group retail sales,

up 1% on the previous year. In addition to credit sales placed on the Group’s

own store cards, credit offers for purchases at Homebase of typically over

£3,000 are provided through product loans from Barclays Partner Finance.

Including these product loans, total sales penetration was marginally higher

at 9.6%.

Defi nition: Group retail credit sales refl ect transactions placed on the Argos and Homebase store cards.

Group credit penetration is Group retail credit sales together with product loans from Barclays Partner Finance, divided by total UK retail sales.

All calculations are inclusive of VAT.



Responsible retailing —— Taking a responsible approachto the environment and the communities in which we operate iscentral to building a sustainable and profitable business. We knowthis as ‘the basis of good business’.

Hear more about our

corporate responsibility

activities in our illustrated

review, available online at


reports/ or, for a full report

go to www.thebasisofgood

business.com

We have again been awarded

gold status for our overall

corporate responsibility

performance

This year we have been

upgraded from silver to

gold making us retail sector

sustainability leaders

It plays a key part in making sure our business is a place where our colleagues

enjoy working and our customers enjoy shopping.

The way we do it

Five principles embed our approach into the way we do business every day.

Keeping clean and green: reducing the impact our operations have on

the environment

Shopping for tomorrow: helping our customers live more sustainable lives

Sourcing with care: sourcing the best products whilst minimising our social

and environmental impact

Building a great place to work: making this a business our colleagues are

proud to work for

Being a good neighbour: supporting the communities where we live and work

Performance highlights

� 78% of waste from the business recycled

� 1,340 tonnes reduction in product packaging

� 55% of customers buying large appliances sent back their packaging for recycling

� 53% fewer carrier bags given to customers (vs 2005)

� 4% reduction in carbon footprint

� 99% of direct-source and direct-import factories completed ethical audits

� 90% of timber-based products sourced from certified or known and legal sources

� All print publications printed on paper from certified sources or recycled paper

� 75% of colleagues responded as engaged in colleague opinion survey (2008/09: 70%)

� Up to two days’ paid leave for every colleague to volunteer in their communities

� £1.9m raised by colleagues and customers for charitable causes

COMMUNITY INVESTMENT £’000

Cash donations 408

Volunteering 123

Gifts in kind 198

Management resource 156

Company donations 885

Monies raised by colleagues/partners

Payroll giving 402

In-store fundraising 1,445

Tick to give 66

Donations from others 1,913

Total 2,798


86.7

06


Responsible retailing key performance indicators

26%

74%

26%

BUILDING ENERGY USE PER SQ FT

(kWh/SQ FT)

Total energy used per square foot

has remained flat, a satisfactory51 performance given the very cold winter.

45

42

38 38

06 07 08 09 10

100%

Waste sent to landfill

Waste recycled

84.3

40%

60%

40%

75.4 70.5

53%

47%

53% 72%

28%

72%

07 08 09

Recycled sources

FSC or PEFC sources

Other paper used

129 128

12%12% 13%13%

87%

13%13%

38%

49%49%

74%

14%14%

07 08 09

61.5

22%

78%78%

10

122

84%

16%

84%

16%

10

WASTE MANAGEMENT (K TONNES)

Total Group waste fell 18% from

70,000 to 61,000 tonnes, and our

recycling rate climbed from 72% to

78%. As a result, only 13,000 tonnes

went to landfill, a 32% reduction

on last year.

CATALOGUES AND PUBLICATIONS:

TOTAL PAPER USED AND

PERCENTAGE SUSTAINABLY

SOURCED (K TONNES)

We have reduced our paper use by 5%.

All print publications are now printed

on paper from certified sources or on

recycled paper.

PACKAGING PER £1,000 SALES (KG)

Packaging per £1,000 sales has

reduced by 9% thanks to our17.717.4 packaging reduction programme.

16.2 16.1

14.6

06 07 08 09 10

CARBON FOOTPRINT (K TONNES)Company car fleet CO2

Increases in electricity purchased Commercial fleet CO2 from combined heat and power Building CO2 plants and a reduction in fuel used by

our commercial fleet has led to a 4% 330 326 reduction in the carbon footprint of

293 283 our operations.

313

72% 67% 67% 67%

26% 30%26% 30% 30%30%30% 30%

2% 3% 3%

3% 2%

06 07 08 09 10

922

856

310

165 132

06 07 08 09 10

ETHICAL SOURCING (NUMBER OF

FACTORIES AUDITED IN THE YEAR)

Ninety-nine per cent of direct-source

and direct-import factories (1,632

factories) have completed ethical

audits against our own standard or

other accredited standard*.

Nine hundred and twenty-two have

completed their audit this year**.

*ICTI, WRAP, BSCi, SMETA or SA8000

**New factories complete an audit when they commence supply and all factories participate in revalidation audits within agreed timescales.


68%

30%30%

111 118

06


Financial summary

Sales up £125m or 2% to £6,023m, refl ecting

growth of 1.5% at Argos and 3.9% at Homebase.

Like-for-like sales were down 2.1% at Argos and

up 2.7% at Homebase, while the net new space

contribution was 3.6% at Argos and 1.2% at

Homebase.

Cash gross margin down £74m or 3%

to £2,276m, representing a 200 basis point

decline in the Group gross margin rate. Argos’

gross margin rate declined by approximately

175 basis points, driven principally by the net

impact of adverse currency movements and

the sales mix. Homebase’s gross margin rate

declined by approximately 350 basis points,

driven principally by the net impact of adverse

currency movements and increased promotional

and clearance activity.

Operating and distribution costs reduced by

£64m or 3% to £1,986m, with costs reduced

by £15m at Argos and by £50m at Homebase.

This resulted in exceptionally strong cost

productivity of around 5% at Argos and 10%

at Homebase.

Benchmark operating profit down £11m

or 4% to £290m, comprising a £37m or 12%

decline at Argos, and a £26m or 177% increase

at Homebase.

Benchmark PBT down £35m or 11% to

£293m, which includes £25m lower net interest

income as further strong cash generation was

more than offset by the effective interest rate

falling substantially to approximately 1% versus

5% in the prior year.

An effective tax rate of 31.0% based on

benchmark PBT, reduced from 31.4% for

the previous financial year reflecting a lower

proportion of disallowable expenditure.

Basic benchmark EPS down 10% to 23.4p.

Total dividend for the year maintained

at 14.7p, with a final dividend of 10.0p

recommended by the Board.

Net cash of £414m at 27 February 2010,

with the cash generation of £130m in the year

benefiting from further good working capital

management and a reduced level of capital

expenditure.

Share buy-back announced, with up to £150m

to be returned over the next 12 months.

Financial defi nitions

1. Benchmark operating profit is defi ned

as operating profit before amortisation of

acquisition intangibles, store impairment and

onerous lease charges or releases, exceptional

items and costs related to demerger incentive

schemes.

2. Benchmark profit before tax (benchmark

PBT) is defined as profit before amortisation of

acquisition intangibles, store impairment and

onerous lease charges or releases, exceptional

items, costs related to demerger incentive

schemes, financing fair value remeasurements,

financing impact on retirement benefi t

obligations, the discount unwind on non-

benchmark items and taxation.

3. Basic benchmark earnings per share

(benchmark EPS) is defined as benchmark PBT

less taxation attributable to benchmark PBT,

divided by the weighted average number of

shares in issue (excluding shares held in Home

Retail Group’s share trusts net of vested but

unexercised options and share awards).


102.3


Financial summary


£m

Argos 4,346.8 4,281.9

Homebase 1,571.9 1,513.2

Financial Services 104.0

Sales 6,022.7 5,897.4

Cost of goods (3,746.9) (3,547.4)

Gross margin 2,275.8 2,350.0

Operating and distribution costs (1,986.1) (2,049.6)

Argos 266.2 303.6

Homebase 41.2 14.9

Financial Services 5.7 6.1

Central Activities (23.4) (24.2)

Benchmark operating profi t 289.7 300.4

Net interest income (see below) 5.2 29.7

Share of post-tax results of joint ventures and associates (2.0) (2.4)

Benchmark PBT 292.9 327.7

Exceptional items included in operating profi t – (694.0)

Costs related to demerger incentive schemes (7.7) (8.4)

Financing fair value remeasurements 2.7 (28.9)

Financing impact on retirement benefi t obligations (0.7) 11.2

Discount unwind on non-benchmark items (6.7) (1.8)

Onerous lease provision releases 12.5 –

Profit/(loss) before tax 293.0 (394.2)

Taxation (83.2) (18.9)

of which: taxation attributable to benchmark PBT (91.4) (103.5)

Profit/(loss) for the year 209.8 (413.1)

Basic benchmark EPS 23.4p 25.9p

Basic EPS 24.3p (47.7p)

Number of shares for basic EPS 862.9m 866.6m

Net interest reconciliation:

Third-party net interest income 4.4 18.6

Financing costs charged to Financial Services 3.5 13.6

Discount unwind on benchmark items (2.7) (2.5)

Net interest income 5.2 29.7




Income statement net fi nancing income 0.5 10.2

The above table has been prepared in accordance with note 2 to the consolidated financial statements on page [60].



Group fi nancial review

Sales and benchmark operating profi t

Group sales were 2% higher at £6,022.7m (2009:

£5,897.4m) while Group benchmark operating

profit declined 4% to £289.7m (2009: £300.4m).

Within this, the drivers of the Argos, Homebase

and Financial Services performance are analysed

as part of the preceding business reviews.

Central Activities represents the cost of

central corporate functions and the investment

costs of new development opportunities.

Costs for the year were 3% lower at £23.4m

(2009: £24.2m), which included savings from

organisational changes made at the end of the

previous financial year to streamline head offi ce

functions. The HomeStore&More trial expanded

with a fourth store and the testing of an adjacent

bedroom furniture format at one of the earlier

stores. The trial stores will continue to assess

the potential opportunity for this new format

development.

Net interest income

Net interest income was £5.2m (2009: £29.7m).

Within this, third-party interest income for the

period reduced to £4.4m (2009: £18.6m). While

the Group’s net cash position increased, the

effective interest rate earned reduced to

approximately 1% from 5%.

Financing costs charged within Financial

Services’ benchmark operating profit saw the

corresponding credit within net interest income

reduce to £3.5m (2009: £13.6m). This non-cash

internal recharge is based upon UK base rates,

and therefore reduced substantially.

The charge within net interest income in

relation to the discount unwind on benchmark

items was £2.7m (2009: £2.5m). This arises from

the accounting treatment whereby provisions

for expected future liabilities are required to be

discounted back to current value. As settlement

of the liability moves closer to the present day,

additional non-cash charges to unwind the

discount are incurred; this will result in the

absolute level of provision eventually matching

the liability in the accounting period that it

becomes due.

Share of post-tax results of joint

ventures and associates

These amounted to a loss of £2.0m (2009:

£2.4m). The loss is due principally to costs

incurred by the joint venture with Barclays

Bank PLC in regard to the Argos credit card.

Benchmark profit before tax

Benchmark profit before tax for the year

declined 11% to £292.9m (2009: £327.7m).

Costs related to demerger

incentive schemes

These amounted to £7.7m (2009: £8.4m),

with the final charge being unchanged from

that reported in the first half of the year. It was

originally announced that these costs could

amount to a maximum of £45m, to be charged

to the income statement over the three-year

period from the October 2006 demerger, and

are excluded from benchmark profit before tax.

The actual cumulative cost has totalled £34m.

Financing fair value remeasurements

Certain foreign exchange movements as well

as changes in the fair value of certain fi nancial

instruments are recognised in the income

statement within net financing income. These

amounted to a net gain of £2.7m (2009: loss

of £28.9m), which arises principally as a result

of translation differences on subsidiary cash

balances. The gain reflects the strengthening

of sterling against other currencies during the

year. Equal and opposite adjustments to these

translation differences are recognised as part

of the movements in reserves. As required by

accounting standards, the net nil exchange

adjustment is therefore split between the

income statement and the statement of

comprehensive income.

Financing impact on retirement

benefi t obligations

The charge through net financing income in

respect of the expected return on retirement

benefit assets net of the interest expense on

retirement benefit liabilities was £0.7m (2009:

credit £11.2m). The current service cost, which

the Group considers a fairer reflection of the

cost of providing retirement benefits, is already

reflected in benchmark operating profi t.

Discount unwind on non-benchmark items

An expense of £6.7m (2009: £1.8m) within net

financing income relates to the discount unwind

on onerous lease provisions. As these provisions

were items previously excluded from benchmark

profit before tax, the discount unwind has also

been excluded from benchmark profit before tax.

As set out within the net interest income review

on the left, these non-cash charges arise from

the accounting treatment whereby provisions

for expected future liabilities are discounted back

to current value.

Onerous lease provision releases

A credit of £12.5m (2009: nil) was recorded in

the year, relating to onerous lease provisions no

longer required. As the provision charges were

items previously excluded from benchmark

profit before tax, the provision releases will also

be excluded from benchmark profit before tax.

Profit before tax

The reported profit before tax for the year was

£293.0m (2009: loss of £394.2m).

Taxation

Taxation attributable to benchmark profi t before

tax was £91.4m (2009: £103.5m), representing

an effective tax rate (excluding joint ventures

and associates) of 31.0% (2009: 31.4%). The

reduction in the effective rate largely refl ects

a lower amount of disallowable expenditure.

Taxation attributable to non-benchmark

items amounted to a credit of £8.2m (2009:

£84.6m). This includes a credit of £7.6m (2009:

£23.5m) being prior year non-benchmark items.

The total tax expense for the year was therefore

£83.2m (2009: £18.9m).

Number of shares and earnings per share

The number of shares for the purpose of

calculating basic earnings per share (EPS) is

862.9m (2009: 866.6m), representing the

weighted average number of issued ordinary

shares of 877.4m, less an adjustment of 14.5m

(2009: 10.8m) representing shares held in

Group share trusts net of vested but unexercised

options and share awards.

The calculation of diluted EPS refl ects

the potential dilutive effect of employee share

incentive schemes. This increases the number

of shares for diluted EPS purposes by 9.3m

(2009: 10.4m) to 872.2m (2009: 877.0m).

Basic benchmark EPS is 23.4p (2009: 25.9p),

with diluted benchmark EPS of 23.1p (2009:

25.6p). Reported basic EPS is 24.3p (2009: loss

of 47.7p), with reported diluted EPS being 24.1p

(2009: loss of 47.7p).


300.4


Dividends

Home Retail Group’s dividend policy remains

to target dividend cover over the medium term

of around two times, based on full-year basic

benchmark EPS.

While earnings have reduced by 10%, the

Group’s cash generation has continued to be

strong. A final dividend maintained at 10.0p is

therefore being recommended by the Board,

holding the dividend for the year at 14.7p. Based

on basic benchmark EPS of 23.4p (2009: 25.9p),

dividend cover is 1.59 times (2009: 1.76 times).

The final dividend, subject to approval by

shareholders at the AGM, will be paid on 21 July

2010 to shareholders on the register at the close

of business on 21 May 2010.

Cash flow and net cash position

Cash flows from operating activities were

£461.0m (2009: £468.4m). Strong working

capital management resulted in an infl ow of

£69.6m (2009: outflow of £10.2m); this infl ow

included the benefit of some timing differences

which are expected to unwind in the new fi nancial

year. The working capital inflow more than offset

the lower benchmark operating result.

Net capital expenditure was £87.4m (2009:

£132.4m), reflecting the lower number of stores

opened year-on-year. Tax paid was £107.3m

(2009: £74.7m), with the prior year benefi ting

from a tax authorities repayment in respect of

the settlement of historic tax issues. Dividends

paid to shareholders amounted to £126.3m

(2009: £127.2m), and £9.4m (2009: £21.6m)

was used to purchase shares for the Home Retail

Employee Share Trust.

The Group’s financing net cash position at

27 February 2010 was £414.0m, an increase of

£129.6m over the year. The financing net cash

position included a £50.0m term deposit which

was purchased in November 2009 and matures

in May 2010.

CASH FLOW AND NET CASH POSITION


£m

Benchmark operating profi t 289.7

Exceptional items within operating profi t – (694.0)


Costs related to demerger incentive schemes (7.7) (8.4)

Statutory operating profit after exceptional items

Depreciation and amortisation

Movement in working capital

Financing costs charged to Financial Services

Non-cash Homebase exceptional charges

Cash flow impact of prior year restructuring charge

Other operating items

Cash flows from operating activities

Net interest

Taxation

Net capital expenditure

Brand acquisitions

Purchase of term deposit

Sale of term deposit

Other investments

294.5 (402.0)

130.1 159.4

69.6 (10.2)

3.5 13.6

– 651.2

(17.4) (3.1)

(19.3) 59.5

461.0 468.4

7.2 16.6

(107.3) (74.7)

(87.4) (132.4)

(1.9) (20.6)

(50.0) (75.0)

75.0 –

(6.7) (2.2)

Cash inflow before fi nancing activities 289.9 180.1

Dividends paid (126.3) (127.2)

Purchase of shares for Employee Share Trust (9.4) (21.6)

Other fi nancing activities 0.3 0.1

Net increase in cash and cash equivalents 154.5

Opening cash and cash equivalents 209.4 174.0

Net cash infl ow 154.5 31.4

Effect of foreign exchange rate changes 0.1 4.0

Closing cash and cash equivalents 364.0 209.4

Term deposit 50.0 75.0

Closing financing net cash 414.0


31.4

284.4


Group financial review continued

BALANCE SHEET

AS AT 27 FEBRUARY 2010 28 FEBRUARY 2009

£m

Goodwill 1,541.0 1,541.0

Other intangible assets 92.7 103.6

Property, plant and equipment 525.1 559.3

Inventories 935.4 930.3

Instalment receivables 429.4 424.5

Other assets 178.1 190.2

3,701.7 3,748.9

Trade and other payables (1,104.9) (1,063.2)

Other liabilities (219.1) (250.2)

(1,324.0) (1,313.4)

Invested capital 2,377.7 2,435.5

Retirement benefi t obligations (24.9) (46.4)

Net tax assets 52.1 32.7

Derivative fi nancial instruments 47.7 52.2

Financing net cash 414.0 284.4

Reported net assets 2,866.6 2,758.4

Pre-tax return on invested capital 12.1% 12.2%

Balance sheet

Reported net assets as at 27 February 2010

were £2,866.6m, equivalent to 332p per share

excluding shares held in the Employee Share

Trust. The year-on-year increase in net assets

was £108.2m. Within this, invested capital

reduced by £57.8m, driven by the working capital

reduction and lower capital expenditure. These

movements also contributed to the £129.6m

increase in financing net cash.

Benchmark pre-tax return on invested

capital (ROIC) is a key performance measure

for the Group. Benchmark operating profi t plus

share of post-tax results of joint ventures and

associates was £287.7m, down £10.3m or 3%,

while year-end invested capital reduced by

2%. This resulted in a pre-tax ROIC of 12.1%

(2009: 12.2%).

Liquidity and funding

The Group maintains liquidity by arranging

funding ahead of requirements and through

access to committed facilities. At 27 February

2010, the Group had £700m of undrawn

committed borrowing facilities, £685m of

which does not expire until 2013. These facilities

are in place to enable the Group to fi nance its

working capital requirements and for general

corporate purposes. The Group’s net cash

position is however expected to continue to

be sufficient to meet its financing needs in the

foreseeable future.

Group fi nancing arrangements

The Group finances its operations through a

combination of retained profits, property leases

and borrowing facilities where necessary. The

Group’s net cash balances averaged approximately

£500m over the year; the Group did not draw

upon its committed borrowing facilities at any

point during the year.

The Group has significant liabilities through

its obligations to pay rents under operating leases;

the operating lease rental expense for the year

amounted to £379.1m. The capitalised value of

these liabilities is £3,033m based upon an eight

times multiple of the year’s operating lease

charge, or £3,148m based upon discounted cash

flows of the expected future operating lease

charges. In common with credit rating agencies

and lenders, the Group treats its lease liabilities

as debt when evaluating fi nancial risk.

Capital structure management and share

buy-back programme

The Group has continued its strong track record

of cash generation. In the four years since

demerger, over £600m of net cash has been

generated. This cumulative net cash generation

has been after approximately £500m of

dividends to shareholders and approximately

£700m of capital expenditure and other

investments that have continued to position

the businesses strongly for growth. The

Group’s adjusted net debt/EBITDAR ratio,

which capitalises the lease rental expense on

an eight times multiple, was 3.4x at demerger,

strengthened to 2.9x after two years, and moved

back to 3.3x for the financial year just ended.

The Board has conducted its regular review

of the Group’s capital structure as part of the

year-end process. In doing so it has taken account

of the Group’s current cash position, its signifi cant

lease obligations, maintaining a capital structure

equivalent to a potential investment grade

rating, continuing to invest appropriately in the

business and maintaining flexibility to enable the

Group to withstand unforeseen fl uctuations in

the trading environment.



FINANCIAL YEAR 05/06 06/07 07/08 08/09 09/10

£m

Benchmark PBT 337.1 376.7 432.9 327.7 292.9

Add: depreciation and amortisation 134.9 147.5 151.6 159.4 130.1

Add: lease rental expense 299.2 328.2 344.8 372.8 379.1

Deduct: interest income (9.5) (16.6) (33.3) (29.7) (5.2)

EBITDAR 761.7 835.8 896.0 830.2 796.9

Financing net (debt)/cash (200) 60 174 284 414

Capitalised lease rental expense (2,394) (2,626) (2,758) (2,982) (3,033)

Adjusted net debt (2,594) (2,566) (2,584) (2,698) (2,619)

Adjusted net debt/EBITDAR ratio 3.4x 3.1x 2.9x 3.2x 3.3x

As a result of the review, it is anticipated that

over the next 12 months up to £150m of capital

will be returned to shareholders through a share

buy-back programme. The programme will be

funded out of the Group’s existing cash resources.

At a share price of 300p, it would represent

approximately 6% of the Company’s 877.4m

issued ordinary shares. The Company currently

has authority to purchase up to 10% of its issued

ordinary shares, and renewal of this authority will

be sought at the Company’s AGM on 30 June 2010.

Retirement benefi t obligations

Pension arrangements are operated principally

through the Home Retail Group Pension Scheme,

a defi ned benefit scheme, together with the

Home Retail Group Stakeholder Pension

Scheme, a defined contribution scheme.

The IAS 19 valuation as at 27 February 2010

for the defi ned benefit pension plans was a net

deficit of £24.9m (28 February 2009: £46.4m).

Plan assets increased to £667.7m (28 February

2009: £504.4m), driven principally by higher

market values. The present value of plan liabilities

increased to £692.6m (28 February 2009:

£550.8m), driven principally by a reduction in

the assumed discount rate to 6.0% (28 February

2009: 6.5%).

A full actuarial valuation of the defi ned

benefit scheme is carried out every three years

by independent, qualified actuaries. The latest

full review, as at 31 March 2009, resulted in a

deficit of £102m. Increases to funding have been

agreed with the pension trustee. The cash fl ow

impact of the additional payments are £17m in

the year to 27 February 2010 (with the Group’s

net cash position at 27 February 2010 of £414m

being after this payment), reducing to £16m and

£14m in the two subsequent fi nancial years.

Counterparty credit risk management

The Group’s exposure to credit risk with regard to

treasury transactions is managed by dealing only

with major banks and financial institutions with

appropriate credit ratings and within limits set

for each organisation. Dealing activity is closely

controlled and counterparty positions are

monitored on a regular basis.

Interest rate risk management

The Group’s principal objective is to manage

the trade-off between the effective rate of

interest and the credit risk associated with

the counterparty bank or fi nancial institution.

The annual effective rate of interest earned

on the Group’s net cash balances reduced

substantially in the financial year being reported.

This reflects a period when UK base rates have

been at their lowest.

Currency risk management

The Group’s key objective is to minimise the

effect of exchange rate volatility. Transactional

currency exposures that could signifi cantly

impact the income statement are hedged using

forward purchase contracts.

Approximately 30% of the Group’s product

costs are paid for directly in US dollars. Sterling

weakened substantially against the US dollar

between August 2008 and April 2009. This had

a significant impact on the Group’s hedged rates,

and therefore the cost of goods sold.

US dollar hedged rates 08/09 09/10 change

First half 2.00 1.75 (0.25)

Second half 2.00 1.50 (0.50)

Full year 2.00 1.60 (0.40)

Share price and total shareholder return

The Group’s share price ranged from a low of

189.0p to a high of 329.7p during the fi nancial

year. On 26 February 2010, the closing mid

market price was 255.0p, giving a market

capitalisation of £2.2bn at the year-end.

Total shareholder return (the change in the

value of a share including reinvested dividends)

has been an increase of 26.9% over the year.

This compares to an increase of 47.8% for the

FTSE 350 General Retail sector and an increase

of 45.5% for the wider FTSE 100.

Accounting standards and use

of non-GAAP measures

The Group has prepared its consolidated fi nancial

statements under International Financial

Reporting Standards for the 52 weeks ended

27 February 2010. The basis of preparation is

outlined in note 2 to the consolidated fi nancial

statement on page [60].

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 defi ned 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 statement on page

[67].



Principal risks and uncertainties —— We discuss below the principal risks and uncertainties that could impact theGroup’s performance, and our mitigating activities. For furtherinformation on how we manage risk, see the business reviewand also page 41, within the corporate governance statement.

AREA OF PRINCIPAL RISK AND UNCERTAINTY DESCRIPTION AND EXAMPLES OF MITIGATING ACTIVITY

Economic and market risks

Impact on sales, costs, profit and cash of:

� Economic conditions

� Cost of raw material products/services/utilities

� Consumer preferences

� Competitor activity

� Seasonality/weather

� UK-centric store network

� Expansion/development of store network

� Changing demographics

The economic outlook for 2010 remains uncertain. Key issues specific to the UK and Republic of Ireland

centre around the political landscape and plans to address the fi scal deficit (eg public spending cuts, tax

changes) with their resultant impact on the consumer. This economic environment, including the response

of other retailers to it, has the potential to impact on the success of the Group in terms of its performance

in respect of sales, costs, profit and cash generation.

Significant cost savings have been made over the last three years in terms of operational effectiveness

and supply chain benefits from the combined leverage of Argos and Homebase. The ongoing effi ciency

programmes will enable the Group to continue its investment in competitive pricing and the development

of the infrastructure. The Group’s operational and financial strength will continue to sustain our commercial

advantage in the market place.

The Group is committed to supporting cost-conscious customers and those looking for value across all

spectrums of the range architecture. Continued investment will further extend choice within the Argos and

Homebase Value ranges and maintain our leadership in long-term growth markets.

Other mitigating activities include:

� Empowering customer choice by strengthening range architecture

� Store format, multi-channel and customer service developments

� Price tracking and dynamic pricing to ensure competitiveness

Currency The volatility of the global economy continues to create a risk of exposure to fluctuations in currency rates

� Purchase of products whose cost base of related to overseas product purchasing.

manufacture is in currencies other than sterling,

principally the US dollar and the euro We attempt to mitigate these risks through:

� Sale of products in currencies other than sterling, � Appropriate hedging policies

principally the euro in the Republic of Ireland � Adjustments to customer pricing

� Seeking opportunities for further sourcing effi ciencies

Operations

Failure to ensure appropriate processes are in place

to manage the complexity of retail operations,

including sourcing of products and customer service

The sourcing of products from outside the UK introduces complex supply chain risks that the Group

mitigates through effective management processes to ensure that stock is in the right place at the right

time to meet customer needs. Our distribution infrastructure is continuously reviewed to drive further

stock effi ciency.

Enhancement of our award-winning multi-channel capability will ensure that customers are

empowered to choose convenience; from shopping online for home delivery to using Check & Reserve

to benefit from immediate collection from store. The use of technology to get closer to our customers

through social networking and online reviews enables customer issues to be identified and resolved quickly.

The new partnership between Homebase and Nectar, the UK’s leading coalition loyalty programme,

provides a platform for leveraging customer data to maximise sales and customer satisfaction.


� Continuously improving the efficiency of catalogue production processes

� Enhancement of the Homebase website, with 10,000 product lines now transactional

� Improving the accuracy of stock forecasts

� Extending installation services for kitchens, bathrooms and bedroom furniture

� Dedicated working parties to manage operational change



AREA OF PRINCIPAL RISK AND UNCERTAINTY DESCRIPTION AND EXAMPLES OF MITIGATING ACTIVITY

Regulatory environment

� Changes in UK and overseas legislation

and regulation, eg consumer protection,

environmental regulation

� Changes in UK fi scal/employment policy,

eg minimum wage

Good governance practices remain important to the Group. In addition to ensuring compliance with existing

requirements, we are active in monitoring potential future developments. We also lobby, often with other

retailers, to support and develop the industry and the interests of consumers. Key developments impacting

the Group are the Carbon Reduction Commitment, Payment Card Industry Data Security Standards and

potential government changes to how customers can apply for store cards.


� Membership of industry representative groups

� Direct engagement with government and regulators

� Dedicated working parties to manage operational change

Infrastructure development/projects

Delay or failure to manage and implement major

business and infrastructure projects effectively

The Group is committed to investing for growth, extending multi-channel leadership and maintaining

a robust infrastructure. Strategic projects to replace or enhance key systems and infrastructure carry

a degree of risk; however, we have dedicated project teams in place with strong governance frameworks

to manage them.


� Detailed approval and planning process prior to project commencement

� Board review of status/progress of major change programmes

� Post project implementation reviews

� Management expertise in significant infrastructure/change programmes

Product safety

Failure to manage supplier relationships and/or

ensure appropriate quality checks are in place

The safety and quality of our products is of critical importance to the Group. Suppliers are required to sign

up to the Group’s Supply Chain Principles and to specific policies regarding products and their environmental

impact. Wherever possible, Argos and Homebase teams work in conjunction with suppliers to ensure

improvement opportunities are explored.


� Rigorous quality/safety assessment programme for new products

� Ongoing monitoring of quality/safety of goods on sale

� Supplier relationship protocols

� Ongoing rotation of supplier audits

� Standardisation of terms and conditions for all suppliers

Pe

� �

ople

Reliance on key personnel

Pension obligations

The Group values its colleagues and their contribution to the success of the organisation. Internal training

schemes and the graduate recruitment programme maintain the succession pool and actively encourage

promotion from within. The Group has rolled out a new leadership model to support the development of

current and future leaders. We are committed to open communications with colleagues at all times and

monitor employee satisfaction through an annual Group-wide staff survey.


� Competitive remuneration packages

� Succession planning

� Management development and training programmes

� Regular review of pension trustee activities and plans to mitigate the fund defi cit

Business interruption

� Acts of terrorism

� Failure or unavailability of operational and/or

IT infrastructure

� Delay or interruption in service provided by

third-party suppliers

A major incident could impact the ability of the Group to continue trading. We maintain and routinely

test our business continuity plans in order to reduce the potential impact of such events. Security measures

are in place where appropriate to protect colleagues, customers and assets. We remain vigilant to the

vulnerability of suppliers and continue to work towards a sustainable outcome for all parties. The ongoing

transfer of our data systems to a purpose-built unit to enhance our continuity arrangements represents

a major risk during the year which is reduced by the robust change management controls in place.


� Business continuity and recovery planning

� IT recovery plans

� Third-party supplier management


GOVERNANCE

Board of Directors and Operating Board

Oliver Stocken Terry Duddy Richard Ashton Penny Hughes

Chairman Chief Executive Finance Director Non-Executive Director

Greg Ball David Guise Peter Connor John Coombe

Managing Director, Human Resources Director Information Systems Director Non-Executive Director Customer and Financial Services

Maria Thompson Gordon Bentley Sara Weller Paul Loft

Commercial Director Company Secretary Managing Director, Argos Managing Director, Homebase


GOVERNANCE

Board of Directors

Oliver Stocken

Chairman Oliver was a director of NM Rothschild & Sons

and held several roles within Barclays Group

culminating in his appointment as group fi nance

director of Barclays PLC. In 2000, he was

appointed to the GUS board where he chaired

the audit committee and subsequently the

remuneration committee. In October 2006,

he became chairman of Home Retail Group.

He is a non-executive director of Standard

Chartered plc and chairman of Stanhope plc

and Oval Limited. Oliver is also chairman of

the Trustees of the Natural History Museum.

Terry Duddy

Chief Executive Terry began his career at Letraset working in

personnel management and then in product

management. In 1984, he joined the Dixons

Stores Group where he held a variety of

commercial positions, including sales director of

Currys, product marketing director of the Dixons

Stores Group and, latterly, managing director of

PC World. Terry joined GUS in August 1998 as

chief executive of the newly acquired Argos,

becoming a GUS Director later that year. In 2000

he was appointed chief executive of Argos Retail

Group. In October 2006, he became chief

executive of Home Retail Group. He is a

non-executive director of Hammerson plc.

Richard Ashton

Finance Director Richard started his career at

PricewaterhouseCoopers where he trained

as a chartered accountant. In 1994, he joined

GE where he spent eight years and held a variety

of positions. These included chief fi nancial

officer of GE Capital’s pan-European equipment

financing business, headquartered in the

Netherlands, assistant to GE Capital’s chief

fi nancial officer in the US and various fi nance

roles in the UK. Richard joined Argos Retail

Group as finance director in November 2001.

In October 2006, he became fi nance director

of Home Retail Group.

Penny Hughes

Non-Executive Director Penny spent 10 years with Coca-Cola, initially

as marketing director and ultimately as president

of Coca-Cola GB & Ireland. She has held a

number of non-executive roles on the boards

of international businesses such as Vodafone,

Trinity Mirror, Body Shop, Reuters and GAP.

Currently she serves on the board of The Royal

Bank of Scotland Group plc, Wm Morrison

Supermarkets plc and Cable & Wireless

Worldwide PLC. She is President of the

Advertising Association and a Trustee of the

British Museum. Penny joined the Board of

Home Retail Group in December 2006 and

chairs the remuneration committee.

John Coombe

Non-Executive Director John held a number of senior fi nancial roles

within Charterhouse Group plc and Charter

Consolidated plc before joining Glaxo

Holdings in 1986. Appointed to the board in

1992, he was ultimately chief fi nancial offi cer

of GlaxoSmithKline for five years before retiring

in 2005. He joined the GUS Board in April 2005.

He became a non-executive director of Home

Retail Group in October 2006. He is the senior

independent director and chairs the audit

committee of Home Retail Group. He is a

non-executive director of HSBC Holdings,

chairman of Hogg Robinson Group and a former

member of the Code Committee of the Panel

on Takeovers and Mergers. Until 2003, he was a

member of the UK Accounting Standards Board.

He is also a trustee of the Royal Academy of Arts

Trust, where he chairs the audit committee.

BOARD COMMITTEES Nomination Committee: Audit Committee:

Oliver Stocken (Chairman), John Coombe, John Coombe (Chairman), Penny Hughes

Terry Duddy, Penny Hughes

Note: Mike Darcey was appointed to the Board of

Remuneration Committee: Directors as a non-executive director on 20 April

Penny Hughes (Chairman), John Coombe, 2010 and became a member of each of the above

Oliver Stocken committees from that date.


GOVERNANCE

Directors’ report

The directors present their report and the audited financial statements for

the 52 weeks ended 27 February 2010 (‘the period’).

Principal activities and business review

The Group’s principal activities comprise home and general merchandise

retailing. The chairman’s statement, review of the business and fi nancial

statements report on performance of the business during the period, the

position at the period end, likely future developments, the principal risks

and uncertainties facing the Group, financial key performance indicators

and charitable donations and are incorporated by reference into this

directors’ report as is the Group’s statement on corporate governance.

There were no material acquisitions or disposals during the period.

Profit and dividends

The Group’s consolidated income statement on page 54 shows a profi t

for the period of £209.8m. The directors recommend the payment of a

final dividend of 10.0p per ordinary share, to be paid on 21 July 2010 to

shareholders on the register at the close of business on 21 May 2010.

An interim dividend of 4.7p per ordinary share was paid on 20 January 2010‚

giving a total dividend for the year of 14.7p per ordinary share.

Directors

The names and biographical details of the directors as at the end of the

period are shown in the Board of Directors and Operating Board section

on pages 34 and 35. On 1 July 2009, Andy Hornby resigned from the

Board. On 20 April 2010, Mike Darcey was appointed to the Board as a

non-executive director. Particulars of directors’ remuneration are shown

in the directors’ remuneration report on pages 43 to 51. Details of the

service contracts of the directors, and how a change of control will affect

the service contracts of the executive directors, are summarised within

the directors’ remuneration report. Neither contract for the executive

directors provides for extended notice periods or compensation in the

event of termination or a change of control.

The directors retiring at the 2010 Annual General Meeting are Penny

Hughes who, being eligible, offers herself for re-election, and Mike Darcey,

who will seek election to the Board.

During the period, the Group maintained liability insurance and

third-party indemnification provisions for its directors, under which the

Company has agreed to indemnify the directors to the extent permitted by

law in respect of all liabilities to third parties arising out of, or in connection

with, the execution of their powers, duties and responsibilities as directors

of the Company and any of its associated companies. These indemnities

are Qualifying Third-party Indemnity Provisions as defined in Section 234

of the Companies Act 2006 and copies are available for inspection at the

registered office of the Company during business hours on any weekday

except public holidays.

Directors’ interests

The beneficial interests of the directors, together with non-benefi cial

interests in Home Retail Group plc shares, are shown below:

Terry Duddy

Number of ordinary shares at 27 February 2010

2,183,932

Number of ordinary shares at 28 April 2010

2,236,158

Richard Ashton 571,387 598,152

Oliver Stocken 126,936 140,353

John Coombe 55,844 61,969

Penny Hughes 15,250 21,375

Mike Darcey, on his appointment on 20 April 2010 and as at 28 April 2010,

had no beneficial or non-beneficial interests in Home Retail Group plc shares.

Substantial shareholdings

As at 28 April 2010, the Company had been notified under Rule 5 of

the Financial Services Authority’s Disclosure and Transparency Rules

of the following holdings of voting rights in the issued share capital of

the Company:

Total number of Percentage of voting rights total voting

(ordinary shares) rights (%)

Schroders plc 87,463,013 9.99

BlackRock Investment Management

(UK) Limited 63,137,923 7.20

Taube Hodson Stonex Partners LLP 43,983,617 5.01

Legal and General Group plc 34,590,018 3.94

Share capital and control

As at 28 April 2010, the Company’s issued share capital comprised a single

class of shares, referred to as ordinary shares. Details of the ordinary share

capital can be found in note 27 to the consolidated fi nancial statements

on page 91.

The rights and obligations attaching to the shares are more fully set out

in the Articles of Association of the Company. There are no restrictions on

the transfer of ordinary shares in the Company other than the following:

� certain restrictions may from time to time be imposed by laws and

regulations (such as insider trading laws); and

� pursuant to the Listing Rules of the Financial Services Authority,

the Company requires certain employees to seek the Company’s

permission to deal in the Company’s ordinary shares.

The Company is not aware of any agreements between shareholders which

may result in restrictions on the transfer of securities and/or voting rights.

There are no shareholdings which carry special rights relating to control of

the Company. A change of control of the Company following a takeover bid

may cause a number of agreements to which the Company or its trading

subsidiaries is party to take effect, alter or terminate. In the context of the

Company as a whole, these agreements are not considered to be signifi cant.

Purchase of own shares

At the Annual General Meeting of the Company held on 1 July 2009,

authority was given for the Company to purchase, in the market, up to

87,000,000 ordinary shares of 10p each. The Company did not use this


GOVERNANCE

authority to make any purchases of its own shares during the period. At the

Annual General Meeting to be held on 30 June 2010, shareholders will be

asked to give a similar authority, details of which are contained in the

Notice of Meeting. As stated in the business review, over the next 12 months

up to £150m of capital will be returned to shareholders through a share

buy-back programme.

Details of the Company’s interests in its own shares are set out in

note 28 to the consolidated financial statements on page 92.

Employee share plans

Some of the Company’s employee share plans include restrictions on the

transfer of shares while the shares are subject to the plan. As described in

the directors’ remuneration report, non-executive directors received part

of their fees in shares, which may not normally be transferred during a

director’s period of offi ce.

Where, under an employee share plan operated by the Company,

participants are the beneficial owners of the shares but not the registered

owners, the voting rights are normally exercised by the registered owner,

at the direction of the participant.

All of the Company’s share plans contain provisions relating to a change

of control. Outstanding awards and options would normally vest and

become exercisable on a change of control, subject to the satisfaction of

any performance conditions at that time.

Political donations

The Group has made no political donations and incurred no items of

political expenditure during the period.

Employees

The Group has in place measures to provide its employees with information

on matters of concern to them as employees, including consulting

employees or their representatives on a regular basis so that the views of

employees can be taken into account in making decisions which are likely

to affect their interests. Various communication routes are made available

to employees to give them awareness of the financial and economic

factors affecting the performance of the Company and employees are

also encouraged to be involved in the Company’s performance through

a Save as You Earn share scheme.

The Group has a policy in place for giving full and fair consideration to

applications for employment by the Company made by disabled persons,

having regard to their particular aptitudes and abilities, and for continuing

the employment of, and for arranging appropriate training for, employees

of the Company who have become disabled persons during the period

when they were employed by the Company. The policy also covers the

training, career development and promotion of disabled persons employed

by the Company.

Creditor payment

For all trade creditors, it is, and will continue to be for the next fi nancial

year, Group policy to:

� agree and confirm the terms of payment at the commencement

of business with that supplier;

� pay suppliers in accordance with applicable terms; and

� continually review the payment procedures and liaise with suppliers

as a means of eliminating difficulties and maintaining a good working

relationship.

Trade creditor days of the Group at 27 February 2010 were 51 (2009: 51),

based on the ratio of Group trade creditors at the end of the year to the

amounts invoiced during the year by trade suppliers. The Company has

no trade creditors.

Articles of Association

The Articles of Association set out the internal regulation of the Company

and cover such matters as the rights of shareholders, the appointment or

removal of directors and the conduct of the Board and general meetings.

Copies are available upon request and are displayed on the Company’s

website at www.homeretailgroup.com. In accordance with the Articles

of Association, directors can be appointed or removed by the Board or

shareholders in general meeting. Amendments to the Articles of

Association must be approved by at least 75% of those voting in person

or by proxy at a general meeting of the Company. Subject to company law

and the Articles of Association, the directors may exercise all the powers of

the Company and may delegate authorities to committees. Details of the

main Board committees can be found in the corporate governance report

on pages 38 to 42.

At the 2010 Annual General Meeting a special resolution, as set out in

the Notice of Meeting, will be put to shareholders proposing the adoption

of new Articles of Association, which will incorporate amendments to the

current Articles of Association to reflect the implementation in the UK in

2009 of the Shareholder Rights Directive and the remaining provisions of

the Companies Act 2006.

Annual General Meeting

The Annual General Meeting of the Company will be held at the Jurys Inn

Hotel, Midsummer Boulevard, Milton Keynes MK9 2HP, commencing at

11.00 am on Wednesday 30 June 2010. The Notice of Meeting is included

in a separate circular to shareholders which accompanies this annual report.

It is also available on the Company’s website at www.homeretailgroup.com.

Financial risk management

The financial risk management objectives and policies of the Group and the

exposure of the Group to price, credit, liquidity and cash flow are set out in

note 4 to the consolidated financial statements on pages 68 to 71.

Relevant audit information

As at 28 April 2010, so far as each director is aware, there is no relevant

audit information of which the auditors are unaware and each director has

taken all steps that he or she ought to have taken as a director in order to

make himself or herself aware of any relevant audit information and to

ensure that the auditors are aware of that information.

Auditors

The auditors, PricewaterhouseCoopers LLP, have indicated their willingness

to continue in office and a resolution that they be reappointed will be

proposed at the Annual General Meeting.

By order of the Board Gordon Bentley Registered Offi ce:

Secretary Avebury

28 April 2010 489-499 Avebury

Boulevard

Milton Keynes

MK9 2NW


GOVERNANCE

Corporate governance report

Chairman’s introduction

The events of the past two years have highlighted the purpose and value

of effective corporate governance. However, they have also highlighted

that effective corporate governance relies much more upon behaviours

and applied principles of good governance than organisational structures

and checklists. This should be reflected in the revised version of the UK

Corporate Governance Code to be published this year.

The Board is responsible for the Group’s system of corporate

governance and is committed to maintaining high standards of behaviour

and principles. In his draft preface to the Revised Code, Sir Christopher

Hogg, Chairman of the Financial Reporting Council, states: “to follow the

spirit of the Code to good effect, boards must think deeply, thoroughly

and on a continuing basis, about their overall tasks and the implications of

these for the roles of their individual members”. I support that statement

and am grateful to the members of the Board for the continuing

commitment and diligence they show to their responsibilities.

This corporate governance report provides an overview of how the

Board has applied the principles of good governance during the period

under review both directly and through its principal committees, the

work and activities undertaken and how it has evaluated its performance.

Oliver Stocken

Chairman

The Board

The work of the Board is structured around a framework of scheduled

meetings and telephone conferences each year. Several of these meetings

are linked to events in the corporate calendar such as the full year and half

year results and the annual general meeting. Other meetings focus on

strategy, the annual budget and planning. In advance of each meeting the

Board receives a comprehensive financial management report that covers

the trading and operational performance of each of the Group’s businesses,

the Group’s financial performance, current market expectations of

performance and any significant developments. Each month the Board

also receives a management information pack that provides detailed

information on the Group’s businesses. The Board meets informally on

the evening before most Board meetings. This provides an opportunity

to discuss current trading and operations and recent developments. The

members of the Operating Board are invited to join these discussions on

a regular basis and to update the Board on their areas of responsibility.

Each non-executive director serves on each of the three main Board

committees: audit, remuneration and nomination. We believe this

facilitates better communication with Board members and the provision

of information to the Board. It also enables Board members to take full

account of the relationships between the work of these committees,

including consideration of financial reporting, internal controls and risk

management, external and internal audit, remuneration policy and

management succession plans.

However, the time commitment expected of non-executive directors is

not restricted to meetings of the Board and Board committees. It is important

that the non-executive directors understand the operations of the Group’s

businesses and they take time to visit stores, distribution centres and offi ces,

attend management conferences and meet members of management

below Operating Board level, including high potential colleagues. In

addition, during the year the non-executive directors attended a meeting

with members of the Operating Board and senior management for Argos

and Homebase to discuss progress on business initiatives.

The Board consists of the chairman, Oliver Stocken; chief executive,

Terry Duddy; finance director, Richard Ashton; and three non-executive

directors: John Coombe (the senior independent director), Penny Hughes

and Mike Darcey (appointed 20 April 2010). The biographical details of the

directors in office at the end of the period under review are shown in the

Board of Directors and Operating Board section on page 35. On 1 July 2009,

Andy Hornby stepped down as a non-executive director, following his

appointment as Chief Executive of Alliance Boots. The Board is very grateful

to Andy Hornby for his significant contribution to Home Retail Group.

In the first two full years as an independently listed plc the formal

evaluation of the performance of the Board was conducted internally.

This year, an externally facilitated effectiveness review of the Board and

its committees was undertaken. The external facilitator attended a Board

meeting and held face-to-face meetings with each member of the Board

and the company secretary, human resources director and the managing

directors of the main businesses. The agenda for the face-to-face meetings

included Board and committee functioning, performance and composition,

governance and independence, training and induction and the role of

the chairman. The external facilitator’s report was reviewed by the

Board and recommendations for improvement were agreed and have

been implemented.

For the period under review, Home Retail Group plc has complied

fully with the main and supporting principles set out in Section 1 of the

Combined Code on Corporate Governance published by the Financial

Reporting Council in June 2008 (‘the Code’) excepting that following

Andy Hornby’s resignation, the audit and remuneration committees

comprised two independent non-executive directors from 1 July, for

the remainder of the period under review. This statement, together with

the directors’ report and the directors’ remuneration report, provides

a summary of the Group’s procedures for applying the principles of the

Code and the extent to which such principles have been applied.

The Company has also complied fully with the remainder of the Code

during the period under review by applying its principles as follows.

The three non-executive directors are determined by the Board to be

independent and there are no relationships or circumstances which could

affect, or appear to affect, a non-executive director’s judgement. The

Company has in place formal procedures regarding conflicts of interest,

which are reviewed on an annual basis. The non-executive directors are

appointed for three-year renewable terms. The Board is satisfied that the

chairman’s other Board appointments and commitments do not place

constraints on his ability to fulfil properly his role as chairman of Home

Retail Group plc.

The Board has at least six scheduled meetings each year and

meets more frequently, as required. During the year, in addition to the

scheduled meetings, four additional meetings were held. The chairman

has also met with the non-executive directors without the executive

directors present.


GOVERNANCE

There is a formal schedule of matters specifically reserved to the Board.

The Board has responsibility for:

� the overall management of the Group, approval of the Group’s

long-term objectives and commercial strategy, and the review of

performance, ensuring that any necessary corrective action is taken;

� the approval of announcements of half-yearly and final results, including

dividends, and the annual report and accounts, including the corporate

governance statement, remuneration report and statement on internal

controls;

� the approval of documentation to be put forward to shareholders at

general meetings and all circulars and prospectuses other than routine

documents;

� the approval of all appointments to the Board and of the company

secretary, following recommendations by the nomination committee,

ensuring adequate succession planning for the Board and senior

management, and approving the terms of reference of the Board

committees; and

� determining the responsibilities of the chairman and of the chief

executive.

The chairman is responsible for the leadership of the Board and ensuring

its effectiveness, for effective communication with shareholders and for

facilitating the effective contribution of the non-executive directors and

their constructive relationship with the executive directors.

The chief executive is responsible for the day-to-day business of the

Group, and is supported by the Operating Board, which includes the

finance director and the managing directors of the main businesses and

shared services functions. Members of the Operating Board meet

informally with the chairman and non-executive directors and regularly

attend and present at Board meetings when relevant agenda items are

under consideration.

There is in place a procedure under which the directors, in furtherance

of their duties, are able to take independent professional advice, if

necessary, at the Company’s expense. The company secretary, who has

been appointed by the Board, is responsible for advising the Board on all

corporate governance matters and for ensuring that Board procedures

are followed, and all directors have access to this professional advice.

The company secretary ensures that the Board receives regular briefi ngs

on corporate governance matters and company legislation.

Individual appraisals of directors have been undertaken by the

chairman. Under the leadership of the senior independent director, the

non-executive directors met without the chairman present to appraise

the chairman’s performance, taking account of any views expressed by

the executive directors.

All directors are subject to election by shareholders at the fi rst

opportunity after their appointment and, thereafter, in accordance

with the Company’s Articles of Association. All directors will be required

to submit themselves for re-election at least once every three years.

Both Penny Hughes and Mike Darcey will retire at the Annual General

Meeting to be held on 30 June 2010. At the Annual General Meeting,

Mike Darcey will be eligible for election and Penny Hughes will be eligible

for re-election.

The letters of appointment for non-executive directors, including the

chairman, are available for inspection by any person at the Company’s

registered office during normal business hours and at the Annual General

Meeting (for 15 minutes prior to the meeting and during the meeting).

Board committees

The Board has appointed the following principal committees:

remuneration committee, nomination committee and audit committee.

The terms of reference of each of these committees are available on the

Company’s website at www.homeretailgroup.com. In order to facilitate

better communication with Board members and the provision of

information to the Board, the independent non-executive directors

serve on each of the Board committees.

The attendance of directors at scheduled meetings of the Board and the

Board committees was as follows:

Board member

Terry Duddy1

Board meetings

(10)5,6

10

Audit Remuneration committee committee

(4)5 (7)5

4 7

Nomination committee

(4)5

4

Richard Ashton2 10 4 – 1

Oliver Stocken3 10 4 7 4

John Coombe 10 4 7 4

Andy Hornby4 2 1 1 –

Penny Hughes 10 4 7 4

Notes: 1. Terry Duddy is not a member of the audit committee or the remuneration committee 2 Richard Ashton is not a member of the audit committee, the remuneration committee

or the nomination committee 3. Oliver Stocken is not a member of the audit committee 4. Andy Hornby resigned as a director on 1 July 2009 5. Includes the final meetings of the period under review which took place in early

March 2010 6. In addition to the six scheduled meetings of the Board, four additional meetings were

held in which all Board members participated

Remuneration committee

Penny Hughes was appointed as chairman of the remuneration committee

on 1 July 2009, following the resignation of Andy Hornby. The other

members of the committee are John Coombe, Oliver Stocken and,

from 20 April 2010, Mike Darcey. Terry Duddy attends meetings of the

committee at the request of the committee chairman. In accordance with

the Code, the committee meets not less than three times a year. During the

period under review the committee met seven times. The remuneration

committee is responsible for making recommendations to the Board on

the Group’s policy on the remuneration of the Operating Board, as well as

the specific remuneration packages for each of the executive directors and

other members of the Operating Board. Details of how the committee has

fulfilled its responsibilities and of compliance with Section B of the Code

regarding remuneration are set out in the directors’ remuneration report

on pages 43 to 51.


GOVERNANCE

Corporate governance report continued

Nomination committee

The nomination committee is chaired by Oliver Stocken and its other

members are John Coombe, Terry Duddy, Penny Hughes and, from

20 April 2010, Mike Darcey. The nomination committee meets not less

than twice a year and has responsibility for making recommendations

to the Board on the composition of the Board and its committees, on

retirements, appointments of additional and replacement directors and

on succession planning. During the year, the nomination committee has

considered the composition of the Board and its committees and

succession planning and also reviewed and discussed management

succession plans. Following the resignation of Andy Hornby, the

committee led the process to appoint a further non-executive director.

As part of this process, the committee evaluated the balance of skills,

knowledge and experience on the board and, in the light of this evaluation,

prepared a specification of the capabilities required for the appointment,

including an assessment of the time commitment expected. An external

search consultancy was appointed to facilitate the search for suitable

candidates. Following this process, Mike Darcey was recommended to

the Board for appointment.

Audit committee

The audit committee is chaired by John Coombe and its other members

are Penny Hughes and, from 20 April 2010, Mike Darcey. John Coombe was

formerly chief fi nancial officer of GlaxoSmithKline plc. The Board considers

that he has the recent and relevant financial experience required to chair

the audit committee. Penny Hughes and Mike Darcey have a wide range of

experience from positions at the highest level of business. Oliver Stocken,

Terry Duddy, Richard Ashton, the Group head of internal audit and the

external auditors attend meetings of the committee at the request of

the committee chairman. Further details of the members of the audit

committee are set out in the Board of Directors and Operating Board

section on page 35.

The audit committee normally meets no fewer than four times

a year and its principal responsibilities cover internal control and risk

management, internal audit, external audit (including auditor

independence) and financial reporting. The committee met with the

external auditors and the head of internal audit at least once during

the year without the presence of executive directors or management.

The committee has a structured programme linked to the Group’s

financial calendar. During the period under review, the committee

undertook the following activities:

� reviewed the full-year announcement, annual report and fi nancial

statements and the half-yearly announcement and considered reports

from the external auditors identifying any accounting or judgemental

issues requiring its attention;

� reviewed the statement in the annual report on the system of

internal control;

� reviewed and approved audit plans for the external and internal auditors;

� considered quarterly reports from the head of internal audit on the

results of internal audit reviews, signifi cant fi ndings, management

action plans and timeliness of resolution;

� reviewed reports on the Group’s risk management process and risk profi le;

� reviewed presentations on risk and its identifi cation, management

and control with senior management;

� reviewed, at each scheduled meeting, a report on any material litigation

involving Group companies;

� reviewed management of fraud risk and incidences of fraud; and

� reviewed arrangements by which Group employees may, in confi dence,

raise concerns about possible improprieties in fi nancial reporting,

dishonesty, corruption, breaches of business principles and other matters.

One of the primary responsibilities of the audit committee is to make

recommendations to the Board in relation to the appointment,

re-appointment and removal of the external auditors. During the period

under review, the committee reviewed and discussed the Public Report on

the 2008/9 Inspection of PricewaterhouseCoopers LLP issued by the Audit

Inspection Unit of the UK’s Public Oversight Board, part of the Financial

Reporting Council. A number of factors were taken into account by the

committee in assessing whether to recommend the external auditors for

re-appointment. These included:

� the quality of reports provided to the audit committee and the Board

and the quality of advice given;

� the level of understanding demonstrated of the Group’s businesses

and the retail sector; and

� the objectivity of the external auditors’ views on the controls around

the Group.

The committee recognises that auditor independence is an essential part

of the audit framework and the assurance it provides. Audit fees paid to the

Company’s auditors, PricewaterhouseCoopers LLP‚ in respect of the period

under review‚ exceeded non-audit fees. The committee has established

control procedures to safeguard the objectivity and independence of the

external auditors and to ensure that the independence of the audit work

undertaken by the external auditors is not compromised.

The committee has established a policy covering the type of non-audit

work that can be assigned to the external auditors. The auditors may only

provide such services provided that these do not conflict with their

statutory responsibilities and ethical guidance. These services are:

� further assurance services – where the external auditors’ knowledge

of the Group’s affairs means that they may be best placed to carry out

such work. This may include‚ but is not restricted to‚ shareholder and

other circulars‚ regulatory reports and work in connection with

acquisitions and divestments;

� services relating to taxation – where the external auditors’ knowledge

of the Group’s affairs may provide significant advantages to the Group’s

tax position and‚ where this is not the case, the work is put out to tender;

and

� general – in other circumstances, the external auditors may provide

services‚ provided that proposed assignments which exceed fi nancial

limits set out in the policy are put out to tender and decisions to award

work are taken on the basis of demonstrable competence and cost

effectiveness.


GOVERNANCE

However, certain areas of work are specifically prohibited‚ including work

related to accounting records and financial statements that will ultimately

be subject to external audit and management of‚ or signifi cant involvement

in‚ internal audit services.

The committee chairman’s pre-approval is required before the

Company uses non-audit services that exceed financial limits set out in

the policy. The committee receives half-yearly reports providing details

of assignments and related fees carried out by the external auditors in

addition to their normal work. Fees in respect of such assignments carried

out in the period under review were:

£m

Services relating to taxation 0.1

All other services 0.1

Accountability and audit

The Board acknowledges that it is responsible for the Group’s system

of internal control and for reviewing its effectiveness. Such a system is

designed to manage rather than eliminate the risk of failure to achieve

business objectives and can provide reasonable, but not absolute,

assurance against material misstatement or loss. The Board has reviewed

the effectiveness of the key procedures which have been established to

provide internal control.

The Board confirms that the Company has in place an ongoing

process for identifying, evaluating and managing the signifi cant risks

faced by the Group, including risks relating to environmental, social and

governance matters. This process was in place throughout the period

under review and up to the date of approval of this annual report and

meets the requirements of the guidance issued in October 2005 entitled

‘Internal Control: Guidance for Directors on the Combined Code’ (the

Turnbull Report).

This process is overseen by a risk committee chaired by the fi nance

director and comprised of all divisional finance directors, the director of

Group treasury and taxation, the company secretary and the risk assurance

manager. The head of internal audit also attends its meetings. The risk

committee met six times in the period under review.

The audit committee has kept under review the effectiveness of this

system of internal control and has reported regularly to the Board. As part

of the process that the Company has in place to review the effectiveness

of the internal control system there are procedures designed to capture

and evaluate failings and weaknesses, and to ensure that necessary

action is taken to remedy any failings that may be categorised by the

Board as signifi cant.

The key procedures which were operational in the period under review

were as follows:

Risk assessment

� risks were identified and reviewed by management followed by the

review of the risk committee. This takes place on a bi-annual basis,

facilitated by the risk assurance manager;

� the risks identified through this process were then reported to the

Operating Board and audit committee with particular focus on those

risks classified as high-level risks by the risk committee. The schedule

of high-level risks was used as the basis for a programme of internal

audit and assurance;

� the audit committee has delegated responsibility from the Board for

considering operational, financial and compliance risks on a regular

basis and received its annual report on the controls over these risks. This

included risks arising from environmental, social and governance matters.

Control environment and control activities

� the Group has established procedures for delegating authority, which

ensures that decisions that are significant, either because of the value or

the impact on other parts of the Group, are taken at an appropriate level;

� the Group has implemented appropriate strategies to deal with each

significant risk that has been identified. These strategies include internal

controls, insurance and specialised treasury instruments;

� the Group sets out principles, policies and standards to be adhered to.

These include risk identification, management and reporting standards,

ethical principles and practice and accounting policies.

Information and communication

� the Group has a comprehensive system of budgetary control, including

monthly performance reviews by the Operating Board. The Operating

Board also reviews a range of financial and non-fi nancial performance

indicators. These indicators were regularly reviewed to ensure that they

remain relevant and reliable;

� the Group has whistleblowing procedures in place for employees to

report any suspected improprieties.

Monitoring

� a range of procedures was used to monitor the effective application of

internal control in the Group, including management assurance through

confirmation of compliance with standards, and independent assurance

through internal audit reviews and review by specialist third parties;

� the internal audit department’s responsibilities include reporting to

the audit committee on the effectiveness of internal control systems,

with a particular focus on those areas identified as being the greatest

risk to the Group;

� follow-up processes were used to ensure there was an appropriate

response to changes and developments in risks and the control

environment.


GOVERNANCE

Corporate governance report continued

Going concern

The business and financial reviews on pages 14 to 31 contain information

on the performance of the Group, its cash flow and net cash position,

capital structure and liquidity and funding. Further information relating to

the Group’s financial risk management is set out in note 4 to the fi nancial

statements and the principal risks and uncertainties that could impact

the Group’s performance are set out on pages 32 and 33.

After making enquiries, the directors are satisfied that the Company

has sufficient resources to continue in operation for the foreseeable future.

Accordingly, they continue to adopt the going concern basis in preparing

the fi nancial statements.

Relations with shareholders

The Board recognises the importance of communicating with its

shareholders and does so through a variety of channels, including

the annual report, the Annual General Meeting and the processes

described below.

Although the majority of shareholder contact is with the chief

executive and the finance director (supported by management specialising

in investor relations), it is the responsibility of the Board as a whole, led by

the chairman, to ensure that a satisfactory dialogue with shareholders

takes place. During the period under review, the chairman of the

remuneration committee also held meetings with a number of

shareholders.

Meetings with shareholders have been held following the full and

half-yearly results announcements. A monthly summary of all important

or relevant issues raised by shareholders during the course of meetings

and discussions is circulated to the Board and reviewed as appropriate

at scheduled Board meetings.

Additionally during the year, the Board (and, in particular, the

non-executive directors) has obtained an independent insight into the

views of major shareholders by commissioning research from a third-party

adviser across a balanced sample of the Company’s investors. These

shareholders controlled some 20% to 25% of the Company’s issued share

capital. The findings of the research were presented to the Board by the

third-party adviser.

Through these processes the Board is kept abreast of key issues.

Shareholders also have a direct line of communication to the chairman,

particularly if there are areas for concern, whether it be about performance,

strategy or governance. The senior independent director is also available

should shareholders have concerns which contact through the normal

channels of the chairman, chief executive and the finance director has

failed to resolve, or for which such contact is inappropriate.

All directors, including the chairmen of the audit, nomination and

remuneration committees, intend to be present at the Annual General

Meeting and be available to answer shareholders’ questions. Voting at the

Annual General Meeting will be by way of a poll by members present at

the meeting and, following each vote, the level of proxies lodged on each

resolution, the balance for and against the resolution and the number

of votes withheld, will be displayed. The results of voting at the Annual

General Meeting will also be available on the Company’s website at

www.homeretailgroup.com as soon as possible after the meeting.


GOVERNANCE

Directors’ remuneration report

This report has been prepared by the remuneration committee on behalf of

the Board. In writing it, the committee has adopted the governance principles

relating to directors’ remuneration as set out in the Combined Code.

This report complies with the Companies Act 2006, schedule 8 of the

Large and medium-sized Companies and Groups (Accounts and Reports)

regulations 2008 and the Listing Rules of the Financial Services Authority.

Chairman’s statement

I am pleased to present my first report on directors’ remuneration.

We made a number of changes to our remuneration policy last year,

and said that we would continue to monitor the effectiveness of the policy.

Having done this, and following continued consultation with shareholders,

we are proposing further changes which we believe result in greater

alignment between performance and reward.

Our performance this year has exceeded initial expectations. The

executive team responded quickly to the challenges that emerged in

2008/09, with the cost base being tightly managed during the year and

with further actions resulting in a reduction of over £50m in the absolute

level of costs in 2009/10. At the end of 2009/10 we have achieved profi t

significantly higher than originally anticipated and also had strong cash

generation. This has therefore resulted in annual bonus targets being

exceeded and a maximum bonus being paid.

Our proposals for the future, outlined below, take into account our

aspirations for the business, the economic environment and feedback

from shareholders.

Background information

In considering our remuneration plans in 2010/11 we took into account

a range of factors including:

� The economic conditions and specifically how we needed to respond

to them

� The most appropriate range of performance measures for our

incentive schemes

� The appropriate balance of our remuneration package

At the beginning of 2009/10, performance expectations from analysts

were well below the previous year with analyst consensus of c. £190m in

respect of benchmark profit before tax (PBT). By the end of the year we had

significantly exceeded expectations with a reported benchmark PBT fi gure

of over £100m above the original analyst consensus figure. 2009/10 saw

growth in market share for both Argos and Homebase and continued

leadership in multi-channel retailing, which resulted in better than

expected sales. We have also dealt successfully with the potential impact

of the weakened value of sterling, offsetting the increase on our cost of

goods through good supply chain management and retail pricing. In

addition, excellent management of costs has helped support the profi t

performance, whilst good management of working capital has contributed

to excellent cash generation. Our dividend policy has been maintained,

which compares favourably against many of our competitors.

Last year we committed to continue to review our remuneration

arrangements and monitor their effectiveness. We believe that the

arrangements put into place for 2009/10 were appropriate, given the

environment and context at that point in time, which made longer-term

target setting very difficult. As a result, the remuneration committee felt

that setting robust three-year internal targets was not possible. We are now

in a better position to set three-year targets, and are therefore proposing to

change remuneration arrangements as detailed in the following section.

Proposed changes to remuneration policy

During the year we have continued to consider our remuneration

arrangements and propose to introduce the policy outlined below in

relation to executive directors and members of the Operating Board for

the financial year 2010/11:

� Continue with the annual bonus plan, which will pay a bonus

for achieving:

i) a benchmark PBT target; and

ii) a Group net cash generation target

For very substantially exceeding these targets there is a maximum

bonus opportunity equating to 150% of salary.

� Discontinue the deferred bonus plan. This plan was in operation for

the financial year 2009/10 only, and was up to 150% of salary.

� Replace the deferred bonus plan with a long-term incentive award of

150% of salary based on a performance measure of basic benchmark

earnings per share (EPS), measured over three years. Subject to

shareholder approval, this award will be made under the conditions

of the existing performance share plan (PSP) and will vest, subject to

continued employment, 25% on achievement of 8% compound annual

growth rate (CAGR) of basic benchmark EPS, rising to a maximum award

at 16% CAGR. The EPS calculation will be adjusted to exclude the

impact of the recently announced share buy-back programme.

� Continue with a long-term incentive PSP award of 150% of salary based

on a performance measure of relative total shareholder return (TSR)

measured over a three-year period. The award will vest, subject to

continued employment and satisfactory Group fi nancial performance,

25% on the achievement of TSR at the median of our peer group, rising

to 100% of the award at the 90th percentile.

� Introduce shareholding guidelines, to be achieved over both three- and

five-year periods. Within three years of the guidelines being introduced,

all members of the Operating Board, including the chief executive and

the Group finance director to hold 50% of annual salary in shares.

Within five years of the guidelines being introduced, the chief executive

to hold 150% of annual salary in shares and the Group fi nance director

and all other members of the Operating Board to hold 100% of annual

salary in shares. After the introduction of the guidelines, for any new

appointments to the Operating Board, the guidelines are to be reached

three and five years after the first share based award is made.

� No annual pay review in April 2010, which means there has been no

change in salaries since April 2008. This policy has been applied across

the entire executive and senior management population. Exceptions

may be made during the year where pay has been identified as being

below market benchmarks.

These changes maintain the overall maximum of incentive awards at 450%

of salary, and substantially shift the balance into long-term incentive plans,

with two thirds based on long-term and one third on short-term performance.

Performance-related pay % of salary

Annual incentive plan bonus (profit and cash measures) 150%

Long-term incentive with EPS measure 150%

Long-term incentive with relative TSR measure 150%

Total 450%


GOVERNANCE

Directors’ remuneration report continued

Remuneration policy applied in the year under review

Home Retail Group’s corporate objective is to perform consistently in the

upper quartile of the general retail sector and our incentive structure is

designed to support this goal.

The policy is based on our remuneration principles:

� The remuneration strategy should help to support corporate objectives

� Remuneration arrangements should support the alignment of interests

of shareholders and employees

� Remuneration packages should be competitive and contain

performance-related elements which increase with seniority

� All employees should be encouraged to participate in Home Retail Group

as shareholders via our share plans

The incentive structure for the executive directors and members of

the Operating Board in the year under review comprised:

� Median level salary

� Annual bonus, subject to achievement of fi nancial targets

� Opportunity to participate in a deferred bonus, subject to the

achievement of fi nancial targets

� Annual participation in the PSP

Executive remuneration

The elements of remuneration in the year under review for executive

directors are detailed below. More than 80% of total potential

remuneration (excluding pensions and benefits) is performance-related.

There is no payment of bonus or long-term incentives if performance

targets are not achieved.

Element Purpose Performance measure

Pay Reflect competitive

market level, the economic

environment and

individual performance

Performance against

agreed objectives for

annual pay award

Annual bonus Achievement of annual

financial targets

Benchmark PBT and Group

net cash generation over

a one-year period

Deferred

bonus

Encourage longer-term

investment in shares and

alignment with interests

of shareholders

Benchmark PBT and Group

net cash generation over

a one-year period with

shares being released

subject to confi rmation of

satisfactory Group fi nancial

performance for the year

in which performance was

originally measured

Performance

share plan

Reward outperformance

relative to peer group

and alignment with

interests of shareholders

Relative TSR and

satisfactory Group

fi nancial performance

over a three-year period

Salary and benefi ts

We normally review salaries annually in April and make adjustments to

reflect movements in the employment market, the general economic

environment and individual performance. In line with competitive practice,

executive directors receive additional benefits that include a car or cash

alternative, private health cover, pension and life insurance. Only their

salary is pensionable.

Salaries have remained unchanged since April 2008 and were not

increased in April 2010. This policy has been applied across the entire

executive and senior management population. Exceptions will be made

during the year where pay has been identified as being below market

benchmarks.

Annual bonus

The remuneration committee sets targets by reference to Board-approved

budgets and reflect performance that is considered stretching. In the period

under review, 2009/10, the benchmark PBT and Group net cash generation

targets for the annual bonus were set at the beginning of the year and

reflected both the internal and external view of challenging market

conditions. Both targets were substantially exceeded. As a result a

maximum bonus payment of 150% of salary will be awarded, of which

one half is being deferred voluntarily in shares by the executive directors.

Performance share plan

The PSP gives executive directors the right to receive shares in the

Company subject to the satisfaction of certain conditions, satisfactory

Group financial performance and their continued employment. This plan

underpins our longer-term incentive structure by providing a share-based

reward which vests only when we outperform our peer group.

For the 2009 award the measure of TSR has been used to assess our

performance against the following peer group of companies over a

three-year period. The peer group is weighted to attach greater importance

to companies that are closer comparators to Home Retail Group.

Peer group for PSP awards made in May 2009:

Carphone Warehouse J Sainsbury Next

Debenhams Kesa Electricals Signet Group

DSG International Kingfi sher Travis Perkins

Dunelm Marks & Spencer Group Tesco

Game Group Morrisons Topps Tiles

Halfords Group Mothercare WH Smith

No awards vest if TSR is below the median return for the peer group. Once

median performance is achieved, 25% of the award will vest, with 100%

of the award vesting for performance at the 90th percentile. Any level of

vesting is also subject to satisfactory Group financial performance, which

is reviewed by the remuneration committee and takes into account a range

of factors including earnings, cash generation and dividend payments to

shareholders.

The award is converted to shares at the price prevailing at the time the

awards are made. Awards equivalent to 150% of salary were made in 2009.

In exceptional circumstances, the remuneration committee may choose

to grant a higher amount, up to 200% of salary.

The awards vest to the extent that the performance test is achieved

over a three-year period. TSR calculations are made by external advisers,

using the average share price over the three-month period up to both the

start and the end of the performance period.


GOVERNANCE

For future awards, subject to shareholder approval, we propose to

make an additional award of 150% of salary based on a basic benchmark

EPS measure to replace the discontinued deferred bonus plan.

Deferred bonus plan

For the financial year 2009/10 executive directors participated in a deferred

bonus plan, which deferred up to 150% of salary in shares, the amount of

which is determined by performance against benchmark PBT and Group

net cash generation targets. Shares are released, subject to continued

employment and satisfactory Group financial performance for the year

in which performance is measured, 1/6th on the first anniversary, 2/6th

on the second anniversary and 3/6th on the third anniversary. If fi nancial

performance is not satisfactory, the committee may reduce or withhold

the award. The targets were both substantially exceeded, and will result

in a maximum award of 150% of salary, deferred in shares.

All-employee share plans

We encourage employees to become shareholders through the operation

of all-employee share plans. In 2009 we invited all eligible employees to

participate in a Save As You Earn (SAYE) plan approved by HM Revenue &

Customs (HMRC). This gave our employees the opportunity to apply for

options to acquire shares in the future. The option price was 80% of the

market value of a Home Retail Group share, calculated as the average price

over the three business days before the date of invitation, this being 200p.

The number of shares over which the option was granted was determined

by the amount committed by the employee under their savings contract.

Employees could elect for their savings contract to run over a period

of three or five years, with a maximum saving of £250 per month. Options

will be exercisable during the six months following the end of the contract.

We intend to run a further invitation for employees in 2010.

Funding of awards

Share awards granted by Home Retail Group may be satisfied with newly

issued shares, treasury shares or shares purchased in the market. Currently,

share awards are satisfied with shares held in the Employee Share Trust.

In the year under review, the Employee Share Trust purchased shares in

the market. We will keep our policy for funding share awards under review.

Pensions

Terry Duddy Prior to 1 April 2006, Terry Duddy was a member of the pension scheme

which will provide him on retirement at age 60 with a pension in line with

pre-6 April 2006 HMRC limits, with pensionable salary limited to the

pension earnings cap. Since April 2006, Terry Duddy has been a member

of the Home Retail Group secured unfunded retirement benefi ts scheme

and will receive on retirement at age 60 a pension of one-thirtieth of full

pensionable salary for each year of service from 1 April 2006.

Richard Ashton Richard Ashton is a member of the pension scheme which will provide

him on retirement at age 60 with a pension of up to two-thirds of the

pension earnings cap subject to HMRC limits. Since April 2006, for

benefits in excess of the pensions earnings cap, he has been a member

of the Home Retail Group secured unfunded retirement benefi t scheme.

Service contracts

Both Terry Duddy and Richard Ashton were appointed as executive

directors on 5 July 2006. Neither contract provides for extended notice

periods or compensation in the event of early termination or a change

of control.

Notice periods for executive directors provide for six months’ notice

from the director and 12 months from the Company. Service contracts do

not provide for additional payments in the event of termination or change

of control.

Terry Duddy Terry Duddy has a service contract dated 27 July 1999, under which the

Group is required to provide 12 months’ notice and he is required to provide

six months’ notice. Under the terms of the contract, the Group reserves

the option to terminate Terry Duddy’s employment by paying him in lieu

of notice. The contract ends when he reaches the normal retirement age

of 60.

Richard Ashton Richard Ashton has a service contract dated 1 March 2005, under which

the Group is required to provide 12 months’ notice and he is required to

provide six months’ notice. The contract ends when Richard Ashton

reaches the normal retirement age of 60.

Chairman and non-executive directors

The agreements for the non-executive directors can be terminated without

compensation and with one month’s notice, other than the chairman, who

has a notice period of three months. Non-executive directors are appointed

for a fixed term of three years and appointments are reviewed at the end

of the term.

Outside appointments

Executive directors may be invited to become non-executive directors of

other companies. These appointments provide an opportunity to gain

broader experience to Home Retail Group. Providing that appointments

are not likely to lead to a conflict of interest, executive directors may accept

non-executive appointments and retain the fees received. During the year,

on 3 December 2009, Terry Duddy became a non-executive director of

Hammerson plc for which he receives an annual fee of £55,000 from

1 April 2010.

Non-executive directors

Our policy on non-executive director remuneration is as follows:

� Remuneration should be in line with recognised best practice and

sufficient to attract and retain high-calibre non-executives

� Remuneration should be set by reference to the responsibilities

undertaken by the non-executive, taking into account that each

non-executive director is expected to be a member of the audit,

remuneration and nomination committees

� Remuneration should be a combination of cash fees paid monthly

and shares, bought twice each year

� Non-executive directors are obliged to retain shares purchased until

their retirement from the Board of Directors. Any tax liability connected

to these arrangements is the responsibility of the individual director

� Non-executive directors should not participate in share plans operated

by the Group

� Non-executive directors should not receive any benefits in kind


GOVERNANCE


Fees are reviewed in the light of market practice of FTSE 100 companies,

the anticipated number of days worked and individual responsibilities.

With effect from 1 April 2010 fees are:

Fees £000

Fees to be used to

purchase shares1

£000

Chairman 200 50

Non-executive base fee 40 27

Senior independent director 10 –

Chair of audit/remuneration committee 30 –

1. The net amount will be used to purchase shares.

Remuneration committee

Role and membership

In the past year, the committee further reviewed the remuneration plans,

with a specific focus on long-term incentives, the overall balance of the

package and performance measures.

The committee met seven times during the period under review.

Attendance at these meetings is set out in the corporate governance

statement on page 39.

The remuneration committee is a committee of the Board and its

membership comprises:

Penny Hughes (chairman from 1 July 2009)

John Coombe

Oliver Stocken

Andy Hornby (resigned 1 July 2009)

Mike Darcey (appointed 20 April 2010)

The remuneration committee is responsible for making recommendations

to the Board on the Group’s policy on the remuneration of the Operating

Board as well as the specific remuneration packages for each of the

executive directors and other members of the Operating Board, including

pension rights and any compensation payments. The remuneration of the

non-executive directors and the chairman is reserved for consideration by

the Board of Directors as a whole. No director is involved in any discussions

about his or her own remuneration.

Advisers

At the invitation of the chairman of the committee, the chief executive

attended meetings to give background information on remuneration matters.

During the period under review, Hewitt New Bridge Street were

appointed as advisers to the remuneration committee and provided advice

from 1 December 2009 onwards. Prior to that time Towers Perrin advised

the committee. Both advised on matters relating to performance

conditions for long-term incentive plans and executive remuneration

issues and provided the committee with salary survey data. They did not

provide the Company with any other services. Linklaters LLP provided legal

advice on share scheme rules.

The committee was also advised by David Guise, Group HR Director

and Paula Hayes, Director of Policy & Reward. The secretary to the

committee was Gordon Bentley, Company Secretary.

The terms of reference of the committee can be found on the

Company’s website at www.homeretailgroup.com.

Performance graph

The graph below compares the TSR for Home Retail Group against the

FTSE 350 index of general retailers for the period from demerger to the end

of the period under review. The directors feel that the FTSE 350 index of

general retailers is the most appropriate choice of index as it is a relevant

comparator group for a retail business. The graph has been prepared in

accordance with the assumptions contained in the relevant legislation.

£110 £103.44

£100 £99.65

£90

£80 £73.16

£70 £65.78

£57.65£63.75£60 £68.52

£50

£46.35£40

11 October 3 March 1 March 28 February 27 February 2006 2007 2008 2009 2010

Value of £100 invested on demerger

Home Retail Group FTSE 350 index of general retailers


GOVERNANCE

The following sections are audited

Directors’ emoluments

The value of the salary, annual bonus and benefits (excluding awards of options and restricted shares) of each director is set out in the following table.

For the non-executive directors, this includes fees and shares as part payment for fees. At the end of the period under review the salary for Terry Duddy

was £820,000 pa and for Richard Ashton was £420,000 pa.

Period ended 27 February 2010 Period ended 28 February

Base salary/ Annual cash Taxable 2009 £000 fees bonus1 benefits Total Total

Terry Duddy 820 615 402 1,475 858

Richard Ashton 4203 315 144 749 432

Oliver Stocken 242 – – 242 221

John Coombe 91 – – 91 81

Andy Hornby5 27 – – 27 71

Penny Hughes6 73 – – 73 52

The following table provides details of shares purchased for non-executive directors on 22 October 2009 and 22 March 2010. The values reported below

are included within the remuneration reported in the directors’ emoluments table.

Number of Number of shares shares purchased on Value purchased on Value

22 October 2009 £000 22 March 2010 £000

Oliver Stocken 11,500 35 11,500 32

John Coombe 5,250 16 5,250 15

Andy Hornby5 3,500 11 – –

Penny Hughes6 3,750 11 5,250 15

Notes: 1. In addition, Terry Duddy and Richard Ashton have voluntarily deferred in shares receipt of a further £615,000 and £315,000 respectively to March 2011. 2. This includes benefits in kind of car, fuel, chauffeur, and private medical insurance. 3. The annual salary this year was reduced by £16,000 to reflect a period of unpaid leave. 4. This includes benefits in kind of car and private medical insurance. 5. Andy Hornby resigned from the Board on 1 July 2009. 6. Penny Hughes was appointed chairman of the Remuneration Committee with effect from 1 July 2009, to replace Andy Hornby. The additional fee for chairing the Remuneration

Committee is therefore included from this date.


GOVERNANCE


Current share plans

Long-term incentive plans

Home Retail Group performance share plan A conditional award of shares was granted to executive directors in 2009 under the Home Retail Group PSP. These awards, along with vested, unvested

and rolled-over awards granted under the GUS plc PSP are included in the table below. During the period under review, the performance conditions for

the rolled-over 2006 award were measured. The TSR performance condition was met. The remuneration committee also reviewed the Group fi nancial

performance for the performance period, taking into account earnings, cash generation and dividend payments to shareholders and concluded that this

performance condition had also been met. The award therefore vested at 80% during the period. The 2007 award has met both the TSR and Group

financial performance conditions and vested at 52%.

Plan shares Plan shares Total plan Share Value of Plan shares awarded released shares held at Share price price on shares on at 1 March during the during the 27 February on date Vesting date of date of

Original grant date 20091 period period2 2010 of award date3 release5 release

Terry Duddy

02/06/06 193,201 – 154,560 – – 12/06/09 272.0p £420,417

16/10/06 57,483 – 57,483 – – 16/10/09 299.6p £172,219

09/05/07 170,648 – – 170,648 – 15/03/104 – –

09/05/08 306,164 – – 306,164 – 09/05/11 – –

08/05/09 – 487,128 – 487,128 252.5p 08/05/12 – –

Richard Ashton

02/06/06 90,159 – 72,127 – – 12/06/09 272.0p £196,192

16/10/06 27,998 – 27,998 – – 16/10/09 299.6p £83,882

09/05/07 87,457 – – 87,457 – 15/03/104 – –

09/05/08 156,815 – – 156,815 – 09/05/11 – –

08/05/09 – 249,504 – 249,504 252.5p 08/02/12 – –

Notes: 1. The shares awarded under the GUS plc 2006 PSP were subject to compulsory rollover at the time of demerger and vested in accordance with the plan’s rules. 2. The performance condition for the rolled-over awards was based on the TSR of Home Retail Group against its comparator group from the date of demerger to the normal vesting date.

The rolled-over GUS plc 2006 PSP was measured against the TSR and Group financial performance conditions and vested at 80%, with shares released to participants. As a result the remaining shares from the original award were forfeited. A dividend equivalent payment was made in relation to the 2006 GUS PSP, and the demerger restricted stock award. Terry Duddy received a total dividend equivalent payment of £104,096 and Richard Ashton £49,075.

3. All awards granted from 2007 onwards are subject to the performance conditions outlined on page 44. 4. The performance period for the 2007 award ended on 26 February 2010 and shares were released to participants earlier than the original vesting date on 15 March 2010. 5. Share price has been rounded to one decimal place.

Deferred bonus plan

This plan operated for the financial year 2009/10 only. For this year, executive directors were entitled to participate in a deferred bonus plan. Subject to

continued employment and satisfactory Group financial performance for the year in which performance is measured, shares will be released 1/6th on

the first anniversary of the award, 2/6th on the second anniversary of the award and 3/6th on the third anniversary of the award. The award is based

on 2009/10 performance against a benchmark PBT and a Group net cash generation target and will be made at the maximum, 150% of salary which

is £1,230,000 for Terry Duddy and £630,000 for Richard Ashton. The shares will be purchased in May 2010, with the number of shares in the plan to be

disclosed in future reports, once they have been awarded.


GOVERNANCE

Home Retail Group SAYE scheme

Terry Duddy and Richard Ashton joined the Home Retail Group SAYE scheme in 2008.

Number of Options Options Options Total number options at granted exercised lapsed of options at Date

1 March during the during the during the 27 February Exercise from which Original grant date 2009 period period period 2010 price exercisable Expiry date

Terry Duddy

01/07/08 8,565 – – – 8,565 190.0p 01/09/13 01/03/14

Richard Ashton

01/07/08 4,947 – – – 4,947 190.0p 01/09/11 01/03/12

Terry Duddy and Richard Ashton were awarded 49 free shares at the time of the demerger under an HMRC approved Share Incentive Plan. They became

fully entitled to these shares on 11 November 2009.

Home Retail Group share price

Details of the closing market price of Home Retail Group shares from 1 March 2009 to 27 February 2010 are shown in the table below:

At 27 February 2010 255.0p

Highest price during the period 329.7p

Lowest price during the period 189.0p

Legacy arrangements

As Home Retail Group demerged from GUS plc in October 2006, some legacy rollover arrangements are still in place in relation to GUS plc share plans.

Where this is the case, reference is made to the previous GUS plc plan in the sections below. The majority of these plans have now vested, with the fi nal

elements of the re-investment plan due to vest in 2010 and 2011.

Share options

The Company granted the following rolled-over options over its shares following demerger. The options are governed by the rules of the GUS plc

executive share option scheme. No new options have been granted during the period under review and no options have been exercised.

Number of Options Options Options Total number options at granted exercised lapsed of options at Date

1 March during the during the during the 27 February Exercise from which Original grant date 2009 period period period1 2010 price exercisable2 Expiry date

Terry Duddy

31/05/05 197,277 – – – 197,277 359.9p 31/05/08 30/05/15

02/06/06 193,201 – – 193,201 – 388.2p 02/06/09 02/06/16

Richard Ashton

31/05/05 80,576 – – – 80,576 359.9p 31/05/08 30/05/15

02/06/06 90,159 – – 90,159 – 388.2p 02/06/09 02/06/16

Notes: 1. The 2006 award did not meet the performance condition and therefore lapsed. 2. There is a performance test based on basic benchmark EPS growth. This requires compound annual growth to exceed compound annual retail price inflation by 4% per annum over

a continuous three-year period.


GOVERNANCE


Co-investment plan

Awards made in 2006 and 2007 were made under the GUS plc co-investment plan in accordance with the plan rules.

Invested Matching Invested Matching Total Value of Plan shares shares shares shares plan shares matching

shares at granted granted returned released held at Share price Share price shares 1 March during during during during 27 February on date on date on date

Original grant date 2009 period period period period4 2010 of award Vesting date of exercise5 of exercise

Terry Duddy

12/06/061 90,123 – – 19,513 70,610 – – 12/06/09 272.0p £192,066

27/06/072 426,476 – – – 135,362 291,114 – 27/06/10 – –

09/05/083 871,918 – – – – 871,918 – 09/05/11 – –

Richard Ashton

27/06/072 207,907 – – – 65,989 141,918 – 27/06/10 – –

09/05/083 446,858 – – – – 446,858 – 09/05/11 – –

Notes: 1. Matching share options granted in 2006 were subject to compulsory rollover at the time of the demerger. The rolled-over awards were governed by the rules of the GUS plc plan. 2. This award was converted to restricted shares on 25 February 2010 and the plan shares at the end of the period represent the balance remaining after the sale of shares to meet tax

and National Insurance liabilities. The remaining shares will be released to participants on the original vesting date of 27 June 2010. 3. Matching awards made in 2008 are subject to performance against a basic benchmark EPS target and a return on invested capital target. If total basic benchmark EPS growth of 10%

or above over the three-year period is achieved, matching shares vest as to one half of the 50% of the award that is subject to basic benchmark EPS, which increases to full vesting of that 50% when benchmark EPS growth reaches 25% or more over the performance period.

4. Dividend equivalent payments were made on matching shares released. Terry Duddy received £148,720 and Richard Ashton £54,746. 5. Share price has been rounded to one decimal place.

Re-investment plan

At the time of the demerger, executive directors were offered the opportunity to re-invest shares acquired in 2004 and 2005 under the terms of the

GUS plc co-investment plan into a one-off re-investment plan.

This one-off plan granted a matching award of Home Retail Group shares if participants agreed to re-invest the invested shares and/or matching

awards from the 2004 and 2005 operation of the GUS plc co-investment plan. The receipt of the matching award is subject to satisfaction of performance

conditions, the retention of re-invested awards and continued employment. The matching award is calculated on the basis of two Home Retail Group

shares for each Home Retail Group share re-invested by the participant. The matching award is made in two equal portions. The first 50% of the award

was time-based and vested on the third anniversary of the grant. The remaining 50% of the award will vest subject to the satisfaction of performance

conditions, in two equal tranches on the fourth and fifth anniversaries of the grant.

Re-invested Matching Total Value of shares shares plan shares matching

Plan released released held at Share price shares shares as at during during the 27 February Vesting on date of on date of

1 March 2009 period1 period 2010 date exercise exercise

Terry Duddy

1,598,850 799,425 799,426 – 17/10/09 302.3p £2,416,870

399,713 – – 399,713 17/10/10 – –

399,712 – – 399,712 17/10/11 – –

Richard Ashton

511,228 255,614 255,614 – 17/10/09 302.3p £772,787

127,807 – – 127,807 17/10/10 – –

127,807 – – 127,807 17/10/11 – –

1. Dividend equivalent payments were made on matching and re-invested shares released. Terry Duddy received £645,329 and Richard Ashton £206,343.


GOVERNANCE

Pensions

The table set out below provides the disclosure of directors’ pension entitlements.

Additional pension

Accrued Accrued Changes earned to Transfer pension at pension at Transfer Transfer in transfer 27 February value of

27 February 1 March value at value at values 2010 the increase 2010 2009 27 February 1 March (less director’s (net of infl ation (less director’s

per annum per annum 2010 2009 contributions) per annum) contributions) £000 £000 £000 £000 £000 £000 £000

Terry Duddy

122 94 2,412 1,633 779 28 553

Richard Ashton

57 46 721 471 240 12 138

By order of the Board

Penny Hughes

Chairman – remuneration committee


GOVERNANCE

Statement of directors’ responsibilities

The directors are responsible for preparing the annual report, the directors’

remuneration report and the financial statements in accordance with

applicable law and regulations.

Company law requires the directors to prepare financial statements for

each financial year. Under that law the directors have prepared the Group

and Parent Company financial statements in accordance with International

Financial Reporting Standards (IFRSs) as adopted by the European Union.

Under company law the directors must not approve the fi nancial

statements unless they are satisfied that they give a true and fair view

of the state of affairs of the Group and the Company and of the profi t or

loss of the Group for that period. In preparing these fi nancial statements,

the directors are required to:

� select suitable accounting policies and then apply them consistently;

� make judgements and accounting estimates that are reasonable and

prudent;

� state whether applicable IFRSs as adopted by the European Union

have been followed, subject to any material departures disclosed and

explained in the financial statements; and

� prepare the financial statements on the going concern basis unless it is

inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records

that are sufficient to show and explain the Company’s transactions and

disclose with reasonable accuracy at any time the financial position of

the Company and the Group and enable them to ensure that the fi nancial

statements and the Directors’ remuneration report comply with the

Companies Act 2006 and, as regards the Group fi nancial statements,

Article 4 of the IAS Regulation. They are also responsible for safeguarding

the assets of the Company and the Group and hence for taking reasonable

steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of

the Company’s website. Legislation in the United Kingdom governing the

preparation and dissemination of financial statements may differ from

legislation in other jurisdictions.

Each of the directors, whose names and functions are listed on page 34,

confirm that to the best of their knowledge:

� the Group financial statements, which have been prepared in

accordance with IFRSs as adopted by the EU, give a true and fair view

of the assets, liabilities, financial position and profit of the Group; and

� the directors’ report includes a fair review of the development and

performance of the business and the position of the Group, together

with a description of the principal risks and uncertainties that it faces.


FINANCIAL STATEMENTS

Independent auditors’ report to the members of Home Retail Group plc – Group

We have audited the Group consolidated financial statements of Home Retail Group plc for the 52 weeks ended 27 February 2010, which comprise

the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated

statement of changes in equity, the consolidated statement of cash flows, and the related notes. The financial reporting framework that has been

applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Respective responsibilities of directors and auditors

As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the Group consolidated

financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Group consolidated fi nancial

statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply

with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part

16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose

or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the fi nancial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the

financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting

policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signifi cant

accounting estimates made by the directors; and the overall presentation of the fi nancial statements.

Opinion on fi nancial statements

In our opinion the Group consolidated fi nancial statements:

� give a true and fair view of the state of the Group’s affairs as at 27 February 2010 and of its profit and cash flows for the 52 weeks then ended;

� have been properly prepared in accordance with IFRSs as adopted by the European Union; and

� have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

� the information given in the directors’ report for the financial year for which the Group consolidated financial statements are prepared is consistent

with the Group consolidated fi nancial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:

� certain disclosures of directors’ remuneration specified by law are not made; or

� we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

� the directors’ statement in relation to going concern; and

� the part of the corporate governance statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code

specified for our review.

Other matter

We have reported separately on the Parent Company financial statements of Home Retail Group plc for the 52 weeks ended 27 February 2010 and

on the information in the directors’ remuneration report that is described as having been audited.

Andrew Paynter (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 28 April 2010



Consolidated income statement For the 52 weeks ended 27 February 2010

Notes

52 weeks ended 27 February 2010

Total £m


Before exceptional Exceptional items items Total

£m £m £m

Revenue

Cost of sales

5,6 6,022.7

(4,055.6)

5,897.4

(3,873.8)

––

5,897.4

(3,873.8)

Gross profi t

Net operating expenses 7,9

1,967.1

(1,672.6)

2,023.6

(1,731.6)

–(694.0)

2,023.6

(2,425.6)

Operating profi t/(loss)

– Finance income

– Finance expense

Net fi nancing income

Share of post-tax loss of joint ventures and associates

10

17

294.5

46.1

(45.6)

0.5

(2.0)

292.0

63.7

(53.5)

10.2

(2.4)

(694.0)

––

––

(402.0)

63.7

(53.5)

10.2

(2.4)

Profit/(loss) before tax

Taxation 9,11

293.0

(83.2)

299.8

(101.2)

(694.0)

82.3

(394.2)

(18.9)

Profit/(loss) for the year attributable to equity holders

of the Company 209.8 198.6 (611.7) (413.1)

Earnings per share pence pence

– Basic

– Diluted

13

13

24.3

24.1

(47.7)

(47.7)

Non-GAAP measures Notes

52 weeks ended

27 February 2010

£m

52 weeks ended

28 February 2009

£m

Reconciliation of profit before tax (‘PBT’) to benchmark PBT

Profit /(loss) before tax 293.0 (394.2) Adjusted for: Exceptional items 9 – 694.0 Demerger incentive schemes 29 7.7 8.4 Financing fair value remeasurements 10 (2.7) 28.9 Financing impact on retirement benefi t obligations 10 0.7 (11.2) Discount unwind on non-benchmark items 10 6.7 1.8 Onerous lease provision releases (12.5) –

Benchmark PBT 292.9 327.7

Benchmark earnings per share pence pence

– Basic 13 23.4 25.9 – Diluted 13 23.1 25.6



Consolidated statement of comprehensive income For the 52 weeks ended 27 February 2010

Profit/(loss) for the year attributable to equity holders of the Company

Other comprehensive income

Net change in fair value of cash fl ow hedges

– Foreign currency forward exchange contracts

Net change in fair value of cash flow hedges transferred to inventory

– Foreign currency forward exchange contracts

Actuarial gains/(losses) in respect of defi ned benefit pension schemes

Fair value movements on available-for-sale fi nancial assets

Currency translation differences

Tax (charge)/credit in respect of items taken directly to equity

Other comprehensive income for the year, net of tax

Notes

24

11

52 weeksended

27 February 2010

£m

209.8

(26.5)

43.0

6.6

3.0

(3.6)

(5.9)

16.6

52 weeks ended

28 February 2009

£m

(413.1)

153.3

(130.1)

(135.4)

(2.3)

35.9

32.5

(46.1)

Total comprehensive income for the year attributable to equity holders of the Company 226.4 (459.2)



Consolidated balance sheet At 27 February 2010

27 February 28 February 2010 2009

Notes £m £m

ASSETS

Non-current assets

Goodwill 14 1,541.0 1,541.0

Other intangible assets 15 92.7 103.6

Property, plant and equipment 16 525.1 559.3

Investment in joint ventures and associates 17 8.2 8.4

Deferred tax assets 26 61.6 87.4

Trade and other receivables 19 4.0 3.4

Other fi nancial assets 25 13.2 9.2

Total non-current assets 2,245.8 2,312.3

Current assets

Inventories 18 935.4 930.3


Current tax assets 50.5 15.1

Other fi nancial assets 25 49.5 53.7

Current asset investments 20 50.0 75.0

Cash and cash equivalents 21 364.0 209.4

Total current assets 2,031.5 1,877.2

Total assets 4,277.3 4,189.5

LIABILITIES

Non-current liabilities

Trade and other payables 22 (62.5) (64.0)

Provisions 23 (198.3) (198.6)

Deferred tax liabilities 26 (37.8) (26.3)

Retirement benefi t obligations 24 (24.9) (46.4)

Total non-current liabilities (323.5) (335.3)

Current liabilities

Trade and other payables 22 (1,042.4) (999.2)

Provisions 23 (20.8) (51.6)

Other fi nancial liabilities 25 (1.8) (1.5)

Current tax liabilities (22.2) (43.5)

Total current liabilities (1,087.2) (1,095.8)

Total liabilities (1,410.7) (1,431.1)

Net assets 2,866.6 2,758.4

EQUITY

Share capital 27 87.7 87.7

Merger reserve 28 (348.4) (348.4)

Other reserves 28 46.6 35.4

Retained earnings 3,080.7 2,983.7

Total equity 2,866.6 2,758.4

The financial statements were approved by the Board of Directors on 28 April 2010 and were signed on its behalf by:

Terry Duddy, Richard Ashton,

Chief Executive Finance Director



Consolidated statement of changes in equity For the 52 weeks ended 27 February 2010

Attributable to equity holders of the Company

Share Merger Other Retained capital reserve reserves earnings Total

£m £m £m £m £m

Balance at 1 March 2009 87.7 (348.4) 35.4 2,983.7 2,758.4

Profit for the year – – – 209.8 209.8

Other comprehensive income – – 8.3 8.3 16.6

Total comprehensive income for the year ended 27 February 2010 – – 8.3 218.1 226.4

Transactions with owners:

Movement in share-based compensation reserve – – – 20.4 20.4

Net movement in own shares – – 2.9 (12.0) (9.1)

Equity dividends paid during the year – – – (126.3) (126.3)

Other distributions – – – (3.2) (3.2)

Total transactions with owners – – 2.9 (121.1) (118.2)

Balance at 27 February 2010 87.7 (348.4) 46.6 3,080.7 2,866.6


Share Merger Other Retained capital reserve reserves earnings Total

£m £m £m £m £m

Balance at 2 March 2008 87.7 (348.4) 3.9 3,602.0 3,345.2

Loss for the year – – – (413.1) (413.1)

Other comprehensive income – – 52.6 (98.7) (46.1)

Total comprehensive income for the year ended 28 February 2009 – – 52.6 (511.8) (459.2)


Movement in share-based compensation reserve – – – 21.3 21.3

Net movement in own shares – – (21.1) (0.4) (21.5)

Equity dividends paid during the year – – – (127.2) (127.2)

Other distributions – – – (0.2) (0.2)

Total transactions with owners – – (21.1) (106.5) (127.6)

Balance at 28 February 2009 87.7 (348.4) 35.4 2,983.7 2,758.4



Consolidated statement of cash fl ows For the 52 weeks ended 27 February 2010

Cash flows from operating activities

Cash generated from operations

Tax paid

Net cash inflow from operating activities

Notes

33

52 weeksended

27 February 2010

£m

461.0

(107.3)

353.7

52 weeks ended

28 February 2009

£m

468.4

(74.7)

393.7

Cash flows from investing activities

Purchase of property, plant and equipment (73.7) (110.9)

Proceeds from the disposal of property, plant and equipment 1.9 2.6

Purchase of intangible assets (17.5) (44.7)

Loan to joint venture (5.1) (2.0)

Purchase of investments (51.6) (75.2)

Disposal of investment 75.0 –

Interest received 7.2 16.6

Net cash used in investing activities (63.8) (213.6)

Cash flows from fi nancing activities

Purchase of shares for Employee Share Trust

Proceeds from sale of own shares

Dividends paid 12

(9.4)

0.3

(126.3)

(21.6)

0.1

(127.2)

Net cash used in fi nancing activities (135.4) (148.7)

Net increase in cash and cash equivalents 154.5 31.4

Movement in cash and cash equivalents

Cash and cash equivalents at the beginning of the year

Effect of foreign exchange rate changes

Net increase in cash and cash equivalents

21 209.4

0.1

154.5

174.0

4.0

31.4

Cash and cash equivalents at the end of the year 21 364.0 209.4



Analysis of net cash/(debt) At 27 February 2010


Non-GAAP measures Notes £m £m

Financing net cash:

Cash and cash equivalents 21 364.0 209.4 Current asset investments 20 50.0 75.0

Total financing net cash 414.0 284.4

Operating net debt:

Off balance sheet operating leases (3,148.1) (3,304.3)

Total operating net debt (3,148.1) (3,304.3)

Total net debt (2,734.1) (3,019.9)

Adjusted for: Off balance sheet operating leases 3,148.1 3,304.3 Current asset investments 20 (50.0) (75.0)

Total cash and cash equivalents reflected in balance sheet 364.0 209.4

The Group uses the term total net debt which highlights the Group’s aggregate net indebtedness to banks and other financial institutions together with

debt-like liabilities, notably operating leases. The capitalised value of these leases is £3,148.1m (2009: £3,304.3m), based upon discounting the current

rentals at the estimated current long-term cost of borrowing of 4.1% (2009: 4.1%).

The current asset investment comprises a term cash deposit invested for a period of six months (2009: nine months) which matures after the balance

sheet date on 10 May 2010 (2009: 15 April 2009). The analysis of net cash/(debt) forms part of the notes to the fi nancial statements.



Notes to the fi nancial statements For the 52 weeks ended 27 February 2010

1. GENERAL INFORMATION

Home Retail Group plc (‘the Company’), which is the ultimate parent company of Home Retail Group (‘the Group’), is a public limited company

incorporated and domiciled in the United Kingdom under the Companies Act 2006 and listed on the London Stock Exchange. The Group is a home

and general merchandise retailer. These consolidated financial statements were authorised for issue by the Board of Directors on 28 April 2010.

Statement of compliance

The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’)

and International Financial Reporting Interpretations Committee interpretations (‘IFRICs’) as adopted by the European Union. They also comply with

those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.

2. BASIS OF PREPARATION

The Group consolidated financial statements are presented in sterling, rounded to the nearest hundred thousand. They are prepared under the historic

cost basis modified for the revaluation of certain financial instruments, share-based payments and post-employment benefits. The principal accounting

policies applied in the preparation of these consolidated financial statements are set out in note 3. Unless otherwise stated, these policies have been

consistently applied to all the periods presented.

Basis of consolidation

The Group financial statements consist of the financial statements of the ultimate parent company (Home Retail Group plc), entities controlled by the

Company (its subsidiaries) and the Group’s share of its interests in joint ventures and associates. The accounting policies of subsidiaries are consistent

with the policies adopted by the Group for the purposes of the Group’s consolidation.

Subsidiaries A subsidiary is an entity whose operating and financing policies are controlled by the Group. Subsidiaries are consolidated from the date on which

control was transferred to the Group. Subsidiaries cease to be consolidated from the date that the Group no longer has control. Intercompany

transactions, balances and unrealised gains on transactions between Home Retail Group companies have been eliminated on consolidation.

Joint ventures and associates Joint ventures are entities in which the Group holds an interest on a long-term basis and which are jointly controlled by the Group and one or more

other interested parties under a contractual agreement. Associates are entities over which the Group has signifi cant influence but not control.

The equity method is used to account for investments in joint ventures and associates and investments are initially recognised at cost.

The Group’s share of net assets of its joint ventures and associates are included on the Group balance sheet. The Group’s share of its joint ventures and

associates’ post-acquisition profits or losses are recognised in its income statement. The cumulative post-acquisition movements are adjusted against

the carrying value of the investment. The carrying amount of an investment in a joint venture or associate is tested for impairment by comparing its

recoverable amount to its carrying amount whenever there is an indication that the investment may be impaired.

Business combinations

Under the requirements of IFRS 3, all business combinations are accounted for using the purchase method. The cost of business acquisitions is the

aggregate of fair values, at the date of exchange, of assets given, liabilities incurred or assumed, equity instruments issued by the acquirer and any

costs directly attributable to the business combination. The cost of a business combination is allocated at the acquisition date by recognising the

acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at that date. The acquisition

date is the date on which the acquirer effectively obtains control of the acquiree. Intangible assets are recognised if they meet the definition of an

intangible asset contained in IAS 38 and its fair value can be measured reliably. The excess of the cost of acquisition over the fair value of the Group’s

share of the identifiable net assets acquired is recognised as goodwill.

Changes in accounting standards

The Group has adopted applicable new standards and amendments to existing standards which are effective for the first time in the current

year as follows:

� IFRS 8 ‘Operating Segments’ replaces IAS 14 ‘Segment Reporting’ and requires segmental information reported to be based on that which the

Group Board and Operating Board use internally for the purposes of evaluating the performance of the Group’s businesses and making decisions

about resource allocation between operating segments. The Group adopted IFRS 8 with effect from 1 March 2009. The adoption of IFRS 8 has not

resulted in a change to the Group’s reportable segments.



Notes to the financial statements continued For the 52 weeks ended 27 February 2010

� IAS 1 (revised) ‘Presentation of Financial Statements’ prohibits the presentation of items of income and expense in the statement of changes in

equity, requiring ‘non-owner changes in equity’ to be presented separately from ‘owner changes in equity’. Entities can choose whether to present

a single performance statement (being a statement of comprehensive income) or two statements (being an income statement and a statement of

comprehensive income). The Group has elected to present two statements: an income statement and a statement of comprehensive income.

� The amendment to IFRS 7 ‘Reclassification of Financial Instruments’ has enhanced the disclosure requirements about fair value measurements and

reinforced existing principles for disclosure about the liquidity risk associated with financial instruments. The Group adopted the amendments to

IFRS 7 with effect from 1 March 2009.

The vesting conditions and cancellations amendment to IFRS 2 ‘Share-Based Payment’ would normally have been effective for the first time for

the current year, however it was early-adopted by the Group during the 52 weeks to 28 February 2009.

The Group has also adopted IFRIC 13 ‘Customer Loyalty Programmes’ with effect from 1 March 2009, but this has had no material impact on the

results or financial position of the Group.

Other new standards, amendments and interpretations are also effective for the first time for the current year, but have had no material impact

on the results or financial position of the Group.

At the balance sheet date a number of amendments to existing standards were in issue but not yet effective:

� Amendment to IAS 27 –‘Consolidated and Separate Financial Statements’;

� Amendment to IAS 39 – ‘Eligible Hedged Items’;

� Amendment to IFRS 2 – ‘Group Cash-settled Share-Based Payment’; and

� IFRS 3 (revised) – ‘Business Combinations’.

The Group has not early-adopted any of these amendments to existing standards. Their impact will be fully considered in due course. There are no

other new standards or IFRICs not yet effective which are expected to have a material impact.

Critical accounting estimates and assumptions

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of revenues,

expenses, assets and liabilities and the disclosure of contingent liabilities. The resulting accounting estimates, which are based on management’s

best judgement at the date of the financial statements, will, by definition, seldom equal the related actual results. The estimates and underlying

assumptions are reviewed on an ongoing basis, with revisions recognised in the period in which the estimates are revised and future periods where

appropriate. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and

liabilities within the next financial year are discussed below:

Taxes The Group is subject to taxes in a number of jurisdictions. Significant judgement is required in determining the provision for income taxes as there are

many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises

liabilities based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that

were initially recorded, such differences will impact the results for the year and the respective income tax and deferred tax provisions in the year in

which such determination is made.

Pension benefi ts The present value of the defi ned benefit obligations depends on a number of factors that are determined on an actuarial basis using a number of

assumptions. The assumptions used in determining the defi ned benefit obligations and net pension costs include the expected long-term rate of return

on the relevant scheme assets and the discount rate. Any changes in these assumptions may impact the amounts disclosed in the Group’s balance

sheet and income statement.

The expected return on scheme assets is calculated by reference to the scheme investments at the year-end and is a weighted average of the expected

returns on each main asset type (based on market yields available on these asset types at the year-end).

The Group determines the appropriate discount rate at the end of each year. This is the interest rate used to determine the present value of estimated

future cash outflows expected to be required to settle the defi ned benefit obligations. In determining the appropriate discount rate, the Group

considers the market yields of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have

terms to maturity consistent with the estimated average term of the related pension liability. Other key assumptions for defi ned benefi t obligations

and pension costs are based in part on market conditions at the relevant year-ends and additional information is disclosed in note 24.




2. BASIS OF PREPARATION CONTINUED Goodwill Goodwill is allocated to cash-generating units (CGUs) at the level of each business segment. The Group is required to assess whether goodwill

has suffered any impairment loss on an annual basis, based on the recoverable amount, being the higher of the CGU’s fair value less costs to sell and

its value-in-use. The value-in-use calculations require the use of estimates in relation to future cash flows and suitable discount rates as disclosed in

note 14. Actual outcomes could vary from these estimates.

Impairment of assets Assets are subject to impairment reviews whenever changes in events or circumstances indicate that an impairment may have occurred. Assets are

written down to the higher of fair value less costs to sell and value-in-use. Value-in-use is calculated by discounting the expected cash flows from the

asset at an appropriate discount rate for the risks associated with that asset. This includes estimates of both the expected cash flows and an appropriate

discount rate which use management’s assumptions and estimates of the future performance of the asset. Differences between expectations and the

actual cash flows will result in differences in the level of impairment required.

A previously recognised impairment loss is reversed if there has been a significant change in the underlying assumptions used to determine the

recoverable amount, however not to an amount higher than the carrying amount that would have been determined, net of amortisation or

depreciation, if no impairment loss had been recognised in prior years.

Provisions Provisions have been estimated for onerous leases, self insurance and other liabilities. These provisions represent the best estimate of the liability at the

balance sheet date, the actual liability being dependent on future events such as trading conditions at a particular store or the incidence of insurance

claims against the Group. Expectations will be revised each period until the actual liability arises, with any difference accounted for in the period in

which the revision is made.

Inventory provisions Inventory is carried at the lower of cost and net realisable value which requires the estimation of the eventual sales price of goods to customers in the

future. Any difference between the expected and the actual sales price achieved will be accounted for in the period in which the sale is made.

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services to external customers, net of value

added tax, rebates, discounts and returns. Revenue is recognised as follows:

Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be

measured reliably. Revenue on goods to be delivered is recognised when the customer receives delivery of the goods. The Group operates a variety of

sales promotion schemes that give rise to goods being sold at a discount to the standard retail price. Revenue is adjusted to show sales net of all related

discounts. Commissions receivable on the sale of services for which the Group acts as agent are included within revenue. A provision for estimated

returns is made, representing the profit on goods sold during the year which will be returned and refunded after the year-end.

Interest income Interest income on customer store card accounts and loans is recognised as revenue using the effective interest method.

Foreign currency translation

Functional and presentation currency The consolidated financial information is presented in sterling, which is the Company’s functional and the Group’s presentation currency. Items

included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which

the entity operates (the functional currency).

Transactions and balances Transactions in foreign currencies are recorded at the exchange rate prevailing on the date of the transaction. At each balance sheet date, monetary

assets and liabilities denominated in foreign currencies are retranslated at the exchange rate prevailing at the balance sheet date. Translation differences

on monetary items are taken to the income statement with the exception of differences on transactions that are subject to effective cash fl ow hedges.

Translation differences on non-monetary items are reported as part of the fair value gain or loss and are included in either equity or the income

statement as appropriate.




Group companies The results and financial position of overseas Home Retail Group entities are translated into sterling as follows:

� assets and liabilities are translated at the closing rate at the date of that balance sheet;

� income and expenses are translated at the average exchange rate for the period; and

� all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to equity. Tax charges and

credits attributable to those exchange differences are taken directly to equity. Goodwill and fair value adjustments arising on the acquisition of

a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing rate.

Goodwill

Goodwill is the excess of the fair value of the consideration payable for an acquisition over the fair value of the Group’s share of identifi able net

assets of a subsidiary, associate or joint venture acquired at the date of acquisition. Fair values are attributed to the identifiable assets, liabilities and

contingent liabilities that existed at the date of acquisition, reflecting their condition at that date. Adjustments are made where necessary to bring the

accounting policies of acquired businesses into alignment with those of the Group. Goodwill on acquisitions of associates and joint ventures is included

in the carrying amount of the investment. Goodwill is stated at cost less any provision for impairment. Goodwill is not amortised and is tested at least

annually for impairment. An impairment charge is recognised where the carrying value of goodwill exceeds its recoverable amount, being the higher

of its fair value less costs to sell and its value-in-use. Value-in-use calculations are performed using cash flow projections discounted at a rate taking

account of the specific risks inherent within the Group’s retail businesses. Gains and losses on the disposal of an entity include the carrying amount

of goodwill relating to the entity sold, allocated where necessary on the basis of relative fair value.

Other intangible assets

Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill, if those assets are separable and their fair

value can be measured reliably. Intangible assets acquired separately from the acquisition of a business are capitalised at cost. Certain costs incurred

in the developmental phase of an internal project are capitalised as intangible assets provided that a number of criteria are satisfied. These include the

technical feasibility of completing the asset so that it is available for use or sale, the availability of adequate resources to complete the development

and how the asset will generate probable future economic benefi t.

The cost of other intangible assets with finite useful economic lives is amortised over that period. The carrying values of intangible assets are reviewed

for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. If impaired, they are written down

to the higher of fair value less costs to sell and value-in-use.

Brands Acquired brands have a finite useful life and are initially recognised at fair value at the date of acquisition and subsequently held at cost less

accumulated amortisation. Amortisation is calculated to spread the cost of the brands over their estimated useful lives of 10 years on a straight-line

basis. This amortisation method reflects the pattern in which the asset’s future economic benefits are expected to be consumed.

Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Computer

software licences are held at cost and are amortised on a straight-line basis over three to five years. Costs that are directly associated with the

production of identifiable and unique software products controlled by the Group, and that will generate economic benefits beyond one year, are

recognised as intangible assets. Computer software development costs recognised as assets are amortised on a straight-line basis over 3 to 10 years.

Costs associated with maintaining computer software programs are recognised as an expense as incurred.

The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each balance sheet date.




3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES CONTINUED Property, plant and equipment

Property, plant and equipment are held at cost being the purchase price and other costs directly attributable to bringing the asset into use less

accumulated depreciation and any impairment in value. An impairment charge is recognised where the carrying value of the asset exceeds its

recoverable amount, being the higher of the asset’s fair value less costs to sell and its value-in-use. Value-in-use calculations are performed using

cash flow projections discounted at a rate taking account of the specific risks inherent within the Group’s businesses.

Depreciation is charged on a straight-line basis as follows:

� freehold properties are depreciated over 50 years;

� leasehold premises are depreciated over the period of the lease;

� plant, vehicles and equipment are depreciated over 2 to 10 years according to the estimated life of the asset;

� land is not depreciated; and

� assets under the course of construction are not depreciated.

The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each balance sheet date.

Receivables

Trade Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. A provision for

impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according

to the original terms of receivables. The amount of the provision is recognised in the balance sheet, with the cost of unrecoverable trade receivables

recognised in the income statement immediately.

Financial services The gross margin from the sale of a retail product on extended credit terms is recognised at the time of the sale of the retail product. Income under

instalment agreements is credited to the income statement using the effective interest method. When a receivable is impaired, the Group reduces

the carrying amount to its recoverable amount.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is generally determined on a first in, first out basis. The cost bases in use within

the Group are general retail goods valued on a standard cost or weighted average basis which approximates to actual cost. Net realisable value is the

estimated selling price in the ordinary course of business, less applicable variable selling expenses. Costs of inventory include the transfer from equity

of any gains or losses on qualifying cash flow hedges relating to their purchase.

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities

of three months or less and bank overdrafts.

Current asset investments

Current asset investments includes cash on deposit held with banks, with original maturities of greater than three months.

Trade payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. They are classifi ed

as current liabilities if payment is due within 12 months of the balance sheet date. They are recognised initially at fair value and subsequently

remeasured at amortised cost.

Borrowings and borrowing costs

All loans and borrowings are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowing.

Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value

and other borrowing costs is recognised in the income statement over the period of the borrowings using the effective interest method.

Current and non-current tax

Current tax and non-current tax are based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement

because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable

or deductible.




Deferred tax

Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. However,

if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the

transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax assets and liabilities are calculated at the tax

rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the tax rates and laws that have been

enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable

profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on

investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is

probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally

enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to taxes levied by

the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Provisions

Provisions are recognised when:

� the Group has a present legal or constructive obligation as a result of past events;

� it is more likely than not that an outflow of resources will be required to settle the obligation; and

� the amount has been reliably estimated.

Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be

required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outfl ow

with respect to any one item included in the same class of obligations may be small. If the effect of the time value of money is material, provisions are

determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and,

where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised

as an interest expense. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset when the

reimbursement is certain.

Provisions are made for onerous lease contracts for stores that have closed or where a decision to close has been announced, and for those stores

where the projected future trading revenue is insufficient to cover the lower of exit cost or value-in-use.

Provisions are also made for legal claims, restructuring costs and estimated cost of claims incurred by the Group’s captive insurance company but not

settled at the balance sheet date.

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made

under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Incentives from lessors are recognised

as a systematic reduction of the charge over the life of the lease.

Post-employment benefi ts

The liability recognised in the balance sheet in respect of defi ned benefit pension plans is the present value of the defi ned benefit obligation at the

balance sheet date less the fair value of plan assets, together with adjustments for unrecognised past service costs. The defi ned benefit obligation is

calculated annually by independent actuaries using the projected-unit credit method. The present value of the defi ned benefit obligation is determined

by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which

the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the consolidated statement

of comprehensive income. Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the

employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line

basis over the vesting period.

For defined contribution pension plans the Group and employees pay contributions into an independently administered fund. The cost of providing

these benefits, recognised in the income statement, comprises the amount of contributions payable to the schemes in respect of the year.




3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES CONTINUED Catalogue costs

Costs incurred during the production of the Group’s catalogues are deferred on the balance sheet net of any associated advertising revenue and

marketing support until the catalogue is made available to the Group, at which point the net deferred cost is charged to the income statement.

Dividends

Dividends proposed by the Board of Directors and unpaid at the year-end are not recognised in the financial statements until they have been approved

by the shareholders at the Annual General Meeting. Interim dividends are recognised in the financial statements when they are paid. Final dividends

are recognised in the financial statements when they are approved by the shareholders.

Insurance

Certain of the Group’s insurance policies are maintained by the Group’s captive insurance company, Global Guernsey Limited, which accounts for

all insurance business on an annual basis and the net consolidated result is dealt with as part of the operating costs in these fi nancial statements.

Insurance premiums in respect of insurance placed with third parties and re-insurance premiums in respect of risks not retained by the Group’s

captive insurance company are charged to the income statement in the period to which they relate.

Financial instruments

The Group classifies its financial instruments in the following categories: financial assets and liabilities at fair value through profit or loss, loans and

receivables and available-for-sale financial assets. The classification depends on the purpose for which the financial instruments were acquired.

Management determines the classification of its financial instruments at initial recognition.

Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value are so designated by management on initial recognition. Derivatives are generally designated as hedges.

Financial assets and liabilities at fair value through profit or loss are initially recorded at fair value with gains or losses arising from changes in their fair

value presented in the income statement. Items in this category are classified as current assets or current liabilities if they are either held for trading

or are expected to be realised within 12 months of the balance sheet date.

Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise

when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans and receivables are

recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. They are included in current assets,

except for those with maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans and receivables

comprise trade and other receivables, cash and cash equivalents and current asset investments in the balance sheet.

Available-for-sale fi nancial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories.

Available-for-sale financial assets are measured at fair value or, where fair value cannot be reliably measured, at cost less impairment. They are

included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Accounting for derivative financial instruments and hedging activities

Derivatives are recognised at fair value on the date a contract is entered into and are subsequently remeasured at their fair value. The method of

recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being

hedged. The Group designates derivatives as either cash flow hedges or fair value hedges.

The Group documents the relationship between hedging instruments and hedged items at the hedge inception, as well as its risk management

objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an

ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

Movements on the hedging reserve in equity are shown in the Group statement of comprehensive income.

Cash fl ow hedges The cash flow hedges are intended to hedge the foreign currency exposures of the future purchases of inventory. The effective portion of changes in

the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. Any gain or loss relating to the ineffective

portion would be recognised immediately in the income statement. The hedged cash flow is expected to occur up to 14 months into the future and

will be transferred to the consolidated income statement via inventory carrying value as applicable.




Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any

changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of

forward currency exchange contracts hedging the Group’s exposure to foreign currency liabilities is recognised in the income statement within cost

of sales.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest

method is used is amortised to the income statement over the period to maturity.

Fair value estimation

The fair value of financial instruments traded in organised active financial markets is based on quoted market prices at the close of business on the

balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for

financial liabilities is the current offer price. The fair value of financial instruments for which there is no quoted market price is determined by a variety

of methods incorporating assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes

for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for

the remaining fi nancial instruments.

The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. The nominal

value less estimated credit adjustments of trade receivables and payables are assumed to approximate to their fair values. The fair value of fi nancial

liabilities is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar

fi nancial instruments.

Share-based payments

The Group operates a number of equity-settled, share-based compensation plans. The fair value of the shares granted is recognised as an expense after

taking into account the best estimate of the number of awards expected to vest. The Group revisits the vesting estimate at each balance sheet date.

Non-market performance conditions are included in the vesting estimate. Expenses are incurred over the vesting period. Fair value is measured at the

date of grant using whichever of the Black-Scholes or Monte Carlo models, or closing market price is most appropriate to the award. Market-based

performance conditions are included in the fair value measurement on grant date and are not revisited for actual performance.

Non-GAAP fi nancial information

Exceptional items Items which are both material and non-recurring are presented as exceptional items within their relevant income statement line. The separate

reporting of exceptional items helps provide a better indication of underlying performance of the Group. Examples of items which may be recorded

as exceptional items are impairment charges, restructuring costs and the profits/losses on the disposal of businesses.

Benchmark operating profit and benchmark profit before tax (‘benchmark PBT’) The Group use the terms benchmark operating profit and benchmark PBT as measures which are not formally recognised under IFRS. Benchmark

operating profit is defined as operating profit before amortisation of acquisition intangibles, store impairment and onerous lease charges or releases,

exceptional items and costs related to demerger incentive schemes. Benchmark PBT is defined as profit before amortisation of acquisition intangibles,

store impairment and onerous lease charges or releases, exceptional items, costs related to demerger incentive schemes, financing fair value

remeasurements, financing impact on retirement benefit obligations, the discount unwind on non-benchmark items and taxation. These measures

are considered useful in that they provide investors with an alternative means to evaluate the underlying performance of the Group’s operations.

Total net debt The Group uses the term total net debt which is considered useful in that it provides the Group’s aggregate net indebtedness to banks and other

financial institutions together with debt-like liabilities, notably operating leases.




4. FINANCIAL RISK MANAGEMENT

Financial risk factors

There are a number of financial risks and uncertainties which could impact the performance of the Group: market risk (foreign exchange and interest

rate risk), credit risk and liquidity risk. The Group operates a structured risk management process which identifies, evaluates and prioritises risks

and uncertainties.

The Group’s treasury function seeks to reduce exposures to foreign exchange, interest rate and other financial risks, and to ensure suffi cient liquidity

is available to meet foreseeable needs and to invest cash assets safely and profitably. Policies and procedures are subject to review and approval by

the Board of Directors as well as subject to internal audit review.

Market risk – foreign exchange risk The Group is subject to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the euro. Foreign

exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations.

To manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, entities in the Group use

forward contracts, transacted with external banks. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities

are denominated in a currency that is not the entity’s functional currency.

Group Treasury is responsible for managing the net position in each foreign currency by using external forward currency contracts. The key objective

of the Group’s foreign exchange transaction exposure management is to minimise potential volatility in profits which could arise as a result of exchange

rate fluctuations whilst maintaining an appropriate competitive stance.

To achieve the above objectives, the Group will initially seek to hedge up to 90% of any foreign exchange transaction risks expected to arise as a result

of uncertain, but probable, foreign currency cash flows up to 14 months forward. This subsequently increases to 100% as cash flows become certain.

For segment reporting purposes, each subsidiary designates contracts as fair value hedges or cash flow hedges, as appropriate. External foreign

exchange contracts are designated as hedges of foreign exchange risk on specific assets, liabilities or future transactions on a gross basis.

The cash flow hedges are intended to hedge the foreign currency exposure of future purchases of inventory. Weekly reports are made to management

to demonstrate that this objective is being achieved. The hedged cash flows are expected to occur up to 14 months into the future and will be

transferred to the consolidated income statement or inventory carrying value as applicable. The Group has foreign operations whose net assets are

exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group’s foreign operations is not hedged.

If on 27 February 2010, the last day of the financial year, sterling had been 5 cents, or approximately 3.3% (2009: approximately 3.5%), weaker/

stronger against the US dollar, with all other variables held constant, post-tax profit would have been £5.9m lower/higher (2009: £6.7m lower/higher)

mainly as a result of foreign exchange losses/gains arising on retranslation of US dollar denominated balances in subsidiary companies with a sterling

functional currency. Equity would have been £13.6m higher/lower (2009: £11.7m higher/lower), arising mainly from the revaluation of US dollar

forward currency contracts.

If on 27 February 2010, the last day of the financial year, sterling had been 5 cents, or approximately 4.5% (2009: approximately 4.4%), weaker/

stronger against the euro, with all other variables held constant, post-tax profit would have been £3.6m lower/higher (2009: £5.0m lower/higher),

mainly as a result of foreign exchange losses/gains on retranslation of sterling denominated cash balances in subsidiary companies with a euro

functional currency. Equity would have been £2.0m higher/lower (2009: £0.4m lower/higher), arising mainly from foreign exchange gains or losses

on retranslation of euro-denominated net assets held by subsidiary companies with a euro functional currency.

Market risk – cash flow and fair value interest rate risk Whilst the Group’s Financial Services business has gross instalment receivable balances on fixed interest rates and floating rates, the Group’s income

and operating cash flows are still considered to be substantially independent of changes in market interest rates.

The Group currently holds a net cash position and has undrawn borrowing facilities.

The Group’s interest rate risk arises from the variance in market rate when deposits are made. This risk is managed by combining overnight deposits

with term deposits. Interest rate risk also arises from any future long-term borrowings that it may incur. Borrowings issued at fixed rates expose the

Group to fair value interest rate risk. The principal objective of the Group’s interest rate risk management is to manage the trade-off between obtaining

the most beneficial effective rates of interest whilst minimising the impact of interest rate volatility on profits before tax. The aim will normally be to

manage interest rate risks by achieving a ratio of between 30% and 70% of net debt fi xed rate.




The Group had no borrowings at any point during the year.

Credit risk The Group has no significant concentrations of credit risk. It has policies in place to ensure that sales of financial services products are made to

customers with an appropriate credit history. Customers are credit scored using an external credit agency. Sales to retail customers are made

in cash, via major debit and credit cards or via in-house or third-party operated fi nancial products.

The Group’s exposure to credit risk with regard to treasury transactions is managed by dealing only with major banks and fi nancial institutions.

Dealing activity is closely controlled and counterparty positions are monitored on a regular basis.

Foreign exchange counterparty limits are set for each organisation on a scale based on credit rating and maturity period.

Group policy is that cash is only deposited with major banks and financial institutions that satisfy the Group’s credit requirements. These credit

requirements are assessed by reference to published credit ratings and the extent of UK Government investment, and are applied in combination to

determine both the maximum amount and the maximum duration of cash deposits. A minimum credit rating of at least AA- (Standard & Poor’s) or

Aa3 (Moody’s) is required, unless the UK Government has a significant investment, in which case a minimum credit rating of at least A+ (Standard

& Poor’s) or A1 (Moody’s) is required.

The above policy reflects revisions which have been made during the year, to take account of developments impacting the economic climate of

banks and financial institutions. Each deposit made by the Group during the year was compliant with the policy which was effective at the date

of the deposit. Where a term deposit has been made and the counterparty ratings have subsequently reduced, each relevant position has been

reviewed and any decision to maintain a position until the normal maturity date has been approved by the Board.

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings as follows:

Cash and term deposits and current asset investment

Cash and Current Bank and institution Bank and institution short-term asset rating at rating at cash deposits investment (a) transaction date 27 February 2010 Maturity date £m £m

AAA AAA n/a

AA AA 10 May 2010

AA AA 28 April 2010

A+ A+ 3 March 2010

A+ A 22 March 2010

A+ A+ 26 April 2010

164.0 –

– 50.0

50.0 –

50.0 –

50.0 –

50.0 –

364.0 50.0

(a) The current asset investment comprises a term cash deposit invested for a period of six months.

Bank and institution Bank and institution rating at rating at transaction date 28 February 2009 Maturity date

AAA AAA n/a

AA AA 7 April 2009

AA A+ 15 April 2009

A+ A 7 April 2009

Cash and Current short-term asset

cash deposits investment (b) £m £m

134.4 –

25.0 –

– 75.0

50.0 –

209.4 75.0

(b) The current asset investment comprised a term cash deposit invested for a period of nine months.




4. FINANCIAL RISK MANAGEMENT CONTINUED Marked to market forward foreign exchange contracts

2010 2009 Bank and institution rating at year end £m £m

AA 12.5 6.7

AA- 8.3 14.1

A+ 20.5 22.9

A 2.4 8.4

A- 4.0 –

47.7 52.1

Of the £47.7m (2009: £52.1m) marked to market forward foreign exchange contracts held at the year-end, 39% (2009: 84%) will have matured within

three months of the balance sheet date.

Liquidity risk Home Retail Group manages its cash and committed borrowing facilities to maintain liquidity and funding flexibility. Liquidity is achieved through

arranging funding ahead of requirements and maintaining sufficient undrawn committed facilities to meet short-term needs. At 27 February 2010,

the Group had an undrawn committed borrowing facility available of £700m, £685m of which does not expire until 2013. This facility includes a

covenant related to adjusted benchmark earnings before interest, tax, depreciation, amortisation and rent. It is in place to enable the Group to fi nance

its working capital requirements and for general corporate purposes, should the need arise. The Group has not drawn down on the facility and has

been in compliance with the requirements of the covenant throughout the year.

The table below analyses the Group’s financial liabilities and derivative financial liabilities into relevant maturity groupings based on the remaining

period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash fl ows. Balances

due within 12 months equal their carrying balances, as the impact of discounting is not signifi cant.

At 27 February 2010

Less than 3 3-6 6-9 9-12

months months months months Total £m £m £m £m £m

Trade and other payables (599.2) – – – (599.2)

At 28 February 2009

Less than 3

months £m

3-6 months

£m

6-9 months

£m

9-12 months

£m Total

£m

Trade and other payables (574.1) – – – (574.1)

When a forward foreign exchange contract matures, this requires an outflow of the currency being sold and an inflow of the currency being bought.

The table below analyses the Group’s outflow and inflow from derivative financial instruments into relevant maturity groupings based on the

remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted

cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not signifi cant.

At 27 February 2010

Less than 3 3-6 6-9 9-12

months months months months Total £m £m £m £m £m

Forward foreign exchange contracts

– outfl ow (318.0) (256.0) (196.0) (99.6) (869.6)

– infl ow 336.6 271.9 204.9 103.9 917.3




Less than 3

months £m

3-6 months

£m

At 28 February 2009

6-9 months

£m

9-12 months

£m Total

£m


– outfl ow

– inflow

(324.4)

368.2

(232.1)

239.7

(92.6)

93.0

(22.8)

23.1

(671.9)

724.0

Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for

shareholders and benefits for other stakeholders and to maintain an optimal and efficient capital structure. In order to maintain or adjust the capital

structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares. The Group fi nances

its operations through a combination of retained profits, property leases and borrowing facilities where necessary. The Group has signifi cant liabilities

through its obligations to pay rents under property leases. The Group, in common with the credit rating agencies, treats its lease liabilities as debt

when evaluating financial risk and investment returns. The Group’s net debt varies significantly throughout the year due to trading seasonality, and

the position as at 27 February 2010 is set out in the analysis of net cash/(debt) on page 59.

Foreign currency

The principal exchange rates used were as follows: Average Closing

52 weeks 52 weeks ended ended

27 February 28 February 27 February 28 February 2010 2009 2010 2009

US dollar 1.59 1.77 1.52 1.43

Euro 1.13 1.22 1.12 1.13

Fair value estimation

Effective 1 March 2009, the Group adopted amendments to IFRS 7 for financial instruments that are measured in the balance sheet at fair value.

This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices)

or indirectly (that is, derived from prices); and

Level 3 – inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).

The fair value of financial instruments traded in active markets is based on quoted market prices at the close of business on the balance sheet date.

A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service,

or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market

price used for financial assets held by the Group is the current bid price. These instruments are included in level 1 and comprise investments in quoted

managed indexed funds. As at 27 February 2010, these instruments, which are classified as available-for-sale financial assets, had a carrying value of

£12.5m (2009: £8.5m).

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using

valuation techniques. The valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity

specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. As at 27 February 2010,

these derivative instruments used for hedging purposes had a net carrying value of £47.7m (2009: £52.1m).

If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. The Group has no level 3

instruments to disclose.

Specific valuation techniques used to value financial instruments include:

� Quoted market prices; and

� The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date.




5. SEGMENTAL INFORMATION

The Board of Directors and Operating Board review the Group’s internal reporting in order to assess performance and allocate resources.

Management has determined the operating segments based on these reports, which reflect the distinct retail brands and different risks associated

with the different businesses. The Group is organised into three main business segments: Argos, Homebase and Financial Services together with

Central Activities. The Board of Directors and Operating Board assess the performance of the operating segments based on a combination of revenue

and benchmark operating profit. Benchmark operating profit is defined within note 3.

52 weeks ended 52 weeks ended 27 February 28 February 2010 2009 £m £m

Revenue

Argos 4,346.8 4,281.9

Homebase 1,571.9 1,513.2


Central Activities – –

Total segment revenue 6,022.7 5,897.4

Benchmark operating profi t/(loss)

Argos 266.2 303.6

Homebase 41.2 14.9



Total segment benchmark operating profi t 289.7 300.4

Benchmark interest 5.2 29.7

Share of post-tax results of joint ventures and associates (2.0) (2.4)

Benchmark profit before tax 292.9 327.7

Exceptional items – (694.0)

Demerger incentive schemes (7.7) (8.4)






Taxation (83.2) (18.9)

Profit/(loss) for the year attributable to equity holders of the Company 209.8 (413.1)

The result for Financial Services is after deducting funding costs of £3.5m (2009: £13.6m) (note 10).




2010 2009 £m £m

Segment assets

Argos 2,364.1 2,391.9

Homebase 896.4 914.7


Central Activities 37.1 40.2

Total segment assets 3,751.2 3,802.6

Tax assets 112.1 102.5

Current asset investments 50.0 75.0

Cash and cash equivalents 364.0 209.4

Total assets per balance sheet 4,277.3 4,189.5

Segment assets include goodwill and other intangible assets, property, plant and equipment, investment in joint ventures and associates,

inventories, trade and other receivables and other financial assets. Tax assets, current asset investments and cash and cash equivalents are

not allocated to segments.

Central Activities’ segment assets include £8.2m (2009: £8.4m) in respect of joint ventures and associates.

2010 2009 £m £m

Segment liabilities

Argos (695.4) (647.1)

Homebase (523.9) (547.8)

Financial Services (54.6) (61.4)


Total segment liabilities (1,325.8) (1,314.9)

Tax liabilities (60.0) (69.8)

Retirement benefi t obligations (24.9) (46.4)

Total liabilities per balance sheet (1,410.7) (1,431.1)

Segment liabilities include trade and other payables, provisions and other financial liabilities. Tax liabilities and retirement benefit obligations are not

allocated to segments.


Financial Central Argos Homebase Services Activities Total

Other segment items Notes £m £m £m £m £m

Depreciation of property, plant and equipment 16 (65.0) (34.2) – (2.5) (101.7)

Amortisation of intangible assets 15 (25.7) (2.1) (0.6) – (28.4)

Impairment of fi xed assets 16 – – – – –

Impairment of goodwill 14 – – – – –

Share-based payment expense 29 (6.4) (3.6) (0.5) (9.9) (20.4)

Additions to property, plant and equipment 16 39.1 30.9 – 3.7 73.7

Additions to intangible assets 15 16.2 1.3 – – 17.5

The share-based payment expense within Central Activities includes £6.3m (2009: £8.6m) relating to demerger incentive schemes for all Group

employees which, together with national insurance costs of £1.4m (2009: £0.2m credit), total £7.7m (2009: £8.4m), and are excluded from benchmark

profit before tax.




5. SEGMENTAL INFORMATION CONTINUED 52 weeks ended 28 February 2009

Financial Central

Other segment items Notes Argos

£m Homebase

£m Services

£m Activities

£m Total

£m

Depreciation of property, plant and equipment 16 (79.8) (52.5) – (2.4) (134.7)

Amortisation of intangible assets 15 (22.6) (1.5) (0.6) – (24.7)

Impairment of fi xed assets 16 – (152.2) – – (152.2)

Impairment of goodwill 14 – (381.7) – – (381.7)

Share-based payment expense 29 (5.1) (2.8) (0.3) (13.1) (21.3)

Additions to property, plant and equipment 16 58.6 48.4 – 3.9 110.9

Additions to intangible assets 15 39.2 1.6 3.9 – 44.7

Geographical segments

The Group trades predominantly in the UK and the Republic of Ireland and consequently the majority of revenues, capital expenditure and segment

net assets arise there.

6. ANALYSIS OF REVENUE BY CATEGORY 52 weeks 52 weeks

ended ended 27 February 28 February

2010 2009 £m £m

Sale of goods

Provision of services by Financial Services

5,918.7

104.0

5,795.1

102.3

Total 6,022.7 5,897.4

7. NET OPERATING EXPENSES

Expenses by function


Total£m


Before Exceptional exceptional items items (note 9) Total

£m £m £m

Net operating expenses comprise:

Selling costs

Administrative costs

(1,396.8)

(275.8)

(1,444.4)

(287.2)

(301.7)

(392.3)

(1,746.1)

(679.5)

Total net operating expenses (1,672.6) (1,731.6) (694.0) (2,425.6)



Notes £m £m

Profit/(loss) before tax is stated after (charging)/crediting:

Operating lease rental expense

– Plant and equipment (9.1) (9.8)

– Property (370.0) (363.0)

Cost of inventories recognised as an expense in cost of sales (3,922.6) (3,742.8)

Write down of inventories (133.0) (131.0)

(Loss)/profit on sale of property, plant and equipment (2.5) 0.2

Depreciation of property, plant and equipment 16 (101.7) (134.7)

Amortisation of intangible assets 15 (28.4) (24.7)

Employee benefi t costs 8 (778.2) (776.9)






Auditors’ remuneration £m £m

Audit services:

Fees payable for the audit of the Company and the consolidated fi nancial statements (0.7) (0.8)

Other services:

Fees payable to the Company’s auditors and its associates for other services

– the audit of the Company’s subsidiaries pursuant to legislation (0.1) (0.1)

– services relating to taxation (0.1) (0.1)

– all other services (0.1) (0.2)

Total fees payable to PricewaterhouseCoopers LLP (1.0) (1.2)

The above disclosure is presented in accordance with SI 2005/2417, where audit fees in respect of the audit of the Company’s subsidiaries pursuant

to legislation are included within other services.

8. EMPLOYEE BENEFIT COSTS AND EMPLOYEE NUMBERS

Employee costs Notes

52 weeksended

27 February 2010

£m

52 weeks ended

28 February 2009

£m

Wages and salaries

Social security costs



24

29

(693.3)

(42.0)

(22.5)

(20.4)

(686.7)

(42.3)

(26.6)

(21.3)

(778.2) (776.9)

Average number of employees


Number of Full time employees equivalent


Number of Full time employees equivalent

Argos

Homebase

Financial Services

Central Activities

32,886

18,842

535

45

17,124

10,259

462

43

33,199

19,951

553

42

17,811

11,455

487

41

52,308 27,888 53,745 29,794

Key management compensation

52 weeksended

27 February 2010

£m

52 weeks ended

28 February 2009

£m

Short-term employee benefi ts



(6.0)

(1.3)

(4.8)

(2.8)

(1.4)

(3.7)

(12.1) (7.9)

Key management consists of the members of the Home Retail Group plc Board and the managing directors of both retail businesses.




9. EXCEPTIONAL ITEMS 52 weeks

ended27 February

2010£m

52 weeks ended

28 February 2009

£m

Goodwill impairment (a) – (381.7)

Store impairment charges (b) – (152.2)

Onerous lease provisions (c) – (117.3)

Costs relating to the post-acquisition integration of the Focus DIY stores (d) – (7.6)

Reorganisation and restructuring charges (e) – (35.2)

Exceptional items in operating profi t/(loss) – (694.0)

Tax on exceptional items in profit/(loss) before tax – 58.8

Exceptional corporation tax credit (f) – 27.4

Exceptional deferred tax charge (g) – (3.9)

Exceptional tax – 82.3

Exceptional loss for the year – (611.7)

(a) In the prior year management interpreted the economic environment and resulting retail downturn as an external indicator of impairment. As a result, and as required by IAS 36, the assets of the business were subject to an impairment review. Details of the goodwill value-in-use calculations can be found in note 14. For the 52 weeks to 28 February 2009, this resulted in an impairment charge in respect of the Homebase goodwill of £381.7m.

(b) As a result of the impairment review detailed above, certain assets were written down to their recoverable amount, being the higher of fair value less costs to sell and value-in-use. Value-in-use is calculated by discounting the expected cash flows from the asset at an appropriate discount rate for the risks associated with that asset. The growth rates and discount rates used were consistent with those used in the goodwill calculations, as disclosed in note 14. For the 52 weeks to 28 February 2009, this resulted in a net impairment charge in respect of the Homebase store portfolio of £152.2m.

(c) The onerous lease provisions cover potential liabilities for onerous lease contracts for stores that have either closed, or where projected future trading income is insufficient to cover the lower of exit cost or value-in-use. Where the value-in-use calculation is lower the provisions are based on the present value of expected future cash flows, discounted at a pre-tax rate of 5.8%, relating to rents, rates and other property costs to the end of the lease terms net of expected sublet income. For the 52 weeks to 28 February 2009, this resulted in an onerous lease charge in respect of the Homebase store portfolio of £117.3m.

(d) Represents costs relating to the post-acquisition integration of certain of the Focus DIY stores acquired in the 52 weeks to 1 March 2008.

(e) Represents costs relating to the reorganisation and restructuring programme during the 52 weeks to 28 February 2009. Actions taken included a streamlining of head office functions across all parts of the Group, restructuring of store-based staff and a consolidation of home delivery warehouses.

(f) Represents the recognition of a corporation tax credit arising from the revision and agreement of prior year tax computations and the completion of a periodic review of the tax risks associated with the Group’s overseas trading operations.

(g) The prior year deferred tax charge of £3.9m represented the reversal of a deferred tax asset created on IFRS transition.




10. NET FINANCING INCOME/(EXPENSE) 52 weeks

ended27 February

2010£m

52 weeks ended

28 February 2009

£m

Finance income:

Bank deposits and other interest 4.4 18.6

Expected return on retirement benefi t assets 34.6 45.1

Financing fair value remeasurements – net exchange gains 7.1 –

Total fi nance income 46.1 63.7

Finance expense:

Unwinding of discounts (a) (9.4) (4.3)

Financing fair value remeasurements – net exchange losses (4.4) (28.9)

Interest expense on retirement benefi t liabilities (35.3) (33.9)

Total fi nance expense (49.1) (67.1)

Less: finance expense charged to Financial Services cost of sales 3.5 13.6

Total net fi nance expense (45.6) (53.5)

Net fi nancing income 0.5 10.2

(a) Included within unwinding of discounts is a £6.7m (2009: £1.8m) charge relating to the discount unwind on exceptional onerous lease provisions.

11. TAXATION 52 weeks 52 weeks


2010 2009 Analysis of charge in year £m £m

Current tax:

UK corporation tax (78.5) (94.5)

Double tax relief 1.7 1.6

Adjustments in respect of prior years 26.9 27.7

Total current UK tax charge (49.9) (65.2)

Overseas tax (2.8) (3.1)

Total current tax charge (52.7) (68.3)

Deferred tax:

Origination and reversal of temporary differences (11.2) 53.6

Adjustments in respect of prior years (19.3) (4.2)

Total tax charge in income statement (83.2) (18.9)




11. TAXATION CONTINUED 52 weeks 52 weeks


2010 2009 Tax included in other comprehensive income £m £m

Cash fl ow hedges (4.6) (6.5)

Retirement benefi t obligations (1.8) 37.9

Share-based payments 0.5 1.1

Total tax (charge)/credit in other comprehensive income (5.9) 32.5

Factors affecting the tax charge

The effective tax rate for the year of 28.4% (2009: (4.8%)), is higher (2009: lower) than the standard rate of corporation tax in the UK of 28.0%

(2009: 28.0%). The differences are explained below:



£m £m


Profit/(loss) before tax multiplied by the standard rate of corporation tax in the UK (82.0) 110.4

Effects of:

Benchmark:

Expenses not deductible for tax purposes (10.7) (214.4)

Differences in effective tax rates on overseas earnings 1.3 0.2

Rate change impact – 0.3

Benchmark tax expense (91.4) (103.5)

Non-benchmark:

Tax credit on non-benchmark items 0.6 61.1

Non-benchmark tax credit in respect of prior years 7.6 23.5

Total tax charge in income statement (83.2) (18.9)

Factors that may affect future tax charges

In the foreseeable future, the Group’s tax charge will continue to be influenced by the profile of profits earned in the different tax jurisdictions within the UK

and the Republic of Ireland.



Exceptional tax (note 9) £m £m

Exceptional loss before tax – (694.0)

Exceptional loss before tax multiplied by the standard rate of corporation tax in the UK – 194.3

Effects of:

Expenses not deductible for tax purposes – (135.5)

Net exceptional tax credit in respect of prior years – 23.5

Exceptional tax credit – 82.3




12. DIVIDENDS 52 weeks 52 weeks


2010 2009 Amounts recognised as distributions to equity holders £m £m

Final dividend of 10.0p per share (2009: 10.0p) for the prior year (85.7) (86.8)

Interim dividend of 4.7p per share (2009: 4.7p) for the current year (40.6) (40.4)

Ordinary dividends on equity shares (126.3) (127.2)

A final dividend in respect of the year ended 27 February 2010 of 10.0p per share, amounting to a total final dividend of £86.6m, has been proposed

by the Board of Directors, and is subject to approval by the shareholders at the Annual General Meeting. This would make a total dividend for the year

of 14.7p per share, amounting to £127.2m. The proposed dividend has not been included as a liability at 27 February 2010 in accordance with IAS 10

‘Events after the Balance Sheet Date’. It will be paid on 21 July 2010 to shareholders who are on the register of members at close of business on

21 May 2010. The Home Retail Group Employee Share Trust (‘EST’) has waived its entitlement to dividends in the amount of £2.7m (2009: £1.8m).

13. BASIC AND DILUTED EARNINGS PER SHARE (‘EPS’)

Basic earnings per share is calculated by dividing the profit attributable to the equity holders of the Company by the weighted average number of

ordinary shares in issue during the year, excluding ordinary shares held in Home Retail Group’s share trusts, net of vested but unexercised options and

share awards. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion

of all potential dilutive ordinary shares.



Earnings £m £m

Profit/(loss) after tax for the fi nancial year 209.8 (413.1)

Adjusted for:

Exceptional items – 694.0

Demerger incentive schemes 7.7 8.4

Financing fair value remeasurements (2.7) 28.9

Financing impact on retirement benefi t obligations 0.7 (11.2)

Discount unwind on non-benchmark items 6.7 1.8

Onerous lease provision releases (12.5) –

Attributable taxation (0.6) (61.1)

Non-benchmark tax credit in respect of prior years (7.6) (23.5)

Benchmark profit after tax for the fi nancial year 201.5 224.2

Weighted average number of shares millions millions

Number of ordinary shares for the purpose of basic EPS 862.9 866.6

Dilutive effect of share incentive awards 9.3 10.4

Number of ordinary shares for the purpose of diluted EPS 872.2 877.0

EPS pence pence

Basic EPS 24.3 (47.7)

Diluted EPS (a) 24.1 (47.7)

Basic benchmark EPS 23.4 25.9

Diluted benchmark EPS 23.1 25.6

(a) In accordance with IAS 33, as the Group made a loss after tax for the 52 weeks ended 28 February 2009, the effect of share incentive awards is anti-dilutive and as such diluted EPS equals basic EPS.




14. GOODWILL Argos Homebase Total

£m £m £m

Cost

At 1 March 2009 and 27 February 2010 1,152.3 770.4 1,922.7

Impairment

At 1 March 2009 and 27 February 2010 – (381.7) (381.7)

Net book value at 27 February 2010 1,152.3 388.7 1,541.0

Argos £m

Homebase £m

Total £m

Cost

At 2 March 2008 and 28 February 2009 1,152.3 770.4 1,922.7

Impairment

At 2 March 2008 – – –

Charge for the year – (381.7) (381.7)

At 28 February 2009 – (381.7) (381.7)

Net book value at 28 February 2009 1,152.3 388.7 1,541.0

Goodwill is allocated to cash-generating units (CGUs) at the level of each business segment. The recoverable amount of each of the business segments

is determined as being the higher of its fair value less costs to sell and its value-in-use. These calculations use cash flow projections based on fi nancial

plans approved by management looking forward five years. Cash flows are extrapolated using a long-term growth rate beyond the fi ve-year plan

period. There are a significant number of inter-connected assumptions that underpin the value-in-use calculations, however the key assumptions,

which management believes are appropriate for both retail businesses, are:

� a long-term growth rate of 2.5% (2009: 2.5%), which has been used to extrapolate cash flows beyond the five-year plan period;

� a post-tax discount rate of 8.5% (2009: 8.5%), which equates to a pre-tax rate of approximately 11.8% (2009: 11.8%), has been estimated taking

account of the specific risks inherent within the Group’s retail businesses and has been applied to the cash fl ow projections; and

� operating profits for the current year, of £266.2m for Argos (2009: £303.6m) and £41.2m for Homebase (2009: £14.9m), have been adjusted into

the plan period, incorporating assumptions in respect of sales growth, gross margin and operating costs.

As a result of the value-in-use calculations as at 27 February 2010 no impairment charge is required against the carrying value of either the Argos or

Homebase goodwill. Management believes that no reasonably possible change in any of the key assumptions detailed above would cause the carrying

value of the Argos or Homebase business segments to exceed their recoverable amounts.




15. OTHER INTANGIBLE ASSETS Computer software Brands Total

£m £m £m

Cost

At 1 March 2009 210.5 20.6 231.1

Additions 15.6 1.9 17.5

Disposals (15.4) – (15.4)

At 27 February 2010 210.7 22.5 233.2

Amortisation

At 1 March 2009 (127.3) (0.2) (127.5)

Charge for the year (26.2) (2.2) (28.4)

Disposals 15.4 – 15.4

At 27 February 2010 (138.1) (2.4) (140.5)

Net book value at 27 February 2010 72.6 20.1 92.7

Assets in the course of construction included above at 27 February 2010 11.8 – 11.8

Computer software Brands Total

£m £m £m

Cost

At 2 March 2008 186.7 – 186.7

Additions 24.1 20.6 44.7

Disposals (0.3) – (0.3)

At 28 February 2009 210.5 20.6 231.1

Amortisation

At 2 March 2008 (103.0) – (103.0)

Charge for the year (24.5) (0.2) (24.7)

Disposals 0.2 – 0.2

At 28 February 2009 (127.3) (0.2) (127.5)

Net book value at 28 February 2009 83.2 20.4 103.6

Assets in the course of construction included above at 28 February 2009 27.8 – 27.8




16. PROPERTY, PLANT AND EQUIPMENT

Freehold properties

£m

Leasehold properties

Long Short leasehold leasehold

£m £m

Plant & equipment

£m Total

£m

Cost

At 1 March 2009 108.2 1.6 336.8 1,058.4 1,505.0

Exchange differences – – – 0.2 0.2

Additions – 0.1 10.1 63.5 73.7

Disposals – – (8.9) (198.4) (207.3)

Transfers between categories 0.3 – (0.3) – –

At 27 February 2010 108.5 1.7 337.7 923.7 1,371.6

Depreciation and impairment losses

At 1 March 2009 (18.2) (0.3) (230.2) (697.0) (945.7)

Exchange differences – – (0.9) (1.1) (2.0)

Charge for the year (1.6) (0.1) (14.2) (85.8) (101.7)

Disposals – – 8.4 194.5 202.9

At 27 February 2010 (19.8) (0.4) (236.9) (589.4) (846.5)

Net book value at 27 February 2010 88.7 1.3 100.8 334.3 525.1

Assets in the course of construction included above at 27 February 2010 – – 3.0 28.7 31.7

Leasehold properties

Freehold properties

£m

Long leasehold

£m

Short leasehold

£m

Plant & equipment

£m Total

£m

Cost

At 2 March 2008 102.3 1.7 382.4 1,158.0 1,644.4

Exchange differences – – 3.0 7.4 10.4

Additions 7.0 – 22.0 81.9 110.9

Disposals (1.1) – (70.7) (188.9) (260.7)

Transfers between categories – (0.1) 0.1 – –

At 28 February 2009 108.2 1.6 336.8 1,058.4 1,505.0

Depreciation and impairment losses

At 2 March 2008 (10.4) (0.4) (200.7) (701.1) (912.6)

Exchange differences – – (0.6) (4.0) (4.6)

Charge for the year (1.3) – (18.1) (115.3) (134.7)

Impairment losses (7.6) – (81.0) (63.6) (152.2)

Disposals 1.1 – 70.3 187.0 258.4

Transfers between categories – 0.1 (0.1) – –

At 28 February 2009 (18.2) (0.3) (230.2) (697.0) (945.7)

Net book value at 28 February 2009 90.0 1.3 106.6 361.4 559.3

Assets in the course of construction included above at 28 February 2009 – – 4.8 44.1 48.9

Store assets are subject to impairment reviews whenever changes in events or circumstances indicate that an impairment may have occurred.

Store assets are written down to the higher of fair value less costs to sell and value-in-use. The key assumptions for the value-in-use calculations

are the same as those detailed for the goodwill impairment model in note 14. Management believes that no reasonably possible change in any of

these key assumptions would cause the carrying value of store assets to exceed their recoverable amounts.




17. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES 2010 2009

£m £m

At 1 March 2009 8.4 7.7

Exchange differences – 1.1

Share of loss after tax (0.7) (0.4)

Additions 0.5 –

At 27 February 2010 8.2 8.4

The Group’s interest in joint ventures consists of a 50% holding in Home Retail Group Personal Finance Limited, a company incorporated in England,

and its interest in associates consists of a 33% shareholding in Ogalas Limited (which trades as ‘home store + more’), a company incorporated in the

Republic of Ireland.

The Group’s share of the revenue of its joint venture for the 52 weeks ended 27 February 2010 is £2.9m (2009: £2.9m) and its share of the loss after tax

is £1.8m (2009: £2.0m). At 27 February 2010, the Group’s share of the net liabilities of its joint venture amounted to £14.5m (2009: £9.3m), consisting

of assets of £17.8m (2009: £25.7m) and liabilities of £32.3m (2009: £35.0m). No liability has been recognised in the Group’s balance sheet in respect

of the joint venture, but the Group’s share of the accumulated losses has been taken initially against the carrying value of the investment, then

subsequently against the carrying value of a loan made by the Group to the joint venture, which is reported within other financial assets in note 25.

The Group’s share of the revenue of its associate for the 52 weeks ended 27 February 2010 is £7.0m (2009: £5.9m) and its share of the loss after tax is

£0.2m (2009: £0.4m). At 27 February 2010, the Group’s share of the net assets of its associate amounted to £8.2m (2009: £8.4m), consisting of assets

of £9.3m (2009: £9.5m), which includes goodwill of £4.9m (2009: £4.9m), and liabilities of £1.1m (2009: £1.1m).

18. INVENTORIES 2010 2009

£m £m

Goods for resale 935.4 930.3




19. TRADE AND OTHER RECEIVABLES Current Non-current Current Non-current

2010 2010 2009 2009 £m £m £m £m

Trade receivables:

– Instalment receivables 497.2 – 491.1 0.2

– Other trade receivables 55.4 – 59.3 –

Less: provision for impairment of receivables

552.6

(70.8)

–

–

550.4

(70.1)

0.2

(0.2)

Other receivables

Prepayments and accrued income

481.8

57.3

43.0

–

4.0

–

480.3

56.4

57.0

–

3.4

–

582.1 4.0 593.7 3.4

The carrying values of current trade and other receivables are a reasonable approximation of their fair values due to their short-term nature. Long-term

receivables have been discounted where the time value of money is material. All receivables due after more than one year are due within fi ve years

from the balance sheet date. There is no concentration of credit risk with respect to trade receivables, as the Group has a broad customer base.

The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold

any collateral as security.

As at 27 February 2010, trade receivables of £74.0m (2009: £86.0m) were impaired. The amount of the provision was £70.8m as at 27 February 2010

(2009: £70.3m). The impaired receivables mainly relate to store card holder balances on customer accounts on which indications of possible default

have been identifi ed.

Movements in the provision for impairment of trade receivables are as follows:

£m

At 1 March 2008 (61.4)

Charge for the year (42.1)

Utilised 33.2

At 28 February 2009 (70.3)

Charge for the year (53.2)

Utilised 52.7

At 27 February 2010 (70.8)

As at 27 February 2010, trade receivables of £26.4m (2009: £28.7m) were past due but not impaired. These mainly relate to store card holders and

corporate customer receivable balances. The ageing analysis of these trade receivables is as follows: 2010 2009

£m £m

Less than 3 months 23.1 26.5

3 to 6 months 2.7 1.7

6 to 9 months 0.1 0.2

9 to 12 months 0.4 0.3

More than 12 months 0.1 –

26.4 28.7

The other classes within trade and other receivables do not contain impaired assets.




20. CURRENT ASSET INVESTMENTS 2010 2009

£m £m

Term cash deposit 50.0 75.0

The current asset investment comprises a term cash deposit invested for a period of six (2009: nine) months which is due to mature after the balance

sheet date on 10 May 2010 (2009: 15 April 2009). The interest rate on this deposit is 1.3% (2009: 6.1%).

21. CASH AND CASH EQUIVALENTS 2010 2009

£m £m

Cash at bank and in hand 364.0 209.4

The effective interest rate during the year ended 27 February 2010 for cash and cash equivalents was 0.9% (2009: 4.8%). Under the terms of a

re-insurance agreement, bank balances totalling £2.9m (2009: £2.9m) are the subject of custodial agreements and may not be withdrawn without

the consent of the re-insured. The Group has provided letters of credit totalling £12.5m (2009: £12.5m) to AIG Europe (UK) Limited as part of their

re-insurance agreement. These letters are secured by cash deposits.

22. TRADE AND OTHER PAYABLES Current Non-current Current Non-current

2010 2010 2009 2009 £m £m £m £m

Trade payables (511.5) – (486.0) –

Social security costs and other taxes (34.9) – (45.0) –

Accruals and deferred income (408.3) (62.5) (380.1) (64.0)

Other payables (87.7) – (88.1) –

(1,042.4) (62.5) (999.2) (64.0)

Trade and other payables are non-interest bearing and the fair values are not considered to differ materially from the recognised book values.

Long-term payables have been discounted where the time value of money is material.




23. PROVISIONS Onerous Insurance Restructuring

leases provisions provisions Other Total £m £m £m £m £m

At 1 March 2009 (173.4) (33.1) (33.6) (10.1) (250.2)

Charged to the income statement – (2.8) – – (2.8)

Released to the income statement 12.5 – 0.8 0.6 13.9

Transfer (2.3) – (0.8) 1.1 (2.0)

Utilised during the year 8.6 3.2 19.0 0.9 31.7

Discount unwind (9.3) – (0.2) (0.2) (9.7)

At 27 February 2010 (163.9) (32.7) (14.8) (7.7) (219.1)

2010 2009 Analysed as: £m £m

Current (20.8) (51.6)

Non-current (198.3) (198.6)

(219.1) (250.2)

The onerous lease provision covers potential liabilities for onerous lease contracts for stores that have either closed, or where projected future trading

revenue is insufficient to cover the lower of exit cost or value-in-use. Where the value-in-use calculation is lower, the provision is based on the present

value of expected future cash flows relating to rents, rates and other property costs to the end of the lease terms net of expected sublet income.

The majority of this provision is expected to be utilised over the period to 2017.

Provision is made at the year-end for the estimated costs of claims incurred by the Group’s captive insurance company but not settled at the balance

sheet date, including the costs of claims that have arisen but have not yet been reported to the Group. The estimated cost of claims includes expenses

to be incurred in settling claims. The majority of this provision is expected to be utilised over the period to 2014.

A number of organisational changes were undertaken to improve the operational efficiency of the Group and drive further cost productivity. Actions

taken included a streamlining of head office functions across all parts of the Group, restructuring of store-based staff and a consolidation of home

delivery warehouses. The majority of this remaining provision is expected to be utilised within one year.

Other provisions include legal claims and other sundry provisions. The majority of this provision is expected to be utilised within one year.

24. POST-EMPLOYMENT BENEFITS

The Group operates both defi ned benefit and defined contribution schemes. A defi ned benefit scheme is a pension plan that defines an amount of

pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

A defined contribution scheme is a pension plan under which both the Group and employees pay contributions into an independently administered

fund. The cost of providing these benefits, recognised in the income statement, comprises the amount of contributions payable to the schemes

in respect of the year.

Pension arrangements for UK employees are operated principally through a defi ned benefit scheme (the Home Retail Group Pension Scheme) and

a defined contribution scheme (the Home Retail Group Stakeholder Pension Scheme). In other countries, benefits are determined in accordance

with local practice and regulations and funding is provided accordingly.

Defi ned benefi t schemes

The Home Retail Group Pension Scheme The scheme has rules which specify the benefits to be paid and are financed accordingly with assets being held in independently administered funds.

A full actuarial valuation of this scheme is carried out every three years with interim reviews in the intervening years. The latest full actuarial valuation

of the scheme was carried out as at 31 March 2009 by independent, qualified actuaries, Towers Watson, using the projected unit method and resulted

in a deficit of £102m. The next full actuarial valuation of the scheme will be carried out as at 31 March 2012.




IAS 19 valuations The valuations used for IAS 19 have been based on the most recent actuarial funding valuations and have been updated by Towers Watson to take

account of the requirements of IAS 19 in order to assess the liabilities of the schemes at 27 February 2010 and 28 February 2009.

The movements during the year in the net (obligation)/asset recognised in the balance sheet were as follows: 2010 2009

£m £m

At 1 March 2009 (46.4) 83.7

Total charge recognised in the consolidated income statement (16.4) (8.6)

Actuarial gain/(loss) recognised in the consolidated statement of comprehensive income 6.6 (135.4)

Contributions paid 31.3 13.9

At 27 February 2010 (24.9) (46.4)

During the year, the Group has paid contributions totalling £31.3m (2009: £13.9m) to the Home Retail Group defi ned benefit pension plans including

£17.3m as part of the deficit recovery plan and increased employer contribution rate agreed with the scheme trustees following the completion of the

31 March 2009 actuarial valuation. The estimated amount of contributions expected to be paid by the Group during the next financial year is £28m,

including £12m as part of the deficit recovery plan.

The amounts recognised in the consolidated balance sheet are determined as follows: 2010 2009

£m £m

Fair value of scheme assets 667.7 504.4

Present value of funded scheme liabilities (679.2) (539.8)

Deficit in the funded scheme (11.5) (35.4)

Present value of unfunded pension arrangements (13.4) (11.0)

Retirement benefit obligation recognised in the balance sheet (24.9) (46.4)

The amounts recognised in the consolidated income statement were as follows: 2010 2009

£m £m

Current service cost (15.8) (20.4)

Curtailment 0.1 0.6

Discount unwind on scheme liabilities (35.3) (33.9)

Expected return on scheme assets 34.6 45.1

Total charge to consolidated income statement (16.4) (8.6)

The current service cost includes £1.4m (2009: £1.8m) in respect of unfunded pension arrangements.

The charge is recognised in the following line items in the consolidated income statement: 2010 2009

£m £m

Administrative costs (15.7) (19.8)

Finance expense (note 10) (35.3) (33.9)

Finance income (note 10) 34.6 45.1

Total charge to consolidated income statement (16.4) (8.6)




24. POST-EMPLOYMENT BENEFITS CONTINUED The principal actuarial assumptions used to calculate the present value of the defi ned benefit obligations were as follows:

2010 2009 % %

Rate of infl ation 3.6 3.4

Rate of increase for salaries 4.6 4.7

Rate of increase for pensions in payment 3.5 3.3

Rate of increase for deferred pensions 3.6 3.4

Discount rate 6.0 6.5

The impact of changing material assumptions is as follows: 2010 2009

Increase/ decrease in

assumptions

Indicative effect

on scheme liabilities

£m

Indicative effect

on annual service cost £m

Indicative effect

on scheme liabilities

£m

Indicative effect

on annual service cost

£m

Rate of infl ation

Rate of increase for salaries

Rate of increase for pensions in payment

Rate of increase for deferred pensions

Discount rate

Life expectancy

0.1%

0.1%

0.1%

0.1%

0.1%

1 year

+/- 13.3

+/- 2.5

+/- 7.3

+/- 3.0

-/+ 14.6

+/- 19.9

+/- 0.6

+/- 0.2

+/- 0.3

+/- 0.1

-/+ 0.6

+/- 0.7

+/- 9.4

+/- 2.2

+/- 5.0

+/- 2.8

-/+ 11.0

+/- 14.9

+/- 0.6

+/- 0.2

+/- 0.2

+/- 0.1

-/+ 0.5

+/- 0.7

The discount rate is based on market yields on high-quality corporate bonds of equivalent currency and term to the defi ned benefi t obligation.

The IAS 19 valuation assumes that mortality will be in line with ‘PA92 Series’ tables with ‘medium cohort’ projections for mortality improvements up

to the current year. The allowance for mortality improvements beyond the current year is based on medium cohort improvements with a 1% fl oor.

Previously it had been assumed that the probability of death occurring at each age would decrease by approximately 0.25% each year. The effect of

this change to the mortality assumption has been to add between 1 to 1.5 years to the average expectation of life on retirement.

Based on these assumptions the average expectation of life on retirement in normal health is assumed to be:

� 23.0 years at age 65 for a male currently aged 65 (2009: 22.5)

� 25.4 years at age 65 for a female currently aged 65 (2009: 25.6)

� 24.4 years at age 65 for a male currently aged 50 (2009: 23.9)

� 26.8 years at age 65 for a female currently aged 50 (2009: 27.0)

The assets of the Home Retail Group Pension Scheme and the expected rates of return are summarised as follows:

2010 2009

Fair Percentageof scheme

Expected long-term

rate of Fair Percentage of scheme

Expected long-term

rate of value

£m assets

% return

% pa value

£m assets

% return

% pa

Market value of scheme assets:

Equities 307.5 46 8.1 302.3 60 8.4

Fixed interest securities 163.3 24 5.4 190.4 38 5.4

Fund of hedge funds 94.3 14 6.7 – – –

Senior secured loans 30.5 5 6.0 – – –

Property 38.1 6 7.6 – – –

Cash and net current assets 34.0 5 4.4 11.7 2 4.5

667.7 100 6.9 504.4 100 7.2




The overall expected rate of return on scheme assets is the weighted average of the best estimate of the individual asset categories and their inherent

expected rates of return.

Changes in the present value of the defi ned benefit liabilities are as follows: 2010 2009

£m £m

Opening defi ned benefi t liabilities (550.8) (562.8)

Current service cost (15.8) (20.4)

Curtailment 1.4 0.6

Interest cost (35.3) (33.9)

Contributions paid by employees (6.1) (6.8)

Actuarial (loss)/gain on liabilities recognised in the statement of comprehensive income (101.1) 58.9

Benefi ts paid 15.1 13.6

Closing defi ned benefi t liabilities (692.6) (550.8)

Changes in the market value of the scheme assets are as follows: 2010 2009

£m £m

Opening market value of scheme assets 504.4 646.5

Settlement/curtailment (1.3) –

Expected return 34.6 45.1

Actuarial gain/(loss) on assets recognised in the statement of comprehensive income 107.7 (194.3)

Contributions paid by the Group 31.3 13.9

Contributions paid by employees 6.1 6.8

Benefi ts paid (15.1) (13.6)

Closing market value of scheme assets 667.7 504.4

Cumulative actuarial loss included in the statement of comprehensive income (94.8) (101.4)

The actual return on scheme assets was a gain of £142.3m (2009: £149.2m loss).

The Group has in place arrangements which secure unfunded pension benefit arrangements for certain directors and senior managers by granting

charges to an independent trustee over independently managed portfolios of marketable securities owned by the Group. The amount of assets

charged in this way is adjusted annually to keep the ratio of assets charged to the discounted value of the accrued benefits secured in this way as close

as possible to the corresponding ratio in the Home Retail Group Pension Scheme. The total value of the assets charged in this way at 27 February 2010

was £12.5m (2009: £8.5m). Further details of the pension arrangements for directors appear in the audited part of the directors’ remuneration report.

History of experience gains and losses: 2010 2009 2008 2007 2006

£m £m £m £m £m

Present value of defi ned benefi t liabilities (692.6) (550.8) (562.8) (628.0) (579.1)

Fair value of scheme assets 667.7 504.4 646.5 637.3 604.6

Net (deficit)/surplus on the scheme (24.9) (46.4) 83.7 9.3 25.5

Experience (loss)/gain on scheme liabilities (12.1) 1.5 (4.3) 20.8 0.2

Percentage of scheme liabilities (1.7%) 0.3% (0.8%) 3.3% 0.0%

Experience gain/(loss) on scheme assets 107.7 (194.3) (44.8) (18.0) 70.9

Percentage of scheme assets 16.1% (38.5%) (6.9%) (2.8%) 11.7%

Defined contribution schemes

The pension cost represents contributions payable by the Group to the defined contribution schemes and amounted to £6.8m (2009: £6.8m).

Contributions totalling £0.7m (2009: £0.3m) were payable to the schemes at 27 February 2010 and are included within trade and other payables.




25. OTHER FINANCIAL ASSETS AND LIABILITIES Current Non-current Current Non-current 2010 2010 2009 2009 £m £m £m £m

Other fi nancial assets

Forward foreign exchange contracts – cash fl ow hedges 42.3 – 25.5 –

Forward foreign exchange contracts – fair value hedges 7.2 – 28.2 –

Available-for-sale fi nancial assets – 13.2 – 9.2

Total other fi nancial assets 49.5 13.2 53.7 9.2

Other fi nancial liabilities

Forward foreign exchange contracts – cash fl ow hedges (1.8) – (1.5) –

Total other fi nancial liabilities (1.8) – (1.5) –


The forward foreign exchange contracts are intended to hedge the foreign currency exposures of future purchases of inventory. The hedged cash fl ows

are expected to occur up to one year into the future.

Gains and losses recognised in the hedging reserve in shareholders’ equity on forward foreign exchange contracts as at 27 February 2010 and

28 February 2009 will be released within one year from the balance sheet date. The notional principal amounts of the outstanding forward foreign

exchange contracts at 27 February 2010 were £869.6m (2009: £671.9m). The fair value of forward foreign exchange contracts is determined using

quoted forward exchange rates at the balance sheet date.

Available-for-sale fi nancial assets

Available-for-sale financial assets are measured at fair value or, where fair value cannot be reliably measured, at cost less impairment.

26. DEFERRED TAX 2010 2009

£m £m

The movements on the net deferred tax account are as follows:

At 1 March 2009 61.1 (20.8)

Income statement (charge)/credit (note 11) (30.5) 49.4

Exchange differences 0.6 –

Tax on pensions and share schemes (charged)/credited to equity (7.4) 32.5

At 27 February 2010 23.8 61.1

The deferred tax amounts recognised are as follows:

Deferred tax assets:

– Deferred tax asset to be recovered after more than one year 61.6 87.4

Deferred tax liabilities:

– Deferred tax liability to be settled after more than one year (37.8) (26.3)

Net deferred tax asset 23.8 61.1




The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax

jurisdiction, is as follows: Accelerated

Asset tax provisions depreciation Other Total

Deferred tax assets £m £m £m £m

At 2 March 2008 34.1 – 12.5 46.6

Income statement credit/(charge) 28.5 – (12.0) 16.5

Tax credited to equity 1.1 – 37.9 39.0

Transfer from deferred tax liabilities 0.1 0.7 (15.5) (14.7)

At 28 February 2009 63.8 0.7 22.9 87.4

At 1 March 2009 63.8 0.7 22.9 87.4

Income statement charge (12.5) (8.4) (10.4) (31.3)

Tax charged to equity (1.0) – (1.8) (2.8)

Transfer to deferred tax liabilities – 7.7 – 7.7

Exchange differences 0.6 – – 0.6

At 27 February 2010 50.9 – 10.7 61.6

Deferred tax liabilities

Property valuations

£m

Accelerated tax

depreciation £m

Other £m

Total £m

At 2 March 2008 (21.8) (30.1) (15.5) (67.4)

Income statement credit 2.1 30.8 – 32.9

Tax charged to equity – – (6.5) (6.5)

Transfer to deferred tax assets – (0.7) 15.4 14.7

At 28 February 2009 (19.7) – (6.6) (26.3)

At 1 March 2009 (19.7) – (6.6) (26.3)

Income statement credit 0.8 – – 0.8

Tax charged to equity – – (4.6) (4.6)

Transfer from deferred tax assets – (7.7) – (7.7)

At 27 February 2010 (18.9) (7.7) (11.2) (37.8)

Deferred tax assets are recognised for tax loss carry-forwards and other temporary differences to the extent that the realisation of the related tax

benefit through the future taxable profits is probable.

The Group has not recognised deferred tax assets of £1.1m (2009: £1.1m) in respect of all non-trading losses, which total £3.9m (2009: £3.9m),

that can be carried forward against future taxable income. In addition, the Group has not recognised deferred tax assets of £32.2m (2009: £32.2m)

in respect of capital losses, which total £114.9m (2009: £114.9m), that can be carried forward against future taxable gains. These losses are

available indefi nitely.

27. SHARE CAPITAL 2010 2009

Number 2010 Number 2009 of shares £m of shares £m

Ordinary share capital of 10p each

Authorised 2,000,500,000 200.1 2,000,500,000 200.1

Allotted, called-up and fully paid 877,445,001 87.7 877,445,001 87.7




28. NOTES TO THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Merger reserve

The merger reserve arose on the demerger of the Group from GUS plc during 2006.

Other reserves Treasury Hedging Translation Total other

shares reserve reserve reserves £m £m £m £m

Balance at 1 March 2009 (27.1) 17.4 45.1 35.4

Other comprehensive income – 11.9 (3.6) 8.3

Net movement in own shares 2.9 – – 2.9

Balance at 27 February 2010 (24.2) 29.3 41.5 46.6

Treasury shares

£m

Hedging reserve

£m

Translation reserve

£m

Total other reserves

£m

Balance at 2 March 2008

Other comprehensive income

Net movement in own shares

(6.0)

–

(21.1)

0.9

16.5

–

9.0

36.1

–

3.9

52.6

(21.1)

Balance at 28 February 2009 (27.1) 17.4 45.1 35.4

Net movement in own shares of £2.9m (2009: (£21.1m)) represents the purchase, and subsequent utilisation or sale, of shares for the purpose of

satisfying obligations arising from the Group’s share-based compensation schemes. Shares in Home Retail Group plc are held in the following trusts

which have been established since demerger:

Home Retail Group Employee Share Trust (‘EST’) The EST provides for the issue of shares to Group employees under share option and share grant schemes (with the exception of the Share Incentive

Plan). At 27 February 2010, the EST held 13,899,537 shares with a market value of £35.4m. The shares in the EST are held within equity of the Group

at a cost of £20.0m. During the year 3,112,268 shares were acquired for a cost of £9.4m. Dividends on these shares are waived.

Home Retail Group Share Incentive Scheme Trust The Home Retail Group Share Incentive Scheme Trust provides for the issue of shares to Group employees under the Share Incentive Plan.

At 27 February 2010, the Trust held 1,007,291 shares with a market value of £2.6m. These shares are held within equity of the Group at a cost

of £4.2m. No additional shares were purchased during the year.

29. SHARE-BASED PAYMENT ARRANGEMENTS

The Group operates a number of share-based payment schemes. These can be analysed into three categories, being those rolled over from old GUS plc

schemes as a result of the demerger from GUS on 11 October 2006, incentive schemes specifically related to the demerger (‘Demerger incentive

schemes’) and new Home Retail Group plc schemes subsequent to the demerger.

Prior to the demerger, a number of Home Retail Group plc employees participated in old GUS plc share-based payment schemes. As part of the

demerger, some of these schemes had early vesting with vesting occurring prior to completion of the demerger, while others were modified by rolling

them over to become Home Retail Group plc share-based payment schemes. Specifically, all executive share option schemes in operation following

the demerger from GUS plc were rolled over from a GUS plc share option arrangement to a Home Retail Group plc arrangement. Furthermore, certain

share grant schemes (namely the co-investment plan and the performance share plan) which originally operated as GUS plc share grant schemes,

were rolled over as Home Retail Group plc share grant schemes. Under IFRS 2, these changes were treated as modifications to the schemes and hence

revalued as at the demerger date.

Summary of the total cost of share-based compensation in respect of ordinary shares in the Company 52 weeks 52 weeks


2010 2009 £m £m

Share option awards (5.0) (7.4)

Share grant awards (15.4) (13.9)

Total expense recognised (all equity-settled) (20.4) (21.3)




The total share-based payments charge of £20.4m (2009: £21.3m) includes £6.3m (2009: £8.6m) relating to demerger incentive schemes which,

together with national insurance costs of £1.4m (2009: £0.2m credit), total £7.7m (2009: £8.4m), and are excluded from benchmark profit before tax.

Summary of share option and share award arrangements

During the year ended 27 February 2010, Home Retail Group plc had a number of share option and share award arrangements for its employees,

all of which are equity-settled. Details of these arrangements are as follows:

Rolled over from old GUS plc schemes

Share options The 1998 approved and non-approved executive share option schemes. Under these schemes, the exercise price of granted options was equal

to the market price of the shares over the three dealing days preceding grant. The options became exercisable three years from the grant date, subject

to the Group’s EPS compound annual growth exceeding compound annual retail price inflation by 4% per annum over a continuous three-year period

and the employee completing three years’ service. The EPS growth target is not a market-based performance condition as defined by IFRS 2. The options

have a maximum term of 10 years from grant. No new options have been granted under these schemes since demerger.

Share awards The (ex-GUS plc) performance share plan. Awards made under this plan normally vested three years after the date of grant for nil consideration,

with the percentage of the award distributed to participants determined by ranking total shareholder return relative to a comparator group, which

is considered a market-based performance condition under IFRS 2. Awards under this plan were valued using a Monte Carlo simulation with historic

volatilities and correlations measured over the three-year period preceding valuation. All awards under this plan have now vested and have been

distributed to participants.

The (ex-GUS plc) co-investment plan permitted the awards of matching shares to participants, conditional on the achievement of specifi ed

performance targets related to the benchmark operating profit of the Group. The matching shares are a nil consideration option and have been

classified as an award of shares because the nature of the award is the same. The grant date was the start of the financial year in which performance

was assessed, which was one year before the quantity of shares awarded was determined. Awards made under this plan normally vest after a four-year

period for nil consideration, and participants have a further two years to exercise their awards. The underlying value of the award was known at grant

date, subject to the outcome of the performance condition.

Demerger incentive schemes

Share awards The performance share plan. Awards made under this plan normally vested three years after the date of grant, at which time shares were distributed

to participants for nil consideration. All awards under this plan have now vested.

The re-investment plan is a three-part scheme running over three, four and five years, under which participants were awarded matching shares.

The matching shares are a nil consideration option and have been classified as an award of shares because the nature of the award is the same.

The percentage of the award distributed to participants is conditional upon continued service, ranking of total shareholder return relative to a

comparator group and the achievement of specified performance targets related to the return on invested capital of the Group. The total shareholder

return performance condition is considered a market-based performance condition under IFRS 2. Awards under this plan have been valued using a

Monte Carlo simulation with historic volatilities and correlations measured over the three-year period preceding valuation. Awards under the fi rst part

of this scheme, running over three years, have now vested and have been exercised.

The long-term incentive plan. Under the long-term incentive plan a one-off grant of matching shares was made to participants at demerger, based

upon the operating profit performance of the Group over the three years prior to demerger. The matching shares were a nil consideration option and

were classified as an award of shares because the nature of the award was the same. The quantity of shares was determined at demerger, following

assessment of performance, and awarded in June 2007. The awards made under this plan normally vested two years later, and participants have a

further two years to exercise their awards. All awards under this plan have now vested.

The share incentive plan was a one-off free share grant to all employees at the time of the demerger. The shares were acquired by a trust on behalf

of participants and will normally be forfeited if a participant’s employment with the Group ceases within three years of the grant date. All awards

under this plan have now vested after this initial three-year period and participants can now exercise their awards, however awards can be exercised

free of tax after a further two years. The shares continue to be held by the trust until the awards are either exercised by participants or lapse.




29. SHARE-BASED PAYMENT ARRANGEMENTS CONTINUED New Home Retail Group plc schemes

Share options The Home Retail Group plc Sharesave Plan permits the grant to employees of options over the Company’s shares linked to a building society

save-as-you-earn contract for a term of three or five years with contributions from employees of between £5 and £250 per month. Options are

normally capable of being exercised at the end of the three or five-year period at an exercise price calculated at a 20% discount to market price

over the three dealing days preceding invitation to participants. Options must be exercised within six months of the end of the three or fi ve-year

save-as-you-earn contract.

Share awards The performance share plan. Awards made under this plan will normally vest three years after the date of grant for nil consideration, with the

percentage of the award distributed to participants determined by ranking total shareholder return relative to a comparator group, which is considered

a market-based performance condition under IFRS 2. Awards under this plan have been valued using a Monte Carlo simulation with historic volatilities

and correlations measured over the three-year period preceding valuation.

The co-investment plan permitted the awards of matching shares to participants. The matching shares are a nil consideration option and have been

classified as an award of shares because the nature of the award is the same. Awards made under this plan normally vest after a four-year period for

nil consideration, and participants have a further two years to exercise their awards. Vesting is normally conditional on the achievement of specifi ed

performance targets in two stages. The grant date was the start of the financial year in which the first performance stage (the achievement of specifi ed

performance targets related to the benchmark operating profit of the Group) was assessed, which was one year before the quantity of shares awarded

is determined. No new awards were granted under this plan during the year.

The deferred bonus plan permits the award of a deferred bonus that will be converted into a conditional award of shares and will operate for the

year ended 27 February 2010 only. The award is based on performance against a benchmark PBT and a Group net cash target and will be made at the

maximum; 150% of salary. The award will be made in May 2010. The grant date is the start of the financial year in which the performance stage is

assessed, which is one year before the shares are awarded. Subject to continued employment and satisfactory Group performance for the year in

which performance is measured, the shares will vest and be released on a phased basis, for nil consideration. 1/6 will vest on the fi rst anniversary

of the award, 2/6 on the second and 3/6 on the third anniversary.

The deferred share plan is a discretionary one-off award of deferred shares. This award has no performance conditions, other than a level of personal

performance. Awards made under this plan will vest on a phased basis for nil consideration; being 1/6 one year after the award is made, 2/6 two years

after the award is made and 3/6 three years after the award is made.

Information relating to share option valuation techniques

The weighted average fair value of options granted during the year over the Company’s shares under the Home Retail Group plc Sharesave Plan,

determined using the Black-Scholes option pricing model, was £0.44 (2009: £0.55) per option. The significant inputs into the option pricing model

were as follows:



Weighted average:

Share price on grant date (£) 2.65 2.38

Exercise price (£) 2.00 1.90

Expected volatility 46.3% 42.4%

Expected dividend yield 5.5% 6.2%

Risk free interest rate 3.1% 4.4%

Expected option life to exercise 3.6 years 3.7 years

Expected volatility is a measure of expected fluctuations in the share price over the expected life of an option. For each financial year the measure

of volatility used by the Company in its pricing model has been calculated by using implied volatility from market quoted prices of traded options

over the Company’s shares.




Reconciliation of movement in the number of share options 52 weeks ended 52 weeks ended

27 February 2010 28 February 2009

Weighted Weighted average average

Number of exercise price Number of exercise price options £ options £

Outstanding at beginning of year 23,247,239 2.71 17,160,056 3.76

Granted 3,817,037 2.00 14,266,007 1.90

Forfeited (6,629,823) 3.11 (7,828,759) 3.48

Exercised (112,285) 1.91 (758) 1.90

Expired (658,757) 3.70 (349,307) 3.73

Outstanding at year-end 19,663,411 2.41 23,247,239 2.71

Exercisable at year-end 3,842,182 3.57 4,733,476 3.57

The weighted average share price for share options exercised during the year was £2.93 (2009: £2.14).

Share options outstanding at the end of the year

Share options at the end of the year had the following exercise prices and remaining contractual lives:

As at 27 February 2010

Weighted Weighted average remaining lives average

Range of exercise prices Number of exercise price Expected Contractual £ options £ years years

1.00 – 1.99 10,608,251 1.90 2.3 2.8

2.00 – 2.99 3,582,773 2.01 3.1 3.6

3.00 – 3.99 5,472,387 3.66 0.4 4.1

As at 28 February 2009

Range of exercise prices £

Number of options

Weighted average

exercise price £

Weighted average remaining lives

Expected Contractual years years

1.00 – 1.99 12,984,269 1.90 3.3 3.8

2.00 – 2.99 34,097 2.79 – 3.9

3.00 – 3.99 10,228,873 3.74 1.1 5.8

Information relating to share award valuation techniques

The value of the awards is determined as the observed market closing share price on the date awarded grants are issued to participants. For the

co-investment plan, this occurs after the first year of performance is assessed. The performance share plan’s and the re-investment plan’s market-

based performance condition is included in the fair value measurement on grant date and is not revised for actual performance.

All of the share awards are equity-settled. Under the share awards, the participants have an entitlement to either dividend equivalents or dividend

distributions from issue date until point of vesting. The observed market share price on the day of valuation is considered inclusive of future

dividend distributions.

There were 5,646,908 ordinary share awards (2009: 7,609,354) granted during the year with a weighted average fair value of £1.13 (2009: £1.84).




30. OPERATING LEASES 2010 2009

£m £m

Future aggregate minimum lease payments under non-cancellable operating leases are as follows:

Less than one year (380.1) (393.0)

Between one and fi ve years (1,382.3) (1,394.3)

More than fi ve years (2,315.8) (2,537.0)

Total operating leases (4,078.2) (4,324.3)

The Group leases various retail stores, offices and warehouses under non-cancellable operating lease agreements. The leases have varying terms,

escalation clauses, contingent rentals and renewal rights.

31. COMMITMENTS 2010 2009

£m £m

Capital expenditure for which contracts have been placed:

Property, plant and equipment (7.5) (17.6)

Intangible assets (0.9) (4.0)

Total commitments (8.4) (21.6)

32. CONTINGENT LIABILITIES

There are a number of contingent liabilities that arise in the normal course of business, which if realised, are not expected to result in a material liability

to the Group.

33. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS 52 weeks ended 52 weeks ended


Cash generated from operations £m £m


Adjustments for:

Share of post-tax losses of joint ventures and associates 2.0 2.4

Net fi nancing income (0.5) (10.2)

Operating profi t/(loss) 294.5 (402.0)

Loss/(profit) on sale of property, plant and equipment 2.5 (0.2)

Depreciation and amortisation 130.1 159.4

Impairment losses – 533.9

Finance expense charged to Financial Services cost of sales 3.5 13.6

(Increase)/decrease in inventories (5.1) 74.5

Decrease in receivables 11.5 12.6

Increase/(decrease) in payables 63.2 (97.3)

Movement in working capital 69.6 (10.2)

(Decrease)/increase in provisions (40.8) 146.9

Movement in retirement benefi ts (15.6) 5.9

Share-based payment expense (net of dividend equivalent payments) 17.2 21.1

Cash generated from operations 461.0 468.4




34. RELATED PARTIES

The ultimate parent company of the Group is Home Retail Group plc. The principal subsidiary and associate undertakings at 27 February 2010 are

shown in note 36. Transactions between Home Retail Group plc and its subsidiaries have been eliminated on consolidation and are not disclosed in

this note. Transactions carried out with related parties in the normal course of business are summarised below:

Joint Venture

The Group lent £5.1m (2009: £2.0m) to and invested £0.5m (2009: £nil) in a joint venture, Home Retail Group Personal Finance Limited. The total loan

of £15.2m (2009: £10.1m) was outstanding as at 27 February 2010.

Key management personnel

Remuneration of key management personnel is disclosed in note 8. During the year, there were no material transactions or balances between the

Group and its key management personnel or members of their close families.

35. POST BALANCE SHEET EVENTS

On 28 April 2010, the Group announced a share buy-back programme. The Board anticipates that over the financial year to February 2011, up to

£150m of capital may be returned to shareholders in this manner, with this being funded out of the Group’s existing cash resources.

36. PRINCIPAL SUBSIDIARY, JOINT VENTURE AND ASSOCIATED UNDERTAKINGS Country of Percentage of

Description incorporation ordinary shares held

Home Retail Group (UK) Limited* Group holding company England 100

Argos Limited General merchandise retailing England 100

Argos Distributors (Ireland) Limited General merchandise retailing Republic of Ireland 100

Homebase Limited Home enhancement retailing England 100

Homebase House and Garden Centre Limited Home enhancement retailing Republic of Ireland 100

Hampden Group Limited Home enhancement retailing Northern Ireland 100

Home Retail Group Card Services Limited Financial services England 100

ARG Personal Loans Limited Financial services England 100

Argos Business Solutions Limited Financial services England 100

Home Retail Group Insurance Services Limited Financial services England 100

Home Retail Group (Hong Kong) Limited Product sourcing for the Hong Kong 100

Home Retail Group companies

* Held directly by the Parent Company

Details of interests in joint ventures and associated undertakings are given within note 17.



Independent auditors’ report to the members of Home Retail Group plc – Parent

We have audited the Parent Company financial statements of Home Retail Group plc for the 52 weeks ended 27 February 2010 which comprise the

Parent Company balance sheet, the Parent Company statement of changes in equity, the Parent Company statement of cash flows, and the related

notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards

(IFRSs) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006.

Respective responsibilities of directors and auditors

As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the Parent Company fi nancial

statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Parent Company financial statements in

accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing

Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of

the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any

other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the fi nancial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the

financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting

policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of

significant accounting estimates made by the directors; and the overall presentation of the fi nancial statements.

Opinion on fi nancial statements

In our opinion the Parent Company fi nancial statements:

� give a true and fair view of the state of the Company’s affairs as at 27 February 2010 and of its cash flows for the 52 weeks then ended;

� have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the

Companies Act 2006; and

� have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

� the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and

� the information given in the directors’ report for the financial year for which the Parent Company financial statements are prepared is consistent with

the Parent Company fi nancial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

� adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited

by us; or

� the Parent Company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting

records and returns; or

� certain disclosures of directors’ remuneration specified by law are not made; or

� we have not received all the information and explanations we require for our audit.

Other matter

We have reported separately on the Group consolidated financial statements of Home Retail Group plc for the 52 weeks ended 27 February 2010.

Andrew Paynter (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 28 April 2010



Parent Company balance sheet At 27 February 2010


Notes £m £m

ASSETS

Non-current assets

Investment in subsidiary 6 2,895.6 2,895.6

Total non-current assets 2,895.6 2,895.6

Current assets


Current tax assets – 2.5

Total current assets 30.7 24.0

Total assets 2,926.3 2,919.6

LIABILITIES

Current liabilities

Trade and other payables 8 (388.6) (270.5)

Total current liabilities (388.6) (270.5)

Total liabilities (388.6) (270.5)

Net assets 2,537.7 2,649.1

EQUITY

Share capital 9 87.7 87.7

Retained earnings 2,450.0 2,561.4

Total equity 2,537.7 2,649.1

The financial statements were approved by the Board of Directors on 28 April 2010 and were signed on its behalf by:

Terry Duddy, Richard Ashton,

Chief Executive Finance Director



Parent Company statement of changes in equity For the 52 weeks ended 27 February 2010


Share Retained capital earnings Total

£m £m £m

Balance at 1 March 2009 87.7 2,561.4 2,649.1

Loss for the year – (2.4) (2.4)

Other comprehensive income – – –

Total comprehensive income for the year ended 27 February 2010 – (2.4) (2.4)


Movement in share-based compensation reserve – 20.4 20.4

Equity dividends paid during the year – (126.3) (126.3)

Other distributions – (3.1) (3.1)

Total transactions with owners – (109.0) (109.0)

Balance at 27 February 2010 87.7 2,450.0 2,537.7


Share Retained capital earnings Total

£m £m £m

Balance at 2 March 2008 87.7 2,673.8 2,761.5

Loss for the year – (6.4) (6.4)

Other comprehensive income – – –

Total comprehensive income for the year ended 28 February 2009 – (6.4) (6.4)


Movement in share-based compensation reserve – 21.3 21.3

Equity dividends paid during the year – (127.2) (127.2)

Other distributions – (0.1) (0.1)

Total transactions with owners – (106.0) (106.0)

Balance at 28 February 2009 87.7 2,561.4 2,649.1

Parent Company statement of cash fl ows For the 52 weeks ended 27 February 2010

There were no cash movements during the year for the Company as any cash transactions were executed by other members of the Home Retail Group

on behalf of the Company. As a result no statement of cash flows has been presented in these fi nancial statements.



Notes to the Parent Company fi nancial statements For the 52 weeks ended 27 February 2010

1. GENERAL INFORMATION

Home Retail Group plc (‘the Company’) is a public limited company incorporated and domiciled in the United Kingdom under the Companies Act

2006 (‘the Act’) and listed on the London Stock Exchange. The Company’s registered number is 5863533 and the registered office of the Company

is Avebury, 489 – 499 Avebury Boulevard, Milton Keynes MK9 2NW.

Statement of compliance

The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) and International

Financial Reporting Interpretations Committee interpretations (‘IFRICs’) as adopted by the European Union. They also comply with those parts of the

Companies Act 2006 applicable to companies reporting under IFRSs.

2. BASIS OF PREPARATION

These separate financial statements of the Company are presented in sterling, rounded to the nearest hundred thousand. They are prepared under

the historic cost basis modified for the revaluation of certain fi nancial instruments.

The Company is the ultimate parent entity of Home Retail Group (‘the Group’). The Company’s financial statements are included in Home Retail

Group plc’s consolidated financial statements for the 52 weeks ended 27 February 2010. As permitted by section 408 of the Act, the Company

has not presented its own comprehensive income statement.

The investment in Home Retail Group (UK) Limited has also been recorded at the nominal value of shares issued, under the provisions of

section 615 of the Act. IFRS 1, First-time Adoption of International Financial Reporting Standards, has been applied in preparing these fi nancial

statements. The financial statements are the first Company financial statements to be prepared in accordance with IFRS.

The financial statements of the Company until 28 February 2009 had been prepared in accordance with UK Generally Accepted Accounting Principles

(‘UK GAAP’). UK GAAP differs in certain respects from IFRS. When preparing the financial statements to 27 February 2010, management has amended

certain accounting methods applied in the UK GAAP financial statements to comply with IFRS. The comparatives were also restated to refl ect

these adjustments.

Reconciliations and descriptions of the effect of the transition from UK GAAP to IFRS on the Company’s equity are given in note 12.

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

The Company’s principal accounting policies are the same as those set out in note 3 of the Group financial statements, with the addition of those

noted below. Unless otherwise stated, these policies have been consistently applied to all the periods presented.

Investments

Investments are included in the balance sheet at their cost of acquisition. Where appropriate, a provision is made for any impairment in their value.

Loans and other payables

Loans from other Group undertakings and all other payables are initially recorded at fair value, which represents the proceeds received. They are then

subsequently carried at amortised cost, less any provision for impairment as appropriate.


The Company operates a number of equity-settled, share-based compensation plans. Awards are granted to employees of the Company’s subsidiaries,

and the Company is reimbursed by its subsidiaries for the fair value of the shares granted over the vesting period. Fair value is measured at the date

of grant using whichever of the Black-Scholes or Monte Carlo models, or closing market price is most appropriate to the award. Market-based

performance conditions are included in the fair value measurement on grant date and are not revisited for actual performance. Further details

of the Company’s share-based compensation plans are set out in note 29 to the Group fi nancial statements.

4. INCOME STATEMENT DISCLOSURES

The Company’s retained loss for the financial year was £2.4m (2009: £6.4m loss).

The Company has no employees, other than the Company directors. No directors received any remuneration from the Company during either year.

Further information on directors’ remuneration, which forms part of the audited Group financial statements, can be found in the directors’

remuneration report on pages 47 to 51.

There were no non-audit services provided by the Company’s auditors PricewaterhouseCoopers LLP.


FFIINNAANCINCIAALL SSTTAATTEMENEMENTTSS

Notes to the Parent Company financial statements continued For the 52 weeks ended 27 February 2010

5. DIVIDENDS 52 weeks 52 weeks

ended ended 27 February 28 February 2010 2009

Amounts recognised as distributions to equity holders £m £m

Final dividend of 10.0p per share (2009: 10.0p) for the prior year (85.7) (86.8)

Interim dividend of 4.7p per share (2009: 4.7p) for the current year (40.6) (40.4)

Ordinary dividends on equity shares (126.3) (127.2)

A final dividend in respect of the year ended 27 February 2010 of 10.0p per share, amounting to a total final dividend of £86.6m, has been proposed

by the Board of Directors, and is subject to approval by the shareholders at the Annual General Meeting. This would make a total dividend for the year

of 14.7p per share, amounting to £127.2m. The proposed dividend has not been included as a liability at 27 February 2010 in accordance with IAS 10

‘Events after the Balance Sheet Date’. It will be paid on 21 July 2010 to shareholders who are on the register of members at close of business on

21 May 2010. The Home Retail Group Employee Share Trust (‘EST’) has waived its entitlement to dividends in the amount of £2.7m (2009: £1.8m).

6. INVESTMENT IN SUBSIDIARY 2010 2009

£m £m

Cost

At beginning and end of the year 2,895.6 2,895.6

The Company’s sole investment is in Home Retail Group (UK) Limited, which is a 100% owned subsidiary incorporated within the UK and is a Group

holding company.

7. TRADE AND OTHER RECEIVABLES Current Current

2010 2009 £m £m

Amounts owed by related party (note 11) 30.7 21.5

The amounts owed by a related party were unsecured, repayable on demand and non-interest bearing. No balances owed by a related party are past due.

8. TRADE AND OTHER PAYABLES Current Current

2010 2009 £m £m

Amounts owed to Group companies (note 11)

Other creditors

(388.0)

(0.6)

(270.0)

(0.5)

(388.6) (270.5)

All amounts owed to Group companies are unsecured, non-interest bearing and repayable on demand.

9. SHARE CAPITAL 2010

Number of shares

2010 £m

2009 Number of shares

2009£m

Ordinary share capital of 10p each

Authorised

Allotted, called-up and fully paid

2,000,500,000

877,445,001

200.1

87.7

2,000,500,000

877,445,001

200.1

87.7



Notes to the Parent Company fi nancial statements continued For the 52 weeks ended 27 February 2010

10. COMMITMENTS

On 12 July 2006, Argos Limited, a subsidiary of the Company, entered into a five-year multi-currency revolving loan facility of £700m with a syndicated

group of banks. This facility has since been extended by one year and then subsequently £685m of this facility has been extended a further year.

On 27 October 2006 the Company acceded to this facility as a borrower and a guarantor. As at the balance sheet date there were no drawings made

under this facility.

There are no capital or operating lease commitments.

11. RELATED PARTY TRANSACTIONS

The principal subsidiary undertakings of the Company are shown in note 36 of the Group financial statements. Transactions between the Company

and its subsidiaries and the Home Retail Group Employee Share Trust (‘EST’) are shown below. All transactions carried out with related parties are

in the normal course of business. 2010 2009

£m £m

Transactions with subsidiary undertakings

Recharge of costs

Interest payable

Transfer of cash to the EST by subsidiary undertakings on behalf of the Company

Settlement of liabilities by subsidiary undertakings on behalf of the Company

20.4

–

9.3

129.4

21.3

(9.1)

21.4

127.3

Amounts owed to subsidiary undertakings (388.0) (270.0)

Transactions with other related parties

Amounts owed by other related party – EST 30.7 21.5

12. UK GAAP TO IFRS TRANSITION

Reconciliation of equity at 1 March 2008

ASSETS

Non-current assets

Investment in subsidiary

Total non-current assets

UK GAAP £m

2,895.6

2,895.6

Transition adjustments

£m

–

–

IFRS £m

2,895.6

2,895.6

Current assets

Trade and other receivables 161.6 – 161.6

Current tax assets 2.2 – 2.2

Total current assets 163.8 – 163.8

Total assets 3,059.4 – 3,059.4

LIABILITIES

Current liabilities

Trade and other payables (297.9) – (297.9)

Total current liabilities (297.9) – (297.9)

Total liabilities (297.9) – (297.9)

Net assets 2,761.5 – 2,761.5

EQUITY

Share capital 87.7 – 87.7

Retained earnings 2,679.8 (6.0) 2,673.8

Treasury shares (6.0) 6.0 –

Total equity 2,761.5 – 2,761.5


FFIINNAANCINCIAALL SSTTAATTEMENEMENTTSS

Notes to the Parent Company financial statements continued For the 52 weeks ended 27 February 2010

12. UK GAAP TO IFRS TRANSITION CONTINUED Transition

Reconciliation of equity at 28 February 2009UK GAAP

£madjustments

£mIFRS £m

ASSETS

Non-current assets

Investment in subsidiary 2,895.6 – 2,895.6

Total non-current assets 2,895.6 – 2,895.6

Current assets

Trade and other receivables – 21.5 21.5

Current tax assets 2.5 – 2.5

Total current assets 2.5 21.5 24.0

Total assets 2,898.1 21.5 2,919.6

LIABILITIES

Current liabilities

Trade and other payables (270.3) (0.2) (270.5)

Total current liabilities (270.3) (0.2) (270.5)

Total liabilities (270.3) (0.2) (270.5)

Net assets 2,627.8 21.3 2,649.1

EQUITY

Share capital 87.7 – 87.7

Retained earnings 2,567.2 (5.8) 2,561.4

Treasury shares (27.1) 27.1 –

Total equity 2,627.8 21.3 2,649.1

Explanation of transition adjustments:

Under UK GAAP company shares held in trust on behalf of participants are shown within the Company balance sheet within ‘Treasury shares’. Under

IFRS the share trust is not included as part of the Company balance sheet and hence there is a transition adjustment to eliminate all associated

balances. In addition, any balance due between the Company and the share trusts are reinstated, as these would have previously been eliminated

on consolidation under UK GAAP.



Group fi ve-year summary

52-week 52-week 52-week 52-week 52-week period to period to period to pro forma to pro forma to

27 February 28 February 1 March 3 March 4 March 2010 2009 2008 2007 2006

Income statement £m £m £m £m £m

Argos 4,346.8 4,281.9 4,320.9 4,164.0 3,858.8

Homebase 1,571.9 1,513.2 1,568.5 1,594.2 1,559.0

Financial Services 104.0 102.3 95.4 93.2 92.5

Sales 6,022.7 5,897.4 5,984.8 5,851.4 5,510.3

Argos 266.2 303.6 376.2 325.0 297.0

Homebase 41.2 14.9 45.1 53.4 51.4

Financial Services 5.7 6.1 5.5 5.0 6.1

Central Activities (23.4) (24.2) (28.8) (24.0) (22.7)

Benchmark operating profi t 289.7 300.4 398.0 359.4 331.8

Net fi nancing income 5.2 29.7 33.3 16.6 9.5

Share of post-tax (loss)/profit of joint ventures and associates (2.0) (2.4) 1.6 0.7 (4.2)

Benchmark PBT 292.9 327.7 432.9 376.7 337.1

Statistics 52-week 52-week 52-week 52-week 52-week period to period to period to pro forma to pro forma to

Argos 27 February

201028 February

2009 1 March

2008 3 March

2007 4 March

2006

Like-for-like change in sales (2.1%) (4.8%) 0.7% 2.4% (1.4%)

New space contribution to sales change 3.6% 3.9% 3.1% 5.5% 7.5%

Total sales change 1.5% (0.9%) 3.8% 7.9% 6.1%

Number of stores at year-end 745 730 707 680 655

Of which Argos Extra stocked-in 339 314 278 238 189

Homebase

Like-for-like change in sales 2.7% (10.2%) (4.1%) (1.4%) (3.1%)

New space contribution to sales change 1.2% 6.7% 2.5% 3.6% 3.1%

Total sales change 3.9% (3.5%) (1.6%) 2.2% 0.0%

Number of stores at year-end 349 345 331 310 297

Of which contain a mezzanine fl oor 190 188 181 165 144

Financial Services

Store card gross receivables (£m) 497 488 482 448 378



Group five-year summary continued


Balance sheet £m £m £m £m £m

Invested capital 2,377.7 2,435.5 3,138.0 3,014.0 3,105.4

Retirement benefi t (obligations)/assets (24.9) (46.4) 83.7 9.3 25.5

Net tax assets/(liabilities) 52.1 32.7 (52.0) (2.6) (4.8)

Derivative fi nancial instruments 47.7 52.2 1.5 (2.2) 1.8

Financing net cash/(pro forma net debt) 414.0 284.4 174.0 60.2 (200.0)

Pro forma net assets 2,866.6 2,758.4 3,345.2 3,078.7 2,927.9

Net GUS group balances – – – – 22.0

Reported net assets 2,866.6 2,758.4 3,345.2 3,078.7 2,949.9



Benchmark pre-tax return on invested capital £m £m £m £m £m

Benchmark operating profi t 289.7 300.4 398.0 359.4 331.8

Share of post-tax (loss)/profit of joint ventures and associates (2.0) (2.4) 1.6 0.7 (4.2)

Benchmark pre-tax return 287.7 298.0 399.6 360.1 327.6

Benchmark pre-tax return on invested capital 12.1% 12.2% 12.7% 11.9% 10.5%


Earnings and dividends 27 February

201028 February

2009 1 March

2008 3 March

2007 4 March

2006

Basic benchmark EPS 23.4p 25.9p 33.9p 29.3p 25.6p

Dividends per share (interim paid and fi nal proposed) 14.7p 14.7p 14.7p 13.0p n/a

Dividend cover 1.59x 1.76x 2.31x 2.25x n/a

The change in both the year-end and the Group’s capital structure on demerger in 2006 resulted in statutory reported results that are non-comparable.

To assist with analysis and comparison, certain pro forma information has therefore been provided in respect of the comparative periods to eliminate the

distortions of these two impacts on the performance of the Group.


MORE INFORMATION

Shareholder information

Who are the Group’s shareholders?

The Group had 32,691 ordinary shareholders at 27 February 2010, comprising a mix of corporations and individuals. Their holdings can be analysed

as follows: Percentage of

Number of total number Number of Percentage of shareholders of shareholders ordinary shares ordinary shares

Over 1,000,000 119 0.36 698,612,021 79.62

100,001 – 1,000,000 338 1.04 119,531,897 13.62

10,001 – 100,000 814 2.49 23,774,411 2.71

5,001 – 10,000 1,004 3.07 6,839,562 0.78

2,001 – 5,000 3,800 11.62 11,483,435 1.31

1 – 2,000 26,616 81.42 17,203,675 1.96

32,691 100.00 877,445,001 100.00

Corporate

Individuals*

Number of shareholders

4,388

28,303

Percentage of total number

of shareholders

13.42

86.58

Number of ordinary shares

835,550,634

41,894,367

Percentage of ordinary shares

95.23

4.77

32,691 100.00 877,445,001 100.00

* Employee shareholdings under the Group’s share schemes are held in trust and are not therefore reflected in the number of individual shareholders.

I have an enquiry or want to update my details. Who should I contact?

For all enquiries and shareholder administration, please contact Capita Registrars:

Postal address: Capita Registrars, Northern House, Woodsome Park, Huddersfield HD8 0GA.

Email: [email protected]

• Telephone: 0871 664 0437* (from abroad +44 208 639 3377)

Lines are open 8.30am to 5.30pm Monday to Friday

• Text phone: 0871 664 0532* (from abroad +44 208 639 2062)

Lines are open 8.30am to 5.30pm Monday to Friday

• Fax number: 01484 600914 (from abroad +44 1484 600914)

*Calls cost 10p per minute plus network extras.

Can I choose to receive information by email?

Shareholders can register to receive reports and notifications by email, browse shareholder information and submit voting instructions at

www.homeretailgroup-shares.com. This service is provided by Capita Registrars.

Does the Group have an investor relations website?

Investor relations information, such as webcasts of results presentations to analysts and investors and accompanying slides, is available at

www.homeretailgroup.com.

Can I reinvest my dividends?

Shareholders can use their cash dividends to purchase further shares in the Group through the dividend reinvestment plan. Completed mandate

forms for this year’s final dividend must be received by Capita Registrars by 26 June 2010. To find out more or obtain a mandate form, please

contact Capita Registrars.


MORE INFORMATION

Shareholder information continued

Where can I find the Group’s share price?

www.homeretailgroup.com

Does the Group provide a share dealing facility?

Investors can buy or sell Group shares through Capita Share Dealing Services. Go to

www.capitadeal.com or call 0871 664 0445*. Lines are open between 8.00am and 4.30pm

Monday to Friday.

* Calls cost 10p per minute plus network extras

When are the next major events for shareholders?

Final dividend ex-dividend

Final dividend record

Interim Management Statement

Annual General Meeting

Payment of final dividend

19 May 2010

21 May 2010

10 June 2010

30 June 2010

21 July 2010

When and where is this year’s AGM?

The 2010 AGM will be held from 11.00 am on Wednesday 30 June 2010 at the Jurys Inn Milton Keynes, Midsummer Boulevard, Milton Keynes MK9 2HP.

Where is the registered offi ce?

The registered office address is Home Retail Group plc, Avebury, 489-499 Avebury Boulevard, Milton Keynes MK9 2NW.

The Company is registered in England and Wales, No. 5863533.


MORE INFORMATION

Index


Who we are and what we do .....................................................................................04

Group performance ...................................................................................................... 06

Operating highlights .................................................................................................................... 06

Financial highlights ....................................................................................................................... 06

Group key performance indicators........................................................................................ 07

Chairman’s statement ................................................................................................. 08

Chief Executive’s statement ...................................................................................... 09

Our product markets ....................................................................................................11

Argos business review ..................................................................................................14

Argos operational review ............................................................................................................14

Argos key performance indicators ..........................................................................................15

Argos fi nancial review...................................................................................................................17

Homebase business review .........................................................................................18

Homebase operational review..................................................................................................18

Homebase key performance indicators ...............................................................................19

Homebase fi nancial review........................................................................................................21

Financial Services business review ...........................................................................22

Financial Services operational review ...................................................................................22

Financial Services fi nancial review..........................................................................................22

Financial Services key performance indicators ................................................................ 23

Responsible retailing .....................................................................................................24

Responsible retailing key performance indicators...........................................................25

Financial summary ........................................................................................................26

Group fi nancial review .................................................................................................28

Principal risks and uncertainties ...............................................................................32

GOVERNANCE

Board of Directors and Operating Board ...............................................................34

Directors’ report .............................................................................................................36

Principal activities and business review............................................................................... 36

Profit and dividends ...................................................................................................................... 36

Directors ............................................................................................................................................ 36

Directors’ interests........................................................................................................................ 36

Substantial shareholdings .......................................................................................................... 36

Share capital and control ............................................................................................................ 36

Purchase of own shares............................................................................................................... 36

Employee share plans....................................................................................................................37

Political donations..........................................................................................................................37

Employees ..........................................................................................................................................37

Creditor payment ...........................................................................................................................37

Articles of Association ..................................................................................................................37

Annual General Meeting..............................................................................................................37

Financial risk management ........................................................................................................37

Relevant audit information ........................................................................................................37

Auditors...............................................................................................................................................37

Corporate governance report ....................................................................................38

Chairman’s introduction............................................................................................................. 38

The Board .......................................................................................................................................... 38

Board committees......................................................................................................................... 39

Remuneration committee ......................................................................................................... 39

Nomination committee ............................................................................................................. 40

Audit committee ............................................................................................................................ 40

Accountability and audit .............................................................................................................41

Going concern ................................................................................................................................. 42

Relations with shareholders...................................................................................................... 42

Directors’ remuneration report ................................................................................43

Chairman’s statement ..................................................................................................................43

Background information .............................................................................................................43

Proposed changes to remuneration policy..........................................................................43

Remuneration policy applied in the year under review ................................................ 44

Remuneration Committee . ...................................................................................................... 46

Performance graph ...................................................................................................................... 46

Directors’ emoluments................................................................................................................47

Current share plans ....................................................................................................................... 48

Deferred bonus plan ..................................................................................................................... 48

Legacy arrangements .................................................................................................................. 49

Pensions ............................................................................................................................................. 51

Statement of directors’ responsibilities .................................................................52


MORE INFORMATION

Index continued


Independent auditors’ report – Group ....................................................................53

Consolidated income statement ..............................................................................54

Consolidated statement of comprehensive income ..........................................55

Consolidated balance sheet .......................................................................................56

Consolidated statement of changes in equity.....................................................57

Consolidated statement of cash fl ows ...................................................................58

Analysis of net cash/(debt) .........................................................................................59

Notes to the fi nancial statements.......................................................................... 60

1 General information ................................................................................................................. 60

2 Basis of preparation ................................................................................................................... 60

3 Summary of principal accounting policies .......................................................................62

4 Financial risk management.................................................................................................... 68

5 Segmental information ........................................................................................................... 72

6 Analysis of revenue by category...........................................................................................74

7 Net operating expenses ...........................................................................................................74

8 Employee benefit costs and employee numbers ..........................................................75

9 Exceptional items ........................................................................................................................76

10 Net fi nancing income/(expense)...................................................................................... 77

11 Taxation ....................................................................................................................................... 77

12 Dividends ......................................................................................................................................79

13 Basic and diluted earnings per share (‘EPS’) ..................................................................79

14 Goodwill ...................................................................................................................................... 80

15 Other intangible assets..........................................................................................................81

16 Property, plant and equipment ......................................................................................... 82

17 Investments in joint ventures and associates ..............................................................83

18 Inventories ...................................................................................................................................83

19 Trade and other receivables ................................................................................................ 84

20 Current asset investments ...................................................................................................85

21 Cash and cash equivalents ...................................................................................................85

22 Trade and other payables......................................................................................................85

23 Provisions.................................................................................................................................... 86

24 Post-employment benefi ts................................................................................................. 86

25 Other financial assets and liabilities ............................................................................... 90

26 Deferred tax ............................................................................................................................... 90

27 Share capital ...............................................................................................................................91

28 Notes to the consolidated statement of changes in equity ..................................92

29 Share-based payment arrangements .............................................................................92

30 Operating leases...................................................................................................................... 96

31 Commitments .......................................................................................................................... 96

32 Contingent liabilities .............................................................................................................. 96

33 Notes to the consolidated statement of cash fl ows ................................................ 96

34 Related parties ...........................................................................................................................97

35 Post balance sheet events.....................................................................................................97

36 Principal subsidiary, joint venture and associated undertakings ........................97

Independent auditors’ report – Parent .................................................................. 98

Parent Company balance sheet.................................................................................99

Parent Company statement of changes in equity...........................................100

Parent Company statement of cash fl ows .........................................................100

Notes to the Parent Company fi nancial statements...................................... 101

1 General information ...............................................................................................................101

2 Basis of preparation .................................................................................................................101

3 Summary of principal accounting policies....................................................................101

4 Income statement disclosures ...........................................................................................101

5 Dividends .....................................................................................................................................102

6 Investment in subsidiary.......................................................................................................102

7 Trade and other receivables .................................................................................................102

8 Trade and other payables......................................................................................................102

9 Share capital ...............................................................................................................................102

10 Commitments ........................................................................................................................103

11 Related party transactions................................................................................................103

12 UK GAAP to IFRS transition...............................................................................................103

Group fi ve-year summary ........................................................................................ 105

MORE INFORMATION

Shareholder information .......................................................................................... 107


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HOME RETAIL GROUP PLC Avebury

489–499 Avebury Boulevard

Milton Keynes

MK9 2NW

Tel: 0845 603 6677

www.homeretailgroup.com

in tough times - annualreports.co.ukargos and homebase are two of the uk’s leading retail brands,...

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